Abstract
Using data from Taiwanese manufacturing firms for the 2000–2015 period, the results of the system-generalised method of moments revealed the direction of causality from a firm's innovative activities to firm profitability. This study also revealed that the profitability of innovative firms surpassed that of noninnovative firms by employing propensity score matching. We further observed a short-term profit-enhancing effect of a firm obtaining a patent after controlling for firm heterogeneity and the endogeneity problem. Our results indicate that firms that invested in research and development successfully obtained patents, and the protection granted by government-issued patents improved their profitability. These findings have strong policy-related implications; innovation policymakers in the government should ensure a favourable industrial environment that focuses on giving firms incentives to improve performance.
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