Measuring Output of Process Innovation at the Firm Level:

Results from German Panel Data

Christian RammerCentre for European Economic Research (ZEW)

Mannheim, Germany

OECD Blue Sky Forum III

19-21 September 19-21, 2016, Ghent

Background(1) Process innovation is a main part of firms’ innovation activities

(204,000 product innovators vs. 187,400 process innovators)

(2) No established measure for measuring the output of process innovation (in contrast to product innovation)

(3) Theoretical models of R&D/innovation often use cost reduction as result variable

(4) Oslo Manual mentions cost reduction and quality improvement as potential output measures

(5) Some national innovation surveys did implement cost reduction and other output measures (BE, CA, CH, DE, NO)

Objectives- Present empirical evidence on the relevance and reliability of

quantitative measures of process innovation output

- Analyse data on process innovation output collected over the past 20 years as part of the German innovation survey:- share of unit cost reduction owing to process innovation- share of sales growth resulting from quality improvements

- Evaluate the usefulness of these measures for better understanding the innovation process in firms and its impacts

Structure: 1) measurement issues (item non-response, consistency)2) determinants of process innovation output3) performance impacts of process innovation output

Process Innovation Output:Conceptual Issues

- Process innovation often associated with changing the cost function (but leaving products unchanged)

- But process innovation often targets quality aspects: increasing flexibility, ensuring constant quality

- In services, product and process innovation often go hand in hand, altering both product quality and process efficiency

- Lean management and total quality management have developed a large set of process output indicators (lead time, processing time, on-time delivery, customer satisfaction, defect rate, accuracy rate, reworking rate, scrap rate, number of steps needed)

Process Innovation Output Measures in the German CIS

- Main challenge: using simple measures that can be applied to all types of firms and sectors

- Cognitive testing resulted in the following design:

annually since 1994

annually since 2002

Item Non-Response by no. of Responses

0

2

4

6

8

10

12

14

16

1 2 3 4 5 6 7 8 9 10 11 12* 13 14 15 16 17 18+Number of survey responses w ith process innovation "yes"

Shar

e of

item

non

resp

onse

(%)

cost reduction (y/n)

quality improvement (y/n)

Yes/no part

* For quality improvement: 12 or more responses

Item Non-Response by no. of ResponsesQuantitative part

* For quality improvement: 11 or more responses

0

5

10

15

20

25

30

35

40

1 2 3 4 5 6 7 8 9 10 11* 12 13+Number of survey responses w ith cost reduction / quality improvement "yes"

Shar

e of

item

non

resp

onse

(%)

share of cost reduction (%)

increase in sales due to quality improvement (%)

sales share of product innovations (%)

Item Non-response by Size/SectorYes/no part Quantitative part

0 2 4 6 8 10 12 14

NACE 5 to 24

NACE 25 to 33

NACE 35 to 53

NACE 55 to 93

5 to 9 employees

10 to 19 employees

20 to 49 employees

50 to 99 employees

100 to 249 employees

250 to 499 employees

500 to 999 employees

1,000+ employees

Share of item non response (%)

cost reduction (y/n) quality improvement (y/n)

0 5 10 15 20 25 30 35 40 45 50 55Share of item non response (%)

cost reduction (%)

quality improvement (%sales increase)

sales share productinnovations (%)

Variety of Responses by no. of Responses

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14+Number of responses to share of cost reduction/increase in sales due to quality improvement/sales

share of product innovations

Num

ber

of d

iffer

ent v

alue

s pe

r re

spon

ding

firm

share of cost reduction

change in sales due to quality improvement

sales share of product innovations

Determi-nants 1:yes/no(probit)

1) These models include all variables of part 1.All models include 12 year dummies and 45 sector dummies.* / **: significant at the 0.05 / 0.01 level

Determi-nants 2:quanti-tativeif yes(OLS)

1) These models include all variables of part 1.All models include 12 year dummies and 45 sector dummies.* / **: significant at the 0.05 / 0.01 level

Impacts1:ExportShare(OLS)

1) These models include all variables of part 1.All models include 12 year dummies and 45 sector dummies.* / **: significant at the 0.05 / 0.01 level

Impacts2:ProfitMargin(Int-reg)

1) These models include all variables of part 1.All models include 12 year dummies and 45 sector dummies.* / **: significant at the 0.05 / 0.01 level

Conclusions(1) Both process innovation output measures work quite well

(2) Share of item non-response for quantitative part high and not falling with response frequency

(3) Responses to the quantitative part are categorical in nature

(4) Weighted data of the two indicators for the German enterprise sector provides meaningful results

(5) Determinants of process innovation output (y/n) largely the same as for product innovation output, but level of output difficult to explain

(6) Process innovation output positively associated with performance

it is possible and useful to collect process innovation output data

Using measures that can be applied across industries limits explanatory power of data, but a differentiated approach would restrict comparability

Thank you for yourattention!

rammer@zew.de

Appendix

0 2 4 6 8 10 12 14 16 18 20 22

0>0, <1

1>1, <2

2>2, <3

3>3, <4

4>4, <5

5>5, <6

6>6, <7

7>7, <8

8>8, <9

9>9, <10

10>10, <15

15>15, <20

20>20, <25

25>25, <30

30>30, <50

40>40, <50

50>50, <60

60>60, <70

70>70, <80

80>80, <90

90>90, <100

100>100

Res

pons

e va

lue

(%)

Share in total responses (%)

cost reduction

change in sales due to quality improvement

sales share of product innovations

Response Values on Quantitative Measures

ProcessInnovationOutputMeasuresbySector(2014)

Weighted results.

Process Innovation Output by Size (2014)

0 10 20 30 40 50 60 70

5-9

10-19

20-49

50-99

100-249

250-499

500-999

1,000+

Size

cla

ss (n

o. o

f em

ploy

ees)

Share of f irms (%)

Firms w ith cost reduction

Firms w ith quality improvements

0 1 2 3 4 5 6Share of cost reduction/increase in sales (%)

Share of cost reduction

Increase in sales due toquality improvements

Weighted results.

Process Innovation Output 1993-2014

0

1

2

3

4

5

6

7

8

'93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06* '07 '08 '09 '10 '11 '12 '13 '14

Shar

e in

all f

irms

(%)

Share of cost reduction - manufacturing

Share of cost reduction - services

Increase in sales due to quality improvements - manufacturing

Increase in sales due to quality improvements - services

Weighted results. - Manufacturing: divisions 5 to 33 (NACE 2), divisions 10 to 37 (NACE 1); Services: divisions 35-39, 46, 49-53, 58-66, 69-74, 78-82 (NACE 2), divisions 40-41, 51, 60-67, 72-74, 90 and groups 92.1, 92.2 (NACE 1).* Break in series due to change in economic classification systems (from NACE 1 to NACE 2) and change in the statistical source for total firm population figures (introduction of the official business register in 2006).

Determi-nants 3:quanti-tativemea-sures(tobit)

1) These models include all variables of part 1.All models include 12 year dummies and 45 sector dummies.* / **: significant at the 0.05 / 0.01 level