Productivity dynamics, innovation and endogeneity: A semiparametric stochastic frontiers approach

This research investigates how innovation influences productivity and technical efficiency in the service industry. We apply a novel approach that addresses endogeneity and heterogeneity of environmental variables in the semiparametric smooth coefficient stochastic frontier model framework. For this purpose, we use instruments such as market channels, collaborative innovation efforts, public subsidies, and spending on innovation. Our study relies on data from the Community Innovation Survey (CIS) and corporate financial records spanning from 2003 to 2020 in Norway. The findings show a U-shaped direct influence of innovation on productivity (i.e., through total factor productivity), complemented by positive indirect effects (i.e, via inputs) and negative impacts on the efficiency of firms within the Norwegian service sector. The research highlights the diverse impact of innovation across firms and sectors within the service industry, revealing significant heterogeneity in its effects. These findings are crucial for managers and policymakers who want to promote innovation, enhance productivity and efficiency in services, and stimulate innovation-driven growth.