nep-ino New Economics Papers
on Innovation
Issue of 2009‒10‒10
24 papers chosen by
Steffen Lippert
Massey University Department of Commerce

  1. Product and Process Innovation and the Decision to Export: Firm-level Evidence for Belgium By Ilke Van Beveren; Hylke Vandenbussche
  2. Industrial research versus development investment: the implications of financial constraints By Czarnitzki, Dirk; Hottenrott, Hanna; Thorwarth, Susanne
  3. Internal Finance and Patents - evidence from firm-level data By Martinsson, Gustav; Lööf, Hans
  4. Social network driven innovation By Ronald Jean Degen
  5. The Formation of Urban Centers under R\&D and Spillover Externalities By Kranich, Jan
  6. Technology, Competition and the Time of Entry: Diversification Patterns in the Development of New Drugs By Tatiana Plotnikova
  7. Pros and Cons of Backing Winners in Innovation Policy By Jo, Seung-gyu; den Butter, Frank A. G.
  8. Animal Spirits and the Composition of Innovation in a Lab-Equipment R&D Model By Pedro Rui Mazeda Gil
  9. Licensing weak patents By David Encaoua; Yassine Lefouili
  10. Beyond Technological Diversification: The Impact of Employee Diversity on Innovation By Christian R. Østergaard; Bram Timmermans; Kari Kristinsson
  11. Services Outsourcing and Innovation: An Empirical Investigation By Görg, Holger; Hanley, Aoife
  12. Complementary Patents and Market Structure By Klaus Schmidt
  13. Does social software support service innovation? By Meyer, Jenny
  14. The Copying Paradox: Why Converging Policies but Diverging Capacities for Development in Eastern European Innovation Systems? By Erkki Karo; Rainer Kattel
  15. A Bayesian Real Option Approach to Patents and Optimal Renewal Fees By Marc Baudry; Béatrice Dumont
  16. Industrial Restructuring and Innovation Policy in Central and Eastern Europe since 1990 By Erik S. Reinert; Rainer Kattel; Margit Suurna
  17. Licensing Complementary Patents: “Patent Trolls”, Market Structure, and “Excessive” Royalties By Anne Layne-Farrar; Klaus M. Schmidt
  18. Do research joint ventures serve a collusive function? By Michelle S. Goeree; Eric Helland
  19. Innovation and Financial Globalisation By Philip R. Lane IIIS, Trinity College Dublin and CEPR
  20. R&D, Corporate Governance and Profitability of Firms – a literature review By Wiberg, Daniel
  21. Catching up to the Technology Frontier: The Dichotomy Between Innovation and Imitation By Jakob Madsen; Rabiul Islam; James Ang
  22. Intellectual Property Rights, Foreign Direct Investment, and Industrial Development By Lee Branstetter; Kamal Saggi
  23. Learning towards system innovation.Evaluating a systemic instrument. By Barbara van Mierlo; Cees Leeuwis; Ruud E.H.M. Smits; Rosalinde Klein Woolthuis
  24. The antecedents and innovation consequences of organizational search: empirical evidence for Spain By Abel Lucena

  1. By: Ilke Van Beveren; Hylke Vandenbussche
    Abstract: Using data from the Community Innovation Survey for Belgium in two consecutive periods, this paper explores the relationship between firm-level innovation activities and the propensity to start exporting. To measure innovation, we include indicators of both innovative effort (R&D activities) as well as innovative output (product and process innovation). Our results suggest that the combination of product and process innovation, rather than either of the two in isolation, increases a firm¡¯s probability to enter the export market. After controlling for potential endogeneity of the innovation activities, only firms with a sufficiently high probability to start exporting engage in product and process innovation prior to their entry on the export market, pointing to the importance of self-selection into innovation.
    Keywords: Exports, Product innovation, Process innovation, Self-selection, Firm heterogeneity
    JEL: D24 F14 L25 O31 O33
    Date: 2009
  2. By: Czarnitzki, Dirk; Hottenrott, Hanna; Thorwarth, Susanne
    Abstract: Previous literature provided evidence on financing constraints for investment in R&D activities due to capital market imperfections and special features of R&D investments. Moreover, it has been shown that a shift in capital structure towards more debt, results in a reduction of R&D investments. This article complements this literature by compartmentalizing R&D activities in its components, R and D. In particular, we distinguish research from development as these activities do not only differ in their nature, but also to a large extent take place sequentially. Our results show that R investment is more sensitive to the firms' operating liquidity than D indicating that firms have to rely even more on internal funds for financing their research compared to development activities. Moreover, we find that (basic) research subsidy recipients' investment is less sensitive to internal liquidity.
