Abstract:-

Can firms’ efforts in innovation activities lead to enhanced productivity, or do they primarily contribute to an augmentation of market power? Drawing upon a dataset of Indian corporate entities operating within the manufacturing sector from 2000 to 2020, this research assesses the intricate relationship between firms’ innovation initiatives, market power implications, and productivity outcomes. To gauge market power, we derive firm-level price-cost margins or mark-ups through production function estimation techniques. For total factor productivity (TFP) estimates, we address two important issues to enhance the measurement precision. First, we incorporate intangible capital, encompassing software and intellectual property into innovation assessment, along with traditional variables such as R&D spending. Second, we eliminate the influence of price effects from the estimated revenue-based TFP using our mark-up estimates. Notably, our findings reveal pronounced differences between firms investing in innovation and those refraining from such initiatives. Innovative firms exhibit both elevated productivity and mark-ups, even after controlling for observables. However, mark-up-corrected productivity estimates yield a less pronounced distinction, implying that market power may exert a more substantial influence than productivity considerations in firms engaged in innovation-related investments.