Applied Economics Letters

ISSN: 1350-4851 (Print) 1466-4291 (Online) Journal homepage: http://www.tandfonline.com/loi/rael20

Advanced technology, innovation, wages and

productivity in the Canadian manufacturing sector

Brian P. Cozzarin

To cite this article: Brian P. Cozzarin (2016) Advanced technology, innovation, wages and
productivity in the Canadian manufacturing sector, Applied Economics Letters, 23:4, 243-249,
DOI: 10.1080/13504851.2015.1068913

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Published online: 05 Aug 2015.

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 APPLIED ECONOMICS LETTERS, 2016
VOL. 23, NO. 4, 243–249
http://dx.doi.org/10.1080/13504851.2015.1068913

Advanced technology, innovation, wages and productivity in the Canadian

manufacturing sector
Brian P. Cozzarin
Department of Management Sciences, University of Waterloo, Waterloo, Ontario, Canada

ABSTRACT KEYWORDS
In this article, we used a two-step estimation procedure, where in the first stage, the number of Product innovation; process
advanced manufacturing technologies used in the firm was estimated using a negative innovation; advanced
binomial regression, and the expenditure on process and product innovation was estimated manufacturing technology;
using a type II Tobit procedure. In the second stage, we used the predicted values from the productivity; wages
first stage in wage and labour productivity equations. The data were from the 2009 Survey of JEL CLASSIFICATION
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Innovation and Business Strategy which was linked to the General Index of Financial O31; O32
Information (2004–2009) and the Longitudinal Employment Analysis Program (2004–2009).
The implications for policy are that we should not expect large aggregate effects of innovation
on productivity and employment. We should expect wage increases and productivity increases,
with process innovation. We should also expect moderate wage increases with product
innovation, and contrary to process innovation, the effect on productivity of product innova-
tion was negative.

I. Introduction community innovation surveys (CIS), Pianta and

Tancioni (2008) found that wages grow faster in
Canada’s recent budget announced nearly $10 bil-
sectors where innovation expenditure is higher.
lion targeted towards innovation or at activities that
They also discovered that factors affecting wages
support innovation (Flaherty 2010). With such funds
were different for high- and low-innovation sectors.
targeted towards innovation, it is important to quan-
In terms of productivity and innovation, Crepon,
tify the value of innovation to industry.
Duguet, and Mairessec (1998) using the French
Furthermore, the government is concerned that
Office of Industrial Studies and Statistics (SESSI)
advanced technology adoption in Canada lags the
survey found a positive effect of innovation on pro-
US (Gilroy 2013). The objectives of the article are
ductivity. In a study of Italian firms, Hall, Lotti, and
to find the impact of product and process innovation
Mairesse (2012) found that process innovation had a
and advanced technology on manufacturing wages
negative effect on productivity while product inno-
and productivity. The policy implications are as fol-
vation had a positive effect. Using CIS3 and CIS4,
lows: if the effects of innovation are positive then
Mairesse and Robin (2009) found that product inno-
government spending is justified, if the effects are
vation affects labour productivity positively but pro-
negligible then government spending is questionable
cess innovation does not. Huergo and Jaumandreu
or perhaps it should be re-directed to areas other
(2004) in a Spanish study of manufacturing firms
than innovation, perhaps to commercialization
found that process innovation caused productivity
instead. We will first discuss innovation and wages
growth.
and then innovation and productivity. In a Finnish
Here, we will discuss advanced manufacturing
study, Kalmi and Kauhanen (2008) found that wages
technology (AMT) in terms of wages and produc-
benefit from innovation. Martínez-Ros (2001) using
tivity. It has been shown that flexibility often
Spanish data found that firms with joint product-
reduces the engineering cost of design changes
process innovation pay higher wages and that inno-
and systems modifications. However, the savings
vation is a good approximation for rents. Using
are often offset by increased programming costs.

