Trade, productivity, and innovation: Firm-level evidence from Malaysian manufacturing

This study attempts to explore the relationships between trade, productivity and innovation using firm-level data from three innovation surveys covering the period 1997-2004. It is found that the link between exporting and productivity is a weak one in Malaysia. Productivity is driven mainly by capital intensity and human capital but this may not necessarily translate into export dynamism. Innovation, whether it is product or process innovation, is likely to be the key driver in exporting. Exporters are likely to be larger firms with foreign ownership. There is some evidence that trade liberalization may promote exports especially for non-innovating firms. The main policy implication of the findings from this study is that policy makers should focus on enhancing innovation capabilities to ensure export dynamism. There is a need to also consider policies to enhance productivity improvements in sectors with export potential. Policy makers should additionally examine the possibility of lowering tariff levels in industries with relatively lower incidence of innovating but with high export potential. More attention should also be paid to providing a conducive environment for small domestic firms to innovate and venture into exporting.