the market valuation of innovation: the case of indian manufacturing sunil kanwar delhi school of...
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The Market Valuation of Innovation: The Case of Indian Manufacturing
Sunil KanwarDelhi School of Economics
Bronwyn H. HallUC Berkeley, NBER, IFS, and NIESR
1. Motivation
Innovation prime motive force behind economic growth
Firms spend large amounts of scare resources on innovative activities
Desirable to know whether financial markets value innovation-intensive firms differentially
Persuasive evidence that developed country stock markets value innovative activity by firms
Can we expect the same in less developed economies? Major reason for incredulity is the fact that predominant share of intellectual capital is generated in a handful of developed economies
A few developing countries do some innovation (Bogliacino et al. 2012) โ process patents, utility models, smaller innovations. Often for imitation and diffusion, but generate profits and hence market value
Hence, stock marketโs valuation of innovation also relevant in developing country context:โข Are more innovative firms valued
more highly than less innovative ones?
โข Is market valuation responsive to the quality of innovation spending?
โข Is market value responsive to market risk?
โข Does the market value-innovation relation vary across industries; and if so, how?
We explore such issues in the context of manufacturing industries in India.
2. Prior literature
Very informative, but mostly pertains to developed countries: Griliches (1981); Bloom and Van Reenen (2002); Hall, Jaffe and Trajtenberg (2005); Greenhalgh and Rogers (2006); Griffiths and Webster (2006); Hall and Oriani (2006);exception Chadha and Oriani (2010)
Our study broad-bases the available evidence by providing further evidence on a developing country, namely India.
Number of distinguishing features, including the context - mostly no product patents; few process patents, limited to certain industries; utility models never an option
Far from obvious that stock market would value such innovation as does occur
3. The Model
(1)
(2)
(3)
4. Sample and Variables
Firm-level data for Indian manufacturing sector (โProwessโ; CMIE)
Sample: 380 firms, 3494 observations, over 2001-2010, covering 22 industries (mostly 2-digit, some 3-digit levels):
Auto ancillaries, automobiles, cement, chemicals, (other) construction material, (other) consumer goods, domestic appliances, drugs and pharmaceuticals, electrical machinery, electronics, food and agro-products, gems and jewellery, glass and glassware, leather and leather products, metals, non-electrical machinery, paper and paper products, personal care, petroleum, plastics and plastic products, rubber and rubber products, and textiles and textile products.
Variables: โข Market Value (V): equity + debt
โข Physical capital (Kp): net fixed assets
โข Knowledge capital (KK): capitalized value
of R&D expenditure; perpetual inventory method (15% depreciation rate)
โข Other intangible capital (KOI): capitalized
value of advertising expenditure; perpetual inventory method (30% depreciation rate)
โข DUM (adv = 0); invariably insignificant
โข Quality of capital (S): real profit after- tax, purged of knowledge capital and other
intangible capital (and time dummies)
Table 1 Sample statistics (3,494 observations on 380 firms, 2001-2010)