CONTACT: Brian P. Cozzarin brian.cozzarin@uwaterloo.ca

© 2015 Taylor & Francis
 244 B. P. COZZARIN
There will also often be a decrease in unskilled
labour requirements but an increase in those of
skilled labour (Sanchez 1996) with higher wages.
Feenstra and Hanson (1999) used the NBER
Productivity Database from 1979 to 1990 to inves-
tigate computer investment and worker wages.
They found that the expenditure on computers
increased relative wages for nonproduction work-
ers. Doms, Dunne, and Troske (1997) used the
1988 Survey of Manufacturing Technology and
the Worker-Establishment Characteristic Database
to examine the wage effect of AMT (N = 3260).
They found that plants that use a large number of
new technologies pay higher wages and employ
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more educated workers along with more man-
agers, professionals and precision-craft workers.
Dunne and Schmitz (1995) used the US 1988
Census Bureau Survey of Advanced Technology
and the 1987 Census of Manufactures
(N = 6909). They found that plants that used the
largest number of AMT paid the highest wages;
these plants also employed the largest proportion
of nonproduction workers. In terms of productiv-
ity and AMT, Bartelsman, Van Leeuwen, and
Nieuwenhuijsen (1998) used statistics from the
Netherlands for 1985 and 1991 and linked to the
1992 Survey of Advanced Manufacturing
Technology and to the Survey of Capital Stocks.
Variables included output, value added, employ-
ment, wage, productivity, K-L ratio and an AMT
index. The results showed that firms using AMT
in 1992 showed higher average growth rates of
productivity between 1985 and 1991.
II. Survey of Innovation and Business Strategy
(SIBS) and linkage to GIFI and LEAP
The SIBS 20091 was linked with a unique firm iden-
tifier to the General Index of Financial Information
(GIFI)2 collected by Canada Revenue Agency and
the Longitudinal Employment Analysis Program
(LEAP).3 The final sample size after linking and
cleaning is 2715 firms. For our purposes, we use
the AMT definition from SIBS: ‘advanced
1
The survey was conducted in January‒April 2010 by Statistics Canada under the auspices of the 1985 Statistics Act which legally requires firms to answer
the questionnaire. The sample was 6233 firms with at least 20 employees; response rate was 70%. For more information, see http://www.ic.gc.ca/eic/site/
eas-aes.nsf/eng/h_ra02092.html.
2
For more information, see http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/rtrn/wht/gifi-ogrf/menu-eng.html.
3
For more information, see http://www23.statcan.gc.ca/imdb/p2SV.pl?Function=getSurvey&SDDS=8013.
4
Due to space limitations, the NAICS4 concordance with the taxonomy is omitted.
technologies are new technologies (equipment or
software) that perform a new function or improve
some function significantly better than commonly
used technologies in the industry or by your
competitors.’ The survey lists nine AMTs: advanced
computerized design and engineering; advanced
computerized processing, fabrication and assembly;
advanced computerized inspection technologies;
advanced communication technologies; advanced
automated material handling technologies; advanced
information integration and control technologies;
advanced biotechnologies/bioproducts; advanced
nanotechnologies and advanced green technologies.
For industry dummies we adapt Pavitt’s (1984) tax-
onomy – with five classifications for North
American Industry Classification System (NAICS)
manufacturing industries: labour intensive
(N = 674), resource intensive (N = 658), scale inten-
sive (N = 802), science (N = 234) and specialized
(N = 347).4 The remaining variable names and sta-
tistics are mentioned in Table 1.
III. Model estimation
Given the forgoing discussion from the
‘Introduction’ section, two hypotheses related to
innovation and AMT are postulated:
(1) Product and process innovations increase
manufacturing wages and labour productivity.
(2) Use of AMT increases manufacturing wages
and labour productivity.
We use a modified ‘CDM’ model that employs two
sequential stages (Mairesse and Robin 2009).
Econometric specifications for the product innova-
tion, process innovation and advanced technology
equations are as follows. Specify in the first stage a
type II Tobit model, where the probit part of the
selection process estimates the probability of under-
taking process (product) innovation, and the maxi-
mum likelihood OLS part estimates the expenditure
on process (product) innovation. Also in the first
stage is the estimation of the number of AMT used
by the firm using a negative binomial estimator. The
predicted values from the type II Tobit expenditure
 APPLIED ECONOMICS LETTERS 245

