Essays on International Activities of Firms, Innovation, and Financial Constraints

This dissertation consists of three essays, focusing on the productivity effects of both international and innovative activities of firms and the link between financial constraints and trading behaviour. The first essay investigates whether the use of imported inputs leads to improvement in productivity. This includes examining the influence of absorptive capacity in the underlying relationship between imported inputs and productivity. This investigation uses firm-level panel data of manufacturing firms in Ghana covering the period between 1991 and 2002. Lagged relative productivity improvement (LRPI) is proposed as a new proxy for absorptive capacity (ABC). For any given period, LRPI is defined as the natural logarithm of a firm’s real value added per worker in the previous period relative to the firm’s initial real value added per worker. An alternative measure of ABC considers total factor productivity instead of real value added per worker. Both the direct and indirect methods of estimating production function are used. Both methods show that firms with high levels of ABC enjoy productivity benefits from the contemporaneous and past use of imported inputs. The results also suggest that firms operating in the input-intensive sectors such as machines, in addition to having high levels of ABC enjoy higher productivity benefits from the current and past use of imported inputs. The second essay examines the effect of higher participation in international activities on productivity, as well examining the effect of innovative activities on productivity. This investigation uses European firms in a global economy (EFIGE) dataset, a representative cross-country firm-level data across seven European countries: Austria, France, Germany, Hungary, Italy, Spain and the UK. Firms simultaneously engaging in a larger number of international activities gain more productivity benefits than firms involved in a smaller number. Evidence is also found that innovating internationally active firms attain higher productivity benefits than innovating domestic-focused firms. Firms that introduce new products or adopt new or improved production technologies or register industrial designs also gain substantial productivity benefits than those that do not. Evidence is also found that innovation output, broadly defined, leads to a substantial improvement in productivity for internationally active firms, whereas its effect is negative for domestic-focused firms. Domestic firms are potentially more vulnerable to the disruptive effect of innovation than internationally active firms. The third essay analyses the effect of access to credit, public financial incentives, and tax-based financial incentives on trade outcomes and foreign market participation using the same cross-country firm-level dataset employed in the second essay. Access to credit, public, or tax-based financial incentives are found to lead to a substantial improvement in a firm’s export performance, and the utilization of a larger share of imported inputs or services in the production process. The effect of financial constraints is found to be size dependent. In general, medium-sized firms with access to credit, public, or tax-based financial incentives display better international trade performance than others. These results provide new evidence on the role of public and/or tax-based financial incentives in promoting internationalization.