How does knowledge spur the productivity of private Egyptian firms? An instrumental variable approach

Purpose This study aims to dissect firm knowledge into two main types: internal firm knowledge (knowledge workers) and external firm knowledge (relational knowledge with other firms). This study aims to investigate how each type affects the productivity of the firms. This study also examines how this effect differs among Egyptian firms in the agriculture, manufacturing and service sectors. Design/methodology/approach The authors use firm-level data in Egypt on the sectoral level. The properties of instrumental variables regression using two-stage least-squares estimation are adopted to overcome endogeneity and omitted variable bias in the empirical estimations. Findings The study’s findings reveal that the effects of internal and external knowledge on the firm productivity are sector-specific; knowledge-workers and relational knowledge are two times more effective for agriculture than manufacturing and service firms; external knowledge plays a vital role in increasing productivity relative to internal knowledge for the manufacturing sector; finally, internal and external knowledge has the same effect on the service firms. Originality/value This research adds to the body knowledge-based theory of the firm by examining the effects of internal and external knowledge on the firms’ productivity. In particular, the paper differentiates this effect across three sectors: agriculture, manufacturing and services. This paper also suggests a novel empirical methodology to address endogeneity and omitted variable bias in this literature of firm knowledge and productivity.