Table 1. Regression variables. proc exp ¼ μ2 numamt þ β2 X1 þ ε2

0
(2)
Variable Description (source) Mean SE
dequity* 2007–2009 change in equity (GIFI) −0.2301 0.0452 First-stage type II Tobit for product innovation and
demp* 2007–2009 change in employment −0.1705 0.0420
(LEAP)
expenditure:
dwage* 2007–2009 change in wage (LEAP) −0.1510 0.0593 0
dyl* 2007–2009 change in Y/L (GIFI, −0.1990 0.0672 Prðprod binÞ ¼ μ3 numamt þ β3 X1 þ ε3 (3)
LEAP) 0
dkl* 2007–2009 change in K/L (GIFI, −0.0687 0.0626 prod exp ¼ μ4 numamt þ β4 X1 þ ε4 (4)
LEAP)
proc_exp 2009 process innovation 330,846 61,589 First-stage negative binomial for AMT:
expenditure (Q49)
prod_exp 2009 product innovation 477,640 87,866 0
expenditure (Q88) numamt ¼ β5 X2 þ ε5 (5)
numamt 2009 number of AMT in use, up to 9 1.6596 0.0510
(Q44) Second-stage performance equations using predicted
proc_bin Binary = 1 if had process innovation 0.1730 0.0200
(2007–2009) values from stage one:
prod_bin Binary = 1 if had product 0.1810 0.0150
innovation (2007–2009) ^
dwage ¼ φ1 demp þ φ2 numamt þ φ3 proc^ exp
DE2006 Debt to equity ratio 2006 (GIFI) −1859.58 1895.72 (6)
þ φ prod^ exp þβ X3 þ ε6
0
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DE2007 Debt to equity ratio 2007 (GIFI) 31.77 11.26

DE2008 Debt to equity ratio 2008 (GIFI) 22.20
aXpc Interaction: number of AMT, (189,731) 37,823
expenditure process innovation
aXpd Interaction: number of AMT, (1,438,042) 107,151
expenditure product innovation
pcXpd Interaction: process innovation 4.36E+13 1.17E+12
expenditure, product innovation
expenditure
hrm HR practices (standardized variable −0.1828
from 9 items in Q64)
university Percent employees with university 0.1071
degree (Q63)
change_bp Change to business practices −0.0075
(standardized variable from 9 items
in Q38)
ob_export Obstacles to exporting −0.1292
(standardized variable from 12
items in Q37)
hoffice Binary = 1 if head office is Canada 0.8927
(Q10)
outsource Outsourcing activities (standardized 0.0748
variable from 14 items in Q24)
Note: HR, human resource; *** p ≤ 0.001; ** p ≤ 0.01; * p ≤ 0.05.
equations and the AMT equation are then used in
stage 3 – wage and productivity equations.
We will assume that technology adoption is endo-
genous (Chennells and VanReenan 1997, 1998; Siegel
1998). And we will assume that product and process
innovation are endogenous. This explains why we use
all three predicted variables in the wage and produc-
tivity equations. The error structure in the wage
equation and the productivity equation is unknown
(since we are combining predicted values from nega-
tive binomial estimator and a two-step type II Tobit
procedure) and there may be bias from the predicted
regressors; thus, we use bootstrapped SEs.
First-stage type II Tobit for process innovation
and expenditure:
0
Prðproc binÞ ¼ μ1 numamt þ β1 X1 þ ε1
4 6
10.01
^
dyl ¼ ψ1 dkl þ ψ2 numamt þψ3 proc^ exp
(7)
þ ψ prod^ exp þβ X3 þ ε7
0
4 7
where dwage is 2007–2009 change in wage, demp is
2007–2009 change in employment, dyl is 2007–2009
0.0259 change in output to labour ratio (Y/L = labour pro-
0.0036 ductivity) and dkl is 2007–2009 change in capital to
0.0288
labour ratio (K/L). By using differenced variables,
we eliminate unobserved fixed effects for employ-
0.0278 ment, wages, K/L and Y/L. All variables with ‘^’ are
predicted values from the first-stage equations.
0.0069
0.0069 Independent variables
The average debt to equity ratio will be used in the
innovation equations (Mairesse et al. 1999). Chen
and Huang (2009) found a positive relationship for
hiring practices, employee participation and perfor-
mance appraisals for administrative innovation,
while for technical innovation staffing, participa-
tion and compensation were significant. Question
64 in SIBS lists nine HR practices that the employer
can checkmark related to the following: aptitude
tests for selection of new employees, formal train-
ing programmes to do their job, formal training
programmes to aid in promotion, formal perfor-
mance agreements, formal appraisals for nonman-
agement staff, formal appraisals for management,
incentive programmes to nonmanagement staff,
incentive programmes to management and incen-
tive programmes that are available to all employees.
We created a normalized variable called hrm for
‘human resource management’ from these prac-
(1) tices. From question 63, we created university
 246 B. P. COZZARIN