    Keywords: Research and development,liquidity constraints,innovation policy
    JEL: O31 O32 O38
    Date: 2009
  3. By: Martinsson, Gustav (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: We find that internal finance resources at the firm-level, measured by cash flow, play a non-trivial role for the number of patent applications, even after controlling for the standard variables of a patent study. The results are based on estimating panel count-data models on a sample of 2,700 Swedish manufacturing firms, with observations from the period 1997-2005. The cash-flow effect is larger during the aftermath of the bursting IT-bubble and for firms that are more likely to be financially constrained. Our results suggest that some firms reduce or stop applying for patents during periods of declining economic activity.
    Keywords: Financing constraints; Innovation; Corporate ownership; Intellectual property rights; Firm level panel data
    JEL: G32 O31 O34
    Date: 2009–09–28
  4. By: Ronald Jean Degen (International School of Management Paris)
    Abstract: This paper explains how the increasingly popular social network driven ideation works for some companies, and how this can be expanded to encompass the complete crowdsourcing innovation process (beyond simple ideation). In a contemporary context, businesses that are unable to keep up with innovations are simply overrun by those who are more efficient at this. This results in the dilemma that confronts all innovating companies in the 21st century: while innovation is critical for survival of a company, internal R&D is an inefficient approach to innovation. As a result of this dilemma, today?s innovative companies generally conduct little or no basic research on their own. They mostly innovate using the research discoveries of others. Some of these companies promote ideation forums on social networks to gain ?memes? for innovative ideas. This first step in the crowdsourcing innovation process can be expanded to include all the remaining steps of the innovation process, up to marketing and selling the product or service, as these all originate from ?crowdsourcing ideation?.
    Keywords: social network driven innovation, ideation forums, crowdsourcing ideation, crowdsourcing innovation process, memes, mavens, connectors, influencers, nanostories, flash mobs, job to be done
    JEL: M0 M1
    Date: 2009–10–04
  5. By: Kranich, Jan
    Abstract: This paper proposes a model of urban agglomeration in conjunction with imperfect competition and endogenous product R\&D of firms. The quality of differentiated manufacturing goods is a result of R\&D services provided by research firms. Sectoral interactions are subject to spatially dependent transaction costs and (knowledge) spillover externalities. The paper analyzes the existence of fundamental city patterns with respect to R\&D intensity and the degree of localization in knowledge production. The model features three equilibrium formations: a monocentric, a mixed, and a perfectly integrated pattern, whereas the R\&D intensity always increases towards the city center. However, product quality and the corresponding R\&D expenditures of firms are not necessarily increasing with the city size; a result, which also renders decisive implications of local innovation policy.
    Keywords: Bid-rent, Land Use, R\&D, Externalities
    JEL: R1 R14
    Date: 2009–09
  6. By: Tatiana Plotnikova (DFG Research Training Program "The Economics of Innovative Change", Friedrich-Schiller-University Jena)
    Abstract: This paper empirically investigates the determinants of R&D diversification strategies in the drug industry. It enriches the existing literature by proposing to look at diversification factors, which reflect market and technological proximity of an R&D project towards other projects within a firm's portfolio as well as R&D competition factors. Additionally, the characteristics of R&D in the market where a new potential product is developed affiect future product choice. The analysis is performed for products-in-development data, merged with firms' patents, which allows us to separate project proximity in market niches from technological proximity. The results of empirical estimation support an idea that R&D diversification is governed by the economies of scope as well as the escape competition motive. Moreover, it is found that competition rather than spillovers in the niche where an R&D project is developed defines firms' decisions to diversify.