Variable Mean Median Standard
Deviation Minimum Maximum Share
Variance Withinโ โ
๐ฝ๐ฒ๐ทฮค 4.36 3.23 3.43 0.16 19.82 0.265 ๐ฒ๐ฒ ๐ฒ๐ทฮค 0.12 0.05 0.20 0.00 2.72 0.159 ๐ฒ๐ฒโฒ ๐ฒ๐ทฮค 0.17 0.06 0.32 0.00 5.39 0.181 ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค 0.13 0.00 0.42 0.00 7.38 0.078 ๐บ ๐ฒ๐ทฮค 0.00 โ0.03 0.31 โ1.94 2.02 0.427 ๐ฒ๐ท (M rupees) 1140.7โ 1110.8 1.71 2.30 1,500,007 0.050 D (๐ฒ๐ถ๐ฐ = 0) 42.4% 0.052 Correlation Matrix ๐ฅ๐ง(๐ฝ๐ฒ๐ท)ฮค ๐ฒ๐ฒ ๐ฒ๐ทฮค ๐ฒ๐ฒโฒ ๐ฒ๐ทฮค ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค ๐บ ๐ฒ๐ทฮค ๐ฅ๐ง๐ฒ๐ท ๐ฅ๐ง(๐ฝ๐ฒ๐ท)ฮค 1 ๐ฒ๐ฒ ๐ฒ๐ทฮค 0.330 1 ๐ฒ๐ฒโฒ ๐ฒ๐ทฮค 0.338 0.906 1 ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค 0.302 0.112 0.077 1 ๐บ ๐ฒ๐ทฮค 0.391 โ0.004 โ0.140 โ0.001 1 ๐ฅ๐ง๐ฒ๐ท โ0.024 โ0.131 โ0.045 โ0.039 0.004 1 Definitions: ๐ฝ = Market value = Equity + Book Debt ๐ฒ๐ท = Net fixed assets ๐ฒ๐ฒ = Knowledge capital at 15% depreciation ๐ฒ๐ฒโฒ = Knowledge capital at 30% depreciation ๐ฒ๐ถ๐ฐ = Advertising capital at 30% depreciation ๐บ = Quality of capital = Profit surprise โ Geometric mean โ โ Within-firm variance as a proportion of total variance (controlling for overall year means)
Table 2 Nonlinear Regressions
Dependent Variable: ln (๐ฝ๐ฒ๐ทฮค ) (1) (2) (3) (4) (5) (6) Regressor NLLS NLLS NLLS NLLS NLLS,
lag RHS NLIV
๐ฒ๐ฒ ๐ฒ๐ทฮค 2.275*** 2.009*** 1.790*** 1.473*** 1.661*** 1.764*** (0.389) (0.375) (0.330) (0.336) (0.324) (0.329) [0.164] *** [0.140] *** [0.134] *** [0.114] *** [0.126] *** [0.137] *** (0.018) (0.018) (0.018) (0.019) (0.018) (0.018) ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค 0.988*** 0.817*** 0.974*** 0.815*** 0.640*** (0.224) (0.183) (0.191) (0.185) (0.145) [0.058] *** [0.052] *** [0.059] *** [0.051] *** [0.044] *** (0.009) (0.008) (0.008) (0.008) (0.008) D (๐ฒ๐ถ๐ฐ= ๐) โ0.028 โ0.037 โ0.004 โ0.031 โ0.083 (0.057) (0.053) (0.056) (0.055) (0.053) ๐บ ๐ฒ๐ทฮค 0.508*** 0.464*** 0.527*** 0.709*** (0.103) (0.101) (0.095) (0.031) ln ๐ฒ๐ท 0.020 0.020 0.012 0.015 0.013 0.012 (0.015) (0.015) (0.014) (0.015) (0.014) (0.016) Industry d.v. No No No Yes No No Year FEs Yes Yes Yes Yes Yes Yes ๐น๐ 0.199 0.267 0.318 0.383 0.286 0.270 Standard Error
0.608 0.582 0.561 0.536 0.571 0.579
Panel D-W 0.266 0.285 0.316 0.345 0.360 0.346 Observations 3494 3494 3494 3494 3114 3114 Firms 380 380 380 380 380 380 Note: Robust standard errors clustered on firm in parentheses below each coefficient Elasticity at the means in square brackets, with its standard error below it In column (5), all right hand side (RHS) variables are lagged one year In column (6), the instruments are the right hand side variables lagged one year ***,** and * denote significance at the 1%, 5% and 10% levels, for a two-tail test
Table 3 Linear Regressions
Dependent Variable: ln (๐ฝ๐ฒ๐ทฮค ) (1) (2) (3) (4) (5) (6) Regressor OLS OLS OLS OLS OLS,
lag RHS IV
๐ฒ๐ฒ ๐ฒ๐ทฮค 1.025*** 0.939*** 0.943*** 0.790*** 0.912*** 0.964*** (0.136) (0.129) (0.116) (0.118) (0.118) (0.120) [0.128] *** [0.117] *** [0.117] *** [0.098] *** [0.114] *** [0.118] *** (0.017) (0.016) (0.014) (0.015) (0.015) (0.015) ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค 0.368*** 0.368*** 0.393*** 0.392*** 0.385*** (0.062) (0.051) (0.055) (0.055) (0.053) [0.049] *** [0.049] *** [0.053] *** [0.053] *** [0.051] *** (0.008) (0.007) (0.007) (0.007) (0.007) D (๐ฒ๐ถ๐ฐ= ๐) โ0.079 โ0.079 โ0.054 โ0.076 0.039 (0.051) (0.047) (0.047) (0.049) (0.050) ๐บ ๐ฒ๐ทฮค 0.704*** 0.633*** 0.686*** 0.500*** (0.076) (0.071) (0.074) (0.100) ln ๐ฒ๐ท 0.006 0.007 0.007 0.010 0.009 0.011 (0.015) (0.015) (0.013) (0.015) (0.014) (0.014) Industry d.v. No No No Yes No No Year Fes Yes Yes Yes Yes Yes Yes ๐น๐ 0.177 0.238 0.339 0.396 0.301 0.318 Standard Error