which is the percentage of employees with a uni- Table 2. Negative binomial regression for number of AMT.
versity degree. numamt Coef. SE
DE2006 4.95E-07 2.49E-06
Business practices can impact innovation and DE2007 7.68E-06 0.000
thus SIBS includes nine items related to changing DE2008 −2.27E-05 0.000
hrm 0.190*** 0.023
business practices in question 38. A standardized university 0.382** 0.141
variable was created called change_bp from the fol- change_bp 0.260*** 0.022
hoffice −0.027 0.057
lowing items: cost reduction, improved good/ser- outsource 0.062 0.068
vice quality, decreased lead times, increased after- ob_export 0.125*** 0.022
b_lab −0.193** 0.073
sales functions, acceptance of greater risk sharing, b_res −0.242*** 0.074
incurred greater up-front or nonrecurring costs, b_sca −0.141* 0.070
b_sci 0.084 0.091
entered a new geographic region or expanded exist- _cons 0.594*** 0.077
N 2715
ing operations, undertook a new business activity LR χ2(13) 378.3
and extended business hours to accommodate Prob > χ2 0.0000
Log likelihood −4739.4
employees/customers/suppliers. From question 37 Pseudo-R2 0.04
(a nonforced Likert scale for ‘low’, ‘medium’ and
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Note: *** p ≤ 0.001; ** p ≤ 0.01; * p ≤ 0.05.