    Keywords: diversification, technological diversity, relatedness, competition, R&D
    JEL: O32 L25 L65
    Date: 2009–09–29
  7. By: Jo, Seung-gyu; den Butter, Frank A. G.
    Abstract: In the economics profession there is a fierce debate whether industrial and innovation policy should be targeted to specific sectors or firms. This paper discusses the welfare effects of such targeted policies in a third-market international trade model under imperfect competition. A theoretical case for picking winners through a preferential innovation policy is discussed, which is shown to hold without evoking retaliation from foreign competitors. However, in practice information uncertainties remain a concern. The question whether in this case ‘backing winners’ is a wise policy option depends on the characteristics of the information asymmetries and on the extent the government is able to design selection procedures in a way to minimize the transaction costs that may be caused from the market participants’ opportunistic behavior.
    Keywords: Innovation policy; R&D subsidies; strategic trade policy; asymmetric information; spill-over effects
    JEL: O24 F12 O32 C73
    Date: 2009–02
  8. By: Pedro Rui Mazeda Gil (CEF.UP and Faculdade de Economia, Universidade do Porto)
    Abstract: We revisit the issue of self-fulfilling “waves of enthusiasm” as stationary rational expectations equilibrium outcomes in endogenous-growth models that merge the quality-ladders with the expanding-variety mechanism. By considering a lab-equipment specification with vertical-innovation intertemporal spillovers but no intersectoral spillovers, we extend previous results of a negative impact of animal spirits on both horizontal aggregate R&D and number of firms to a framework where decreasing returns to horizontal entry are not a necessary condition. In contrast, our general-equilibrium setting allows us to predict an effect of animal spirits on R&D composition impacting neither on aggregate growth nor on aggregate vertical R&D, as reduced outlays in “mature” industries compensate for the increased R&D intensity in newly-born industries.
    Keywords: endogenous growth, horizontal and vertical R&D, stationary sunspot equilibria
    JEL: O41 E32 D43 L16
    Date: 2009–09
  9. By: David Encaoua (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Yassine Lefouili (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: In this paper, we revisit the issue of licensing ‘weak' patents under the shadow of litigation. Departing from the seminal paper by Farrell and Shapiro [2008], we consider innovations of any size and not only ‘small' innovations, and we allow the number of licensees to be less than the number of firms in the downstream industry. It is shown that the optimal two-part tariff license from the patent holder's perspective may either deter or trigger litigation, and conditions underwhich each case arises are provided. We also reexamine the claim that the licensing revenues from ‘weak' patents overcompensate the patent holder relative to what a natural benchmarkwould command. Finally we suggest two policy levers that may alleviate the harm raised by the licensing of ‘weak' patents.
    Keywords: Licensing Schemes ; Probabilistic Rights ; Patent Litigation
    Date: 2009–09–03
  10. By: Christian R. Østergaard; Bram Timmermans; Kari Kristinsson
    Abstract: This paper investigates the effect of employee diversity in terms of gender, age, ethnicity and education on the firm’s likelihood of introducing an innovation. The analysis draws on data from a recent innovation survey. This data is merged with a linked employer-employee dataset that allow us to identify the employee composition of each firm. We test the hypothesis that employee diversity is associated with better innovative performance. The econometric analysis reveals positive, negative and non-significant effects of the different employee characteristics on the likelihood of introducing an innovation.
    Keywords: Diversity, Innovation, Education, Gender, Cultural Backgrund
    JEL: A
    Date: 2009
  11. By: Görg, Holger (Kiel Institute for the World Economy); Hanley, Aoife (Kiel Institute for the World Economy)
    Abstract: We provide a comprehensive empirical analysis of the links between international services outsourcing, domestic outsourcing, profits and innovation using plant level data. We find a positive effect of international outsourcing of services on innovative activity at the plant level. Such a positive effect can also be observed for domestic outsourcing of services, but the magnitude is smaller. This makes intuitive sense, as international outsourcing allows more scope for exploiting international factor price differentials, therefore giving the establishment higher profits and more scope to restructure production activities towards innovation. We also find that international services outsourcing has a positive effect on profitability, as predicted by theory, while this is not true for domestic sourcing. The results are robust to various specifications and an instrumental variables analysis.
