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by Wulong Gu, Statistics Canada, and Jianmin Tang, Industry Canada, November 2003
Empirical studies commonly use research and development (R&D) to measure innovation and often find, especially in Canada, no strong link between productivity and innovation. In this paper, we model innovation as an unobservable latent variable that underlies four indicators: R&D, patents, technology adoption and skills. We find that these indicators are reasonably good measures of innovation for aggregate manufacturing. But the reliability of the indicators for innovation differs among individual industries. Only the skill indicator is a fairly good measure of innovation for all manufacturing industries. Our innovation indexes, based on the latent variable model, show that most manufacturing industries became more innovative over the 1980–1997 period. The pace of innovation in the electrical and electronic products industry accelerated during the 1990s. In addition, we show that the new measure of innovation has a positive and statistically significant impact on productivity. It takes from one to three years, depending on the industry, for innovation to generate an impact on productivity.