This document summarizes a presentation on dummy variables and innovation in the manufacturing sector in Pakistan. It includes: 1) References several books on econometrics and a research paper on determinants of innovation in manufacturing in Pakistan. 2) Defines dummy variables, product innovation, and process innovation. Large firms, exporting firms, and firms with more educated managers are more likely to innovate. 3) Uses panel data from Pakistani manufacturing firms to estimate innovation rates based on firm characteristics like size, location, and industry. The highest innovation rates are in Karachi, large firms, and textile/food/garment industries. 4) Employs a probit model to estimate the effects of internal

1. Here I begin….

2. Dummy Variables (Binary
variables)

3. References for my Presentation
Lecture!
Books Literature Research Paper Reference
• Elements of Econometrics-
Jan Kmenta • “What Determines Innovation
• Applied Econometrics- in Manufacturing Sector?
Dimitrios Asteriou & Stephen Evidence from Pakistan”, By
G. Hall
Mahreen Mahmud and
• Theory of Econometrics- A.
Koutsoyiannis
Hamna Ahmed
• Basic Econometrics- Damodar
Gujarati
• Econometric Methods- Jack
Johnston & John DiNardo

5. DUMMY VARIABLE
International Literature i.e. Books Research Paper
• Elements of Econometrics – • What Determines
Jan Kamenta Innovation in the
• Theory of Econometrics – A. Manufacturing Sector?
Koutsoyiannis Evidence from Pakistan,
• Econometric Methods – By Mahreen Mahmud
Jack Johston & John (Lahore School of
DiNardo economics) and Hamna
• Basic Econometrics - Ahmed
Damodar N. Gujarati
• Applied Econometrics-
Dimitrios Asteriou &
Stephen g. Hall

6. Introduction
 Key ingredients in developing country’s growth strategy to
catch up with Developed one’s.
 The World economics forum considers it one of the twelve
pillars of Global competitiveness Index.
 Positive relation b/w innovation and productivity.
 Some European-industrialized countries review shows that
the elasticity of innovation w.r.t. growth ranges b/w 0.035
and 0.29

7. Innovation
 “the introduction of a new product or process over the
past three years” – most widely used operational
definition.
 Complex process, difficult to quantify.
 Property rights, in case of developing countries.
 Pakistan ranks at 118th our of a total of 142 countries-
Global Competitiveness Report 2011-12.

8. Innovation as a Driver
of Growth
Innovation Competitiveness Productivity Growth

9. Innovation can be in,
Product Process
• Definition, • Definition,
“An article or “Perform a series of
substance that is mechanical or chemical
manufactured or refined for operations on (something) in
sale.” order to change or preserve
it.”

10. Innovative VS Non-Innovation- Firms
Firm’s Internal characteristics Firm’s external characteristics
 Size  Geographical location
 Age  Demand growth in the
 Ownership structure industry
 Past performance  Industry concentration
 Trade status  Government policies
 Quality of management  General institutional structure
 Training & education of the firm’s operating area
background  etc.
 Manager’s & entrepreneur’s
experience
 etc.

12. Firm’s size
and
innovation
 Positive link b/w size of firms, innovation and
productivity.

13. Data Source
o Panel data provided by two rounds of Pakistan Investment Climate
Assessment Survey conducted by the World Bank in 2002 and 2006-
07 respectively with total of 40 manufacturing firms.
 Panel survey provides detailed info on firm characteristics and on
various aspects of business environment in the country.
 Key dimensions like,
I. Infrastructure and services,
II. Courts,
III. Crimes,
IV. Government-business relations,
V. Degree of competition, and
VI. Factor markets (land, labor and finance).
 Surveyed firms located in 13 cities across the country with largest
share (of innovation) coming from Karachi.
 07 different industries with 60% share (of innovation) coming from
Textile, Food and Garments industries.

14. Innovation Rates- Pakistan
Innovative by firm type
50%
Both prod & proc
23% Prod only
Proc only
27%

15. Innovation Rates- Pakistan
By Size Firm
60% 25%
52% 22%
50%
20%
40%
15% 13%
30%
22%
20% Firms 10% Firm
10%
10% 5%
0%
0%
Exporters Non
exporters

16. Innovation Rates by Industry
30.00%
25.00%
20.00%
15.00%
10.00%
5.00% Product
Process
0.00%

17. 60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Karachi
Lahore
Sheikhupura
Sialkot
Faisalabad
Gujranwala
Wazirabad
Islamabad/Rawalpindi
Sukkur
Hyderabad
Quetta
Peshawar
Innovation Rates by Location
Process
Product

18. Methodology
Estimation strategy
Empirical Framework  Prob(Ijt = 1|X,Y) = αo+
ΣβiXjt-1+ΣγiYjt-1+εo
 Estimating probit model using
 Ijt = αo+ ΣβiYjt-1+ΣγiYjt-1+εo MLE technique.
Ijt is a dummy variable taking on value Probit model is the
of 1 if firm j is an innovator in year 2006-
07 and 0 else. econometric model having Dep.
Variable as binary i.e. 0 or 1
t refers to the second round of the panel
(2006-07) and t-1 is the first (2002).  Where logit model just
contains different cdf for indep.
Xjt-1 & Yjt-1 are the vectors of internal Var of probit model
& external vectors characteristics
respectively that firm j had in 2002.
αo,βi and γi are the parameters
 εo is the error term

19. Modified Dep. Var. Technique
Product equation Process equation
Prob(Prodjt = 1|X,Y) = • Prob(Procjt = 1|X,Y) = αo+
αo+ ΣβiXjt-1+ΣγiYjt-1+εo ΣβiXjt-1+ΣγiYjt-1+εo
 Prod refers to product • Proc refers to process
innovation in the 2006-07 innovation in the 2006-07
period, respectively. period, respectively.
 In this way, through this • In this way, through this
equation estimates on the equation estimates on the
determinants of innovation determinants of innovation
are separate for product are separate for product
innovators. innovators.

20. Results
 Exporting firm got 15% higher probability of
innovation.
 Medium firms are 17.5% more, to small.
 Large firms are 48.6% more to innovate, in
comparison to small.
 Top manager’s experience matters 0.6%
 Education matters 2.8%

21. Equation 2, 2(augmented) 3, 4
Table 3 Table 4
• Shows the result of estimated • Shows the results of
equation 2 and augmented estimated equation 3
equation by involving the (product) and equation 4
effect of firms in clusters, with (process) , with their
their parameters and t parameters and t statistics
statistics values along with values along with marginal
marginal effects. effects.

22. Policy implication and conclusion

24. Who are they?

25.  Summary
• Conclusion

26. Questions & Answers

27. The Presentation Ends, But not my
Time

28. Dedication of this Presentation and my
motivation!
1. You can’t connect the dots looking forward, you can only
connect them looking backward.
2. The heaviness of being successful was replaced by the lightness
of being a beginner again, less sure about everything.
3. I loved what I did. You have got to find what you love.
4. ‘Keep looking, Dun Settle’
5. Every morning I looked in the morning and say, If today were
the last day of my lyf, what I want to do, what I am about to do
today. And when the answer is no for too many days in a row, I
know I need to change something.
6. ‘Stay hungry, stay foolish’

29. Steve Jobs
Born: February 24, 1955
San Francisco, California
American business executive, computer programmer, and entrepreneur

30. Motivational Speech
Steve Jobs Stanford Commencement Speech 2005