Does innovation make (SME) firms more productive?

There is no shortage of dialogues and commentaries extolling the need for more innovation to regenerate sagging national productivity growth. However, hard evidence on whether or not innovation makes a difference is largely absent because most firm-level studies are drawn from cross-sectional data which cannot disentangle cause and effect. This paper advances this state of the art by bringing a dynamic element to the modelling. We use a panel of approximately 7 000 Australian small to medium-sized enterprises (SMEs), over a five-year period, to estimate the effect of introducing a new product, or new managerial, operational or marketing method on the firm's future productivity. In our context, we define these as changes that were new to the firm, rather than new to the world. Over and above innovation, we also test for whether collaborative arrangements with external parties make further contributions to firm productivity. We begin this paper with a review of the accepted stylised facts concerning firm-level innovation and productivity. We then describe and estimate our model. We find that firms that introduced an innovation saw their (total factor) productivity rise by 2.7 percentage points annually over the subsequent years relative to other firms in their industry. Those firms that accompanied their innovations with an innovation-oriented collaboration raised their productivity by an additional 3.3 percentage points