‘high’), we created a normalized variable called
ob_export for obstacles to exporting. The obstacles
listed in question 37 include legal/administrative, to equity ratio of the firm had no effect on the
export taxes, uncertainty about international stan- number of AMT in use.
dards, access to financing, concerns of violating Table 3 shows the type II Tobit procedure for
patents/intellectual property rights, foreign tariffs/ expenditure on process innovation. The first-stage
trade barriers, border security issues, distance to probit equation has a binary dependent variable
customers, linguistic/cultural issues, customer
requirements to use specific technology/systems, Table 3. Type II Tobit model for expenditure on process
meeting cost requirements and meeting quality innovation.
requirements. Outsourcing activities of the firm Type II Tobit selection model
(coded as ‘yes’/‘no’) are reported in question 24. A Coef. SE
standardized variable was created using the 14 proc_exp Step 2: Maximum likelihood estimation
numamt 7,39,430*** 80,932
items: production of goods, provision of services, dequity −12,363 61,842
distribution and logistics, call centres, marketing/ hrm 7,48,391*** 1,65,841
university 4,21,791 1,029,418
sales/after sales service, software development, data change_bp 1,121,531*** 1,64,849
hoffice 39,583 4,04,010
processing, ICT (information and communications outsource 1,678,886*** 4,97,421
technology) services, legal services, accounting/ ob_export 3,71,734* 1,58,713
b_lab 0.440 206
book-keeping, human resource management b_res 0.243 174
(HRM), financial management, engineering/technical b_sca 0.647 189
b_sci 0.835 272
services and R&D. Finally, a binary variable called _cons −3,951,208 4,28,493
hoffice was created that equals 1 if the firm has its proc_bin Step 1: Probit for sample selection
head office in Canada. numamt 0.108*** 0.012
dequity −0.002 0.009
hrm 0.109*** 0.024
university 0.062 0.150
IV. Estimation results change_bp 0.164*** 0.024
hoffice 0.006 0.059
outsource 0.245*** 0.073
The first stage estimates for the number of AMT and ob_export 0.054* 0.023
expenditure on process and product innovation are _cons −0.577*** 0.063
N 2515
displayed in Tables 2–4. For the negative binomial Censored obs. 1054
regression of number of AMT (Table 2), we see that Uncensored obs. 1461
Wald χ2(12) 283.7
human resource practices, change in business prac- Prob > χ2 0.0000
Log likelihood −25581.5
tices and obstacles to exports are all highly signifi- LR test for independence χ2(1) = 1825.2 Prob > χ2 = 0.0000
cant. The proportion of university educated of equations
employees is significant at the 1% level. The debt Note: *** p ≤ 0.001; ** p ≤ 0.01; * p ≤ 0.05.
 APPLIED ECONOMICS LETTERS 247

Table 4. Type II Tobit model for expenditure on product Table 5. Bootstrap OLS performance equations.
innovation. dwage dyl
Type II Tobit selection model (change in (change in labour
Coef. SE wage productivity
2007–09) SE 2007–09) SE.
prod_exp Step 2: Maximum likelihood estimation
numamt 1,436,311*** 2,34,905 demp 1.187*** 0.043
dequity −3,02,785 1,85,007 dkl 0.771*** 0.084
hrm 1,683,465*** 4,82,652 ahat# 0.130 1.176 −0.020 4.747
university 1.33E+07*** 2,873,255 pchat# 7.85E-07*** 1.470E-07 1.57E-06** 5.550E-07
change_bp 3,240,482*** 4,80,338 pdhat# −4.15E-07*** 7.690E-08 −7.86E-07** 2.790E-07
hoffice 1,119,526 1,171,739 aXpc## −6.25E-10 4.830E-08 −1.09E-07 1.230E-07
outsource 4,764,503*** 1,430,169 aXpd## 6.72E-09 1.630E-08 3.76E-08 4.860E-08
ob_export 1,524,812*** 4,62,289 pcXpd## −4.46E-16 1.480E-15 −9.06E-16 4.270E-15
b_lab −1.105 584.075 hrm 0.081 0.225 0.169 0.896
b_res −1.291 593.808 university 5.067*** 1.018 9.065* 3.931
b_sca −0.767 556.287 change_bp 0.405 0.314 0.746 1.242
b_sci 0.843 741.340 hoffice 0.386*** 0.090 0.587* 0.277
_cons −14,700,000*** 1,242,935 outsource 0.641*** 0.133 1.076* 0.484
ob_export 0.352* 0.157 0.615 0.616
prod_bin Step 1: Probit for sample selection b_lab 0.048 0.230 −0.103 0.912
numamt 0.0739*** 0.0121 b_res −0.002 0.290 −0.041 1.140
−0.0156
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dequity 0.0095 b_sca 0.016 0.170 −0.159 0.667

