Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 387: Knowledge Capital and Performance Heterogeneity: A Firm Level Innovation Study

Hans Lööf () and Almas Heshmati ()
Additional contact information
Hans Lööf: Industrial Economics and Management, Postal: Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Almas Heshmati: Dept. of Economic Statistics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: This paper is an empirical analysis of knowledge capital and performance heterogeneity at the firm level. We apply new econometric methods to extensive data on innovation and innovative activities in Swedish manufacturing. Knowledge capital, defined as the ratio of innovation sales to total sales, is found to be a significant factor contributing to the performance heterogeneity among firms. A number of interesting results emerge. First, the results show that there is a two-way and positive relationship between firm performance and knowledge capital. This relationship holds even when we control for human capital, type of output, firm size, capital intensity, entry, merger, partial closure or exit of firms. Second, the elasticity of productivity growth with respect to knowledge capital is doubled when all innovations are substituted for radical innovations. Third, knowledge capital rises with innovation input per employee. Fourth, profitability is important for the willingness of firms to invest in innovative activities. Fifth, when controlling for differences in innovation investments and human capital, knowledge intense firms are not more innovative than labor and capital intense firms. Finally, organizational rigidities in innovation projects are found to have a significant negative impact on innovation output.

Keywords: Knowledge capital; performance heterogeneity; innovation; manufacturing; firms

JEL-codes: C51; D24; L60; O31; O32

31 pages, First version: June 13, 2000. Revised: August 15, 2000. Earlier revisions: August 14, 2000, August 15, 2000, August 15, 2000.

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