Abstract
This paper examines how the firm´s advertising investments are related to different measures of economic and productivity performance during 2007 – 2017 in Ecuadorian manufacturing. Particularly, this study analyzes if firms that have advertising investments have better economic and productivity performance compare to non-advertising investment firms. In addition, this looks for evidence on how the different advertising strategies may affect productivity and gross revenue in both advertising and non-advertising firms. For this, this paper estimates the total factor productivity (TFP) at firm-level using a semi-parametric approach to reduce the simultaneous and endogeneity problems in the selection of inputs. The estimation results show that manufacturing firms which invest in advertising have an Advertising Premia on economic and productivity indicators, this premia is higher on economic outcomes. Also, the findings are that continuing advertising investment strategy firms have higher TFP, labor productivity, and gross revenue than exiting advertising investment firms, suggesting self-selection in the exit side of the market but not in the entry side of the market. Finally, the study finds that after firms entering to invest in advertising, firms experience an improvement on TFP, labor productivity, and gross revenue growth, which are in favor of learning by advertising hypothesis.
Highlights
Firms usually seek to have economic returns/profitability to be able to remain and growth in time
We estimate a parametric and semi-parametric Cobb Douglas production function using the Ordinary Least Square (OLS), Fixed Effects (FE), System Generalized Method of Moments (GMMSYS) proposed by Arellano & Bond (1991), Blundell & Bond (2000) and the preferred method, Levinsohn & Petrin (2003) (LP) estimator, to obtain the total factor productivity (TFP) corrected for the simultaneous determination of inputs and productivity, minimizing endogeneity problems and robust to the Ackerberg, Caves, & Frazer (2015) critique
We employ a strategy analysis of investments in advertising over the entire period, in order to determine if those strategies increase the TFP, TFP growth, labor productivity, and gross revenue
Summary
Firms usually seek to have economic returns/profitability to be able to remain and growth in time. Investments in intangible assets/capital such as Research and Development (R&D), patents, intellectual property rights, trademarks, goodwill, advertising, and others, may lead to generate the same profitability, sales, productivity and growth levels in market share, see for example: (Corchón & Marini, 2018; Hall, Mairesse, & Mohnen, 2010; Lev, 2005) In this final line, Bontempi & Mairesse (2015) find that intangible capital represents more than four times the productivity gains of tangible capital, similar results are found by Crass & Peters (2014) where intangible assets, especially R&D, advertising spending and human capital, improves business productivity. Much evidence suggests that this investment has a positive effect on a firm’s market value (Connolly & Hirschey, 1984; Salinger, 1984; Chauvin & Hirschey, 1993; Joshi & Hanssens, 2010; Luo & de Jong, 2012)
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