hrm 0.0867*** 0.0248 b_sci −0.091 0.113 −0.037 0.457
university 0.6854*** 0.1483 _cons −2.854*** 0.887 −4.996 3.447
change_bp 0.1668*** 0.0246 N 2293 2293
hoffice 0.0576 0.0604 Bootstrap 500 500
outsource 0.2453*** 0.0736 replications
ob_export 0.0785*** 0.0238 R2 0.90 0.59
_cons −0.7558*** 0.0638 Root MSE 0.54 1.44
N 2515
Censored obs. 1226 Notes: #indicates a predicted variable from either type II Tobit estimation
Uncensored obs. 1289 (pchat, pdhat) or from negative binomial estimation (ahat).
##
Wald χ2(12) 238.5 indicates an interaction variable created using predicted values from type
Prob > χ2 0.0000 II Tobit and negative binomial estimation (aXpc, aXpd) or from type II
Log likelihood −24027.7 Tobit estimation (pcXpd).
LR test for independence χ2(1) = 1923.1 Prob > χ2 = 0.0000 *** p ≤ 0.001; ** p ≤ 0.01; * p ≤ 0.05.
of equations
Note: *** p ≤ 0.001; ** p ≤ 0.01; * p ≤ 0.05.
interaction terms are also insignificant. We see that
both pchat (predicted value of expenditure on process
called proc_bin, while the second-stage OLS regres- innovations) and pdhat (predicted value of expendi-
sion has process innovation expenditure as the depen- tures on product innovation) are significant. In the
dent variable. We see that HRM intensity, intensity of wage equation, the elasticity for pchat is 12.60 and
changes to business processes, outsourcing and obsta- 5.59 for pdhat. So for a 1% increase in the expenditure
cles to exporting are substantially significant. Table 4 on process innovation, there is a 12.60% change in
shows the type II Tobit procedure for engaging in and wages. However, as the table shows, product and pro-
expenditure on product innovation. The same vari- cess innovation were found to impact wages and
ables as in Table 3 are significant; however, two more labour productivity. The elasticity for process innova-
variables arise: change in equity and the proportion of tion in the wage equation is 12.6% while for product
university-educated employees. This indicates that innovation it is 5.6%. This demonstrates that wages are
increased cash flow and a higher proportion of uni- more affected by process innovation. In the labour
versity-educated employees have a significant impact productivity equation, process innovations have an
on the likelihood of conducting product innovation elasticity of 0.4% and product innovations have an
and on the level of expenditure. elasticity of −6.8%.
Table 5 shows the results from the bootstrap regres- What can be said to generalize these findings?
sions for change in wage and change in labour produc- We see that process innovation increases wages.
tivity. From the table, we see that ahat is insignificant Pianta and Tancioni (2008) used European CIS
in both regressions. Our finding of no effect of AMT is and found that wages grew faster in sectors where
in contrast to the literature (Bartel and Sicherman innovation expenditure was higher. Unfortunately,
1999; Bartelsman, Van Leeuwen, and Nieuwenhuijsen our results cannot corroborate their findings. In the
1998; Doms, Dunne, and Troske 1997; Dunne and productivity equation process, innovation reduces
Schmitz 1995; Hitt and Brynjolfsson 1996). The productivity.
 248 B. P. COZZARIN
V. Conclusion
In this article, we used a modified ‘CDM’ two-stage
estimation procedure. In the first stage, we estimated
the number of AMT, expenditure on product and
process innovation; in the second stage, the predictions
from stage one were used in wage and productivity
equations. Data were from the SIBS which was linked
to the General Index of Financial Information and the
LEAP. In the wage equation, the elasticity for process
innovation is 12.6% and for product innovation it is
5.6%. In the labour productivity equation, process
innovations have an elasticity of 0.4% and product
innovations have an elasticity of −6.8%. The implica-
tions for policy are that we should not expect large
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aggregate effects of innovation on productivity.
However, we should expect wage increases and pro-
ductivity increases, with process innovation. We
should also expect moderate wage increases with pro-
duct innovation, but should not expect productivity to
increase.
Disclosure statement
No potential conflict of interest was reported by the author.
Funding
This work was supported in part by Social Sciences and
Humanities Research Council under Grant 435-2014-2061
and by Industry Canada under Research Contract 5025591.
ORCID
Brian P. Cozzarin http://orcid.org/0000-0002-4280-7633
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