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Innovation, Firm Risk and Industry Productivity

  • Maliranta, Mika
  • Määttänen, Niku

Radical innovations require risk-taking. However, it is hard to find an objective measure for innovation investments that would take riskiness into account. In this paper, we investigate how a simple measure of firms’ innovation investments, namely the employee share of managers and professionals, is associated with profit risk at the firm level. Using data that cover essentially all firms in the Finnish business sector, we first document that labor productivity dispersion is very high among firms with a high employment share of managers and professionals. We also find that the dispersion in the return to firms’ total capital is particularly high among young firms with a high employment share of managers and professionals. We then build a simple model where firms’ innovation activities and firm risk are interrelated. We use the model to analyze how the asymmetric tax treatment of profits and losses in corporate taxation influences firms’ innovation decision in market equilibrium and whether innovation subsidies can improve industry productivity by mitigating such a tax distortion.

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Paper provided by The Research Institute of the Finnish Economy in its series ETLA Reports with number 22.

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Length: 18 pages
Date of creation: 01 Apr 2014
Date of revision:
Handle: RePEc:rif:report:22
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  1. Cullen, Julie Berry & Gordon, Roger H., 2007. "Taxes and entrepreneurial risk-taking: Theory and evidence for the U.S," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1479-1505, August.
  2. Richard E. Caves, 1992. "Industrial Efficiency in Six Nations," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031930, June.
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