0.616 0.593 0.552 0.530 0.565 0.559
Panel D-W 0.265 0.282 0.364 0.385 0.413 0.335 Observations 3494 3494 3494 3494 3114 3114 Firms 380 380 380 380 380 380 Note: Robust standard errors clustered on firm in parentheses Elasticity at the means in square brackets, with its standard error below it In column (5), all right hand side variables are lagged one year In column (6), the instruments are the right hand side variables lagged one year ***,** and * denote significance at the 1%, 5% and 10% levels, for a two-tail test
Table 4 Regressions with Firm Effects
Dependent Variable: ln (๐ฝ๐ฒ๐ทฮค ) (1) (2) (3) (4) (5) Regressor OLS with
industry fixed effects
OLS with random firm effects
OLS with firm fixed effects
OLS with firm fixed effects
GMM-SYS With lag 2+ instruments
Lagged dep. Var. 0.484*** 0.706*** (0.023) (0.036) ๐ฒ๐ฒ ๐ฒ๐ทฮค 0.785*** 0.688*** 0.428*** 0.315*** 0.302*** (0.117) (0.117) (0.140) (0.087) (0.071) ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค 0.413*** 0.353*** 0.250*** 0.192*** 0.146*** (0.054) (0.048) (0.064) (0.054) (0.028) ๐บ ๐ฒ๐ทฮค 0.631*** 0.428*** 0.352*** 0.239*** 0.251*** (0.071) (0.053) (0.051) (0.045) (0.056) ln ๐ฒ๐ท 0.011 โ0.047*** โ0.158*** โ0.182*** โ0.005 (0.015) (0.018) (0.042) (0.032) (0.014) LR coef: ๐ฒ๐ฒ ๐ฒ๐ทฮค 0.609*** 1.026*** (0.172) (0.221) LR coef: ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค 0.372*** 0.495*** (0.107) (0.091) Year Fes Yes Yes Yes Yes Yes Observations 3494 3494 3494 3114 3096 Firms 380 380 380 380 379 ๐น๐ 0.395 0.372 0.381 0.522 Std. Err. Within 0.530 0.347 0.321 0.271 Share of variance across firms
0.566 0.602 0.737 0.662
AR(1) t-test 69.9*** 29.0*** 30.1*** 1.8*** Hansen test 255.1** (df) (206) AR(1) test โ10.7*** (p-value) (0.000) AR(2) test 2.0** (p-value) (0.050) Note: Robust standard errors clustered on firm in parentheses. Hausman test for correlated effects: ๐๐๐ = 137.0 (๐-value = 0.000). Instruments in col. (5) are lags 2 and earlier (level and differenced) of the dependent and independent variables. ***,** and * denote significance at the 1%, 5% and 10% levels, for a two-tail test.
Table B1 GMM-SYS regressions
Dependent Variable: ln (๐ฝ๐ฒ๐ทฮค ) (1) (2) (3) (4) (5) (6) Estimation Method Regressor GMM-SYS
with lag 2+ instruments
GMM-SYS with lag 3+ instruments
GMM-SYS with lag 3/4 instruments
GMM-SYS with lag 2+ instruments
GMM-SYS with lag 3+ instruments
GMM-SYS with lag 3/4 instruments
Lagged dep. var. 0.706*** 0.694*** 0.677*** (0.036) (0.039) (0.045) ๐ฒ๐ฒ ๐ฒ๐ทฮค 0.991*** 0.711*** 0.668*** 0.302*** 0.326*** 0.238*** (0.174) (0.130) (0.144) (0.071) (0.094) (0.110) ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค 0.336*** 0.287*** 0.287*** 0.146*** 0.169*** 0.165*** (0.055) (0.073) (0.079) (0.028) (0.039) (0.039) ๐บ ๐ฒ๐ทฮค 0.793*** 0.802*** 0.821*** 0.251*** 0.181*** 0.203*** (0.115) (0.149) (0.153) (0.056) (0.073) (0.085) ln ๐ฒ๐ท 0.002 โ0.024 0.018 โ0.005 โ0.011 0.001 (0.035) (0.035) (0.035) (0.014) (0.016) (0.019) LR coef: ๐ฒ๐ฒ ๐ฒ๐ทฮค 1.026*** 1.067*** 0.735*** (0.221) (0.286) (0.312) LR coef: ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค 0.495*** 0.553*** 0.510***
