Does innovation cause the productivity improvement in taiwanese manufacturing firms?

In recent two decades, firms face an extremely rapid changing environment characterized by globalization, great diversification of consumers' demand, the emergence of new competitors and the shock of financial crisis. Therefore, innovation is of great interest to most researchers because it is regarded as a key element of productivity growth and firm survival for enterprises. Moreover, there has been a vast transformation in Taiwan's industrial development. However, some firms survive and grow from small firms or even micro firms to large-sized companies, while some choose to shut down. To truly reflect the impacts of innovation on firms' productivity performance, we will focus on the innovation activities of Taiwanese Manufacturing firms. Besides, in order to take the relations among R&D, innovation and productivity into consideration, we are going to use a modified CDM-type (Crepon et al., 1998) model to solve the selection bias and endogeneity problem. The basic structure of the model describes how firms decide whether to do R&D or not, and the intensity of R&D is produced as a result of this selection. The second stage is knowledge production function, and the third stage is the production function equation. One of the two datasets included is Taiwan Technological Innovation Survey II(TTIS-II), which is an innovation survey of Taiwan from 2004 to 2006 conducted by National Science Council. The other is Industry, Commerce and Service Census, which is compiled by Directorate-General of Budget, Accounting and Statics, Executive Yuan every five years. In order to calculate the total factor productivity (TFP), we will use Census in 2001 and 2006 at the same time. From our work, we conclude that process innovation brings significant and positive influence on total factor productivity, which is more beneficial for manufacturing firms in Taiwan.