The Relationship Between Innovation and Productivity Based on R&D and ICT Use An Empirical Analysis of Firms in Luxembourg

This paper assesses whether Research and Development (R&D) investments and Information and Communication Technologies (ICT) use play a role in determining the firm's innovativeness and labour productivity. The estimation method is based on the three-step CDM model. Unlike most previous studies, this paper distinguishes between external and internal R&D expenditures. We also introduce different specifications of ICT to capture their degree of variety, rather than aggregated measure of ICT capital, as frequently applied in previous analyses. Results highlight the complexity of managing ICT and R&D investments with regards to improving firm innovation. While confirming the acknowledged "innovation enabler" role of these innovation inputs, not all increases in ICT investments and R&D translate into equivalent increases in a firm's capacity to innovate. Estimation results also confirm the positive relationship between innovation and labour productivity.