(0.091) (0.133) (0.125) Observations 3494 3494 3494 3096 3096 3096 Firms 380 380 380 379 379 379 Hansen test 279.3*** 224.1*** 165.1*** 255.1*** 220.2*** 155.1*** (df) (216) (184) (96) (206) (170) (95) AR(1) test โ6.7*** โ6.9*** โ6.8*** โ10.7*** โ10.4*** โ9.9*** (p-value) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) AR(2) test โ1.0 โ0.9 โ0.9 2.0** 1.9* 1.9* (p-value) (0.328) (0.357) (0.365) (0.050) (0.065) (0.065) Note: Robust standard errors in parentheses Instruments are lags (level and differenced) of dependent and independent variables โ In columns (1) and (4) they include lag 2 and earlier values, In columns (2) and (5) lag 3 and earlier values, and In columns (3) and (6) lags 3 and 4 only. ***,** and * denote significance at the 1%, 5% and 10% levels, for a two-tail test
Economic Significance:
Elasticity w.r.t Knowledge Capital: 0.14 (Hall-Oriani 2006) France: 24% Germany: 22% Italy: 18% US: 42% UK: 24%
Semi-elasticity w.r.t Knowledge Capital: 1.75 France: 0.66 Germany: 0.56 Italy: 0.94 US: 0.80 UK: 1.92
Evidence of under-investment
Sectoral Heterogeneity (Pavitt 1984)
1: supplier dominated - leather, textiles & textile products, rubber, gems & jewellery
2: production intensive (scale intensive) โ automobiles, cement, (other) construction material, (other) consumer goods, domestic appliances, food & agro-products, glass & glassware, metals & metal products, personal care, paper & paper products
3: production intensive (specialised suppliers) - automobile ancillaries, non-electrical machinery
4: science-based - chemicals, drugs & pharmaceuticals, electrical machinery, electronics, petroleum products, & plastic products
Table 5 Nonlinear Regressions by Pavitt Sector
Dependent Variable: ln (๐ฝ๐ฒ๐ทฮค ) (1) (2) (3) (4) Pavitt Sector Regressor Supplier-
dominated Scale- intensive
Specialized- supplier
Science- based
๐ฒ๐ฒ ๐ฒ๐ทฮค 4.24 1.80*** 1.28*** 1.73*** (3.45) (0.65) (0.38) (0.50) [0.102] [0.093] *** [0.152] *** [0.155] *** (0.063) (0.025) (0.034) (0.034) ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค 2.74*** 0.73*** 0.83 1.51** (0.89) (0.18) (0.56) (0.64) [0.097] *** [0.077] *** [0.030] [0.055] ** (0.022) (0.013) (0.019) (0.016) ๐บ ๐ฒ๐ทฮค 0.41 0.50*** 0.48*** 0.48*** (0.46) (0.18) (0.13) (0.18) ln ๐ฒ๐ท 0.08 0.03 โ0.10*** 0.03 (0.06) (0.02) (0.04) (0.02) Year Fes Yes Yes Yes Yes ๐น๐ 0.450 0.352 0.357 0.289 Std. Error 0.464 0.549 0.541 0.581 Panel D-W 0.350 0.329 0.343 0.294 Observations 316 1,235 690 1,253 Firms 32 134 78 136 Notes: Robust standard errors clustered on firm in parentheses Elasticity at means in square brackets, with standard error below it ***,** and * denote significance at 1%, 5% and 10% levels, for two- tail test
Table A1 Observations by Industry and Pavitt sector
Pavitt sector Industry Obs
. Firms Mean
R&D growth
Mean ADV
growth (i) supplier-dominated Gems and jewellery 7 1 0.23% 4.81% (i) supplier-dominated Leather products 30 3 3.21% 0.60% (i) supplier-dominated Rubber products 20 2 0.91% โ0.88% (i) supplier-dominated Textiles & textile products 259 26 1.42% โ1.08% (ii) scale-intensive Domestic appliances 60 7 1.29% 4.11% (ii) scale-intensive Automobiles 101 12 1.59% 0.96% (ii) scale-intensive Cement 140 14 1.33% 0.78% (ii) scale-intensive Food & agri. products 352 39 0.89% 0.51% (ii) scale-intensive Glass and glassware 25 3 โ1.97% 