Value creation through intellectual property and innovation: the case of the Turkish manufacturing industry

Abstract

The purpose of this thesis is to examine the importance of welfare increasing factors in the Turkish manufacturing sector. The global political and economic system in the 21st century favours those that can innovate and create value. The importance of physical labor as a factor of production is being replaced by human talent that can innovate and create knowledge. These welfare increasing factors are collectively called intellectual property and they are strictly protected in the new economic environment. Innovation is defined as any activity that "adds value" and welfare is obtained by value creation. This thesis looks at the effect of various value adding activities like Research and Development, advertising, patents and trademarks on value creation which is operationalized in two dimensions. One is the total market value of the firms after taking into account their physical assets and the other is the value added (output or production) after controlling for traditional labor and capital. Based on the market value regressions an innovation index is constructed that can be used to rank firms with respect to their innovative activity. This index is later used in the Cobb-Douglas production function to estimate its contribution to value added of the companies that are listed in the Istanbul Stock Exchange. The results indicate that investing in intellectual property increases the market values of the companies six times more than investing in physical assets and they have a small but significant effect on value added. However, the value adding potential of the companies seems to have been declining which necessitates future work. Finally a questionnaire for obtaining expert opinion is discussed which sheds light on best practices and difficulties. This study is an important first step but it also has some limitations. Better measures of innovation and better models can be developed to obtain more comprehensive results. Similarly, the sample selection process and sample size can be improved to obtain more assuring results. Whatever the results, one thing is certain however. The advancement of the humanity as a whole has always depended highly on value adding activities and that will be more important than ever in the new century.