Targeted Investments in Modernization and Gains in Productivity: Evidence from Firms in the Global Paper Industry

This paper examines the impact of investments in modernization and innovation on productivity in a sample of firms in the global pulp and paper industry. Our motivation for this paper arose from plant-visits the authors made to pulp and paper mills in North America and Europe, focusing on issues related to productivity, innovation and competition. In contrast to much of the existing literature which focuses on the impact of R&D and patents on firms' performance and productivity, we collected data and information on actual investment transactions in four main areas of operations: (i) mechanical, (ii) chemicals, (iii) monitoring devices and (iv) information technology. We find that firms which made decisions to implement a greater number of investment transactions in modernization achieved higher productivity, and these estimated quantitative effects are greater than the impact of standard innovation variables such as patents and R&D. Investment transactions in the information technology and digital monitoring devices imparted a particularly noticeable boost to productivity. These results are obtained after controlling for other firm-specific variables such as capital-intensity and mergers and acquisitions. Two broad messages emerge from our study. First, firms' decisions to undertake investments in modernization and various forms of incremental innovations appear to be critical for achieving gains in productivity. While these may typically generate small gains on a year-to-year basis, they can compound to form meaningful differences in performance, productivity and competitive position across firms in the longer-run. Second, for some of the traditional industries like pulp and paper, R&D and patents seem to be particularly poor indicators of innovation and, more generally, how firms go about achieving gains in productivity. While this paper focuses on the pulp and paper industry, our broad framework and methodology is general and can be applied to understanding firms' strategies related to enhancing performance and productivity in a variety of industries.