7.93% (ii) scale-intensive Metals & metal products 217 22 0.51% 1.03% (ii) scale-intensive Other consumer goods 30 3 โ2.80% โ0.17% (ii) scale-intensive Other construction products 171 18 0.62% 2.71% (ii) scale-intensive Paper & paper products 129 13 1.79% 0.08% (ii) scale-intensive Personal care 10 3 โ2.92% 1.46% (iii) specialized supplier Automobile ancillaries 419 43 1.58% 1.18% (iii) specialized supplier Nonelectrical machinery 271 35 2.59% 1.94% (iv) science-based Chemicals 600 62 0.79% 0.08% (iv) science-based Electrical machinery 129 15 2.36% 2.32% (iv) science-based Electronics 68 8 1.39% 0.83% (iv) science-based Petroleum products 64 7 โ0.36% 2.58% (iv) science-based Drugs & pharmaceuticals 268 31 2.72% 1.76% (iv) science-based Plastic products 124 13 1.21% 0.09% Total 3494 380 1.32% 1.00%
Table B2 GARCH Model for log(Sales)
Parameter (1) (2) (3) (4) (5) Parameters of Equation 8(a) ๐ท๐ 0.999*** 1.000*** 1.002*** 1.002*** 1.001*** (0.002) (0.002) (0.001) (0.001) (0.001) Parameters of Equation 8(c) ๐ถ๐ โ3.070*** โ2.980*** โ5.030*** โ4.600*** (0.190) (0.150) (0.480) (0.580) ๐ถ๐ โ0.064*** โ0.078*** โ0.321*** โ0.384*** โ0.235*** (0.026) (0.021) (0.072) (0.086) (0.076) ๐ ๐ 0.904*** 0.636*** โ0.050*** โ0.049*** โ0.056*** (0.348) (0.075) (0.003) (0.003) (0.003) ๐ ๐ โ0.040 (0.049) ๐ธ๐ 1.063*** 1.029*** 1.075*** (0.008) (0.034) (0.008) ๐ธ๐ 0.005 (0.004) Year FEs In eq (8a) In eq (8a) In eq (8a) In eq (8a) In eq (8a) Industry FEs No No No No In eq (8c) Observations 2752 2752 2752 2752 2752 Log-likelihood 466.9 466.5 1172.7 1173.2 1216.5 Equations (8a)-(8c) in the text are reproduced below for convenience: ๐๐๐=๐๐+๐ท๐๐๐,๐โ๐+๐บ๐๐ ๐บ๐๐~๐ฑ(๐,๐๐๐) ๐๐๐= ๐๐ฑ๐ฉเตซ๐๐+๐ถ๐๐๐๐เตฏ+แบ๐ ๐+๐ ๐๐๐๐แป(๐บเท๏ฟฝ๏ฟฝ๐,๐โ๐)๐+(๐ธ๐+๐ธ๐๐๐๐)๐๐,๐โ๐
where ๐ is log(sales), ๐ is log(๐ฒ๐ท), ๐ is the industry to which the ๐๐๐ firm belongs, ๐๐ are the year dummies, and ๐๐ are the industry dummies.
Table 6 Market Value Regressions Allowing for Uncertainty
Dependent Variable: ln (๐ฝ๐ฒ๐ทฮค ) Regressor (1) (2) (3) (4) ๐ฒ๐ฒ ๐ฒ๐ทฮค 0.959*** 0.945*** 0.925*** 1.227*** (0.110) (0.110) (0.120) (0.220) ๐ฒ๐ถ๐ฐ ๐ฒ๐ทฮค 0.380*** 0.374*** 0.378*** 0.376*** (0.050) (0.050) (0.050) (0.050) ๐ โ 5.790** โ5.540 8.300*** (2.640) (8.310) (3.180) ๐ ๐ 203.6 (144.0) ๐ x (๐ฒ๐ฒ ๐ฒ๐ทฮค ) โ13.240 (8.390) ๐บ ๐ฒ๐ทฮค 0.727*** 0.716*** 0.713*** 0.716*** (0.080) (0.078) (0.078) (0.078) ln ๐ฒ๐ท 0.009 0.013 0.012 0.014 (0.014) (0.014) (0.014) (0.014) Year Fes Yes Yes Yes Yes ๐น๐ 0.329 0.335 0.337 0.337 Std. Error 0.553 0.551 0.550 0.550 Panel D-W 0.351 0.329 0.345 0.294 Observations 3114 3114 3114 3114 Firms 380 380 380 380 Notes: OLS regressions. Robust standard errors clustered on firm in parentheses โ Industry sales variance estimated as shown in Appendix B, Table B3. ***,** and * denote significance at 1%, 5% and 10% levels, for two-tail test
Conclusions
Where most firms do not patent, or have utility models, we find that:
โข Stock market places greater value on more innovative firms, ceteris paribus
โข Rate of return appears to be larger than that in developed countries, excepting UK
โข Depreciation rate too high? Probably not
โข Firms underinvest in R&D. Probably
โข R&D-intensive firms valued more for option value of R&D programmes
โข Market value-innovation relation appears to vary between supplier-dominated & other industry groups, but few firms in former group, & differences insignificant.