Innovation and Productivity: An Update

Innovation and Economic Growth

Article Snapshot


Bronwyn Hall and Pierre Mohnen


Eurasian Business Review, Vol. 3, No. 1, pp. 47-65, 2013


This paper surveys evidence on the link between innovation and improvements in productivity. These links can be hard to measure. Generally, innovation helps firms increase the revenues they earn per employee, affecting the firm’s output and the price of the product.

Policy Relevance

One type of innovation tends to enhance the gains from other types of innovation.

Main Points

  • Innovation can be either technological (product or process innovations) or non-technological (organizational and marketing innovations).
  • Productivity is a ratio of output over input; it increases when more resources are used (more labor or raw materials), and/or when resources are used more efficiently (called total factor productivity, or TFP).
  • This paper reviews studies that look for a link between gains in productivity and the intensity of innovation.
    • Some measure the intensity of innovation by looking at the proportion of sales due to new products.
    • Others examine innovation by noting cost reductions due to process innovations.
  • Typically, for product innovation, if innovation increases 10%, labor productivity increases by 2.5%; several studies show TFP gains from process, organization, or marketing innovations.
  • Several studies show that one type of innovation often complements another type, enhancing its effect on productivity; this effect tends to be the same for manufacturing and service firms.
  • Evidence from Europe shows that product and process innovations yield greater productivity gains when deployed together; also, organizational innovations often complement other innovations.


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