The generation and exploitation of technological change: market value and total factor productivity
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In this paper we articulate and test the hypothesis that TFP is a reliable and relevant measure of firm’s innovation capabilities, and, as such, accounts for Tobin’s q indicator. With this aim, we investigate empirically the relationship between firm level total factor productivity and the Tobin’s q. Measuring Tobin’s q allows inferring the actual value of knowledge capital from stock market valuation. We use a panel of companies listed on UK and the main continental Europe financial markets (Germany, France and Italy) for the period 1995–2005. Our results confirm that TFP is a reliable indicator of firm’s innovative capabilities. When we control for firm’s R&D investments and intangible assets, the effects of TFP on market value remain highly significant. This suggests that TFP is a broader measure of innovation capability than R&D is. The validation of the Tobin’s q and TFP relationship has important implications concerning firm’s technological innovation measurement.
KeywordsTobin’s q Innovation Total factor productivity Knowledge capital
JEL ClassificationO3 O33
The authors wish to thank Bronwyn Hall, Raffaele Paci and Fabiano Schivardi for useful suggestions. Preliminary versions have been presented at CRENoS-DECA seminar series, University of Cagliari, and the AFSE 2009 tematic meeting, Sophia Antipolis. We are grateful for the useful comments of many participants. The financial support of the Collegio Carlo Alberto and the Dipartimento di Economia dell’università di Torino is acknowledged. The research leading to these results has received funding from the European Community’s Seventh Framework Programme (FP7/2007-2013) under grant agreement no. 216813.
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