Impact of Innovation on Productivity and Efficiency: Evidence from the Textile Industry of Pakistan

Abstract

Being ranked 4th in the production of cotton, Pakistan's Textile industry makes up one-fourth of industrial output and generates employment for about 40 percent of the industrial labor force. Having 60 percent of total export, textile export has been declining in Pakistan since 2013-14. Therefore, this study explored the impact of innovation on productivity and efficiency in the textile industry in Faisalabad and Lahore, Pakistan. These two districts together contribute 47.8 % of the total textile firms of Punjab, Pakistan. The Stochastic Frontier Analysis has been used on data taken from 193 textile firms by random sampling. The ownership of the firms has key importance in reducing the firms' inefficiency. The lesser the liabilities, the more likely it is for the firm to take the risk, apply new ideas, and adopt innovation. Employing skilled labor in their work facility increases the likelihood of efficiency. The results show a positive relationship between efficiency and all types of innovation. While Research and development expenditure also has a positive effect on productivity as well as efficiency. Workers' training also enhances the productivity of firms, so government should facilitate the firms for workers' training and R&D expenditure.