    Keywords: innovation, services outsourcing, offshoring, R&D
    JEL: F19 O31
    Date: 2009–09
  12. By: Klaus Schmidt (University of Munich)
    Abstract: Many high technology goods are based on standards that require several essential patents owned by different IP holders. This gives rise to a complements and a double mark-up problem. We compare the welfare effects of two different business strategies dealing with these problems. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always benefits from entry and innovation
    Keywords: IP rights, complementary patents, standards, licensing, patent pool, vertical integration
    JEL: L1 L4
    Date: 2009–08
  13. By: Meyer, Jenny
    Abstract: Recent Internet technologies and web-based applications, such as social software, are being increasingly applied in firms. Social software can be employed for knowledge management and for external communication enabling access to internal and external knowledge. Knowledge in turn constitutes one of the main inputs to service innovation. Hence, social software has the potential to support service innovation. Using data from 505 German Information- and Communication Technology (ICT) and knowledge-intensive service firms, this is the first paper which empirically analyses the question whether the use of social software applications triggers innovation. Thereby, it refers to a knowledge production function in which social software use constitutes the knowledge sourcing activity. The results reveal that there is a positive relationship between social software and service innovation. Since this result is robust when controlling for former innovative activities and the previous propensity to adopt new technologies and to change processes, the analysis suggests that the causality runs from social software to innovation.
    Keywords: Social software,web 2.0,service innovation,knowledge management
    JEL: O31 O33 M10
    Date: 2009
  14. By: Erkki Karo; Rainer Kattel
    Abstract: This paper analyses the development of Eastern European innovation systems since the 1990s by looking together at the theoretical and empirical accounts of two discourses that have had a siginificant impact on the development of innovation systems: innovation policy and public administration and management. We propose a framework for analysing the development of innovation policies distinguishing between two concepts - policy and administrative capacity . that are necessary for innovation policy making and implementation. Using the framework we show how the Eastern European innovation systems have, because of past legacies and international policy transfer, developed a highly specific understanding of innovation policy based on the initial impact of the Washington Consensus policies and later the European Union. We argue that because of the interplay between the principles and policy reccomendations of the two international discourses we can see the emergence of a .copying paradoxÿ in Eastern European innovation systems: that is, despite the perception of policy convergence, we can witness a divergence in the policy from the intended results, and as a result can talk about limited and de-contextualised policy-making capacities.
    Date: 2009–08
  15. By: Marc Baudry (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Béatrice Dumont (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen)
    Abstract: This article aims at estimating the optimal profile of renewal fees patent offices should implement. It is at the crossroad of two strands of literature. The first strand is the theoretical literature analysing renewal fees as an optimal revelation mechanism. The second strand is the econometric literature developing real option models of patent renewal decisions to assess the value of patents. Using data from the French patent office, we find that there is little room to lower the social cost of patents without affecting the monetary incentives to apply for a patent and innovate. We show that a menu of optimally defined profiles helps to further discriminate among patents.
    Date: 2009–09–23
  16. By: Erik S. Reinert; Rainer Kattel; Margit Suurna
    Abstract: The paper aims to show that, first, innovation policies deployed in Central and Eastern European (CEE) countries since 1990s have been a double-edged sword: on the one hand enabling fast and furious industrial restructuring while, on the other hand, locking CEE economies into economic activities with low value added/productivity growth and thus undermining future sustainable growth. However, the impact of accession into the European Union (EU) has been equally pivotal for industrial restructuring and innovation policy making in CEE countries in the 2000s and this process can be summed up as a strong Europeanization of innovation policy in CEE. The paper proceeds to show, second, that also Europeanization has been largely a double-edged sword for CEE countries. Since joining the EU in 2004 or 2007, and already during the accession process, there is a strong change in innovation policies in many CEE countries towards a much more active role of the state. In this change there is a clear and strong role of EUÿs structural funding, particularly the negotiations and planning that comes with it. However, these changes come with specific problems: first, there is an over-emphasis in emerging CEE innovation policies on a linear understanding of innovation (from lab to market) that is based on the assumption that there is a growing demand from industry for R&D (which is not the case because of the structural changes that took place in the 1990s via the Washington Consensus policies); and, second, increasing usage of independent implementation agencies in an already weak administrative capacity environment lacking policy skills for networking and long-term planning.
    Date: 2009–05
  17. By: Anne Layne-Farrar; Klaus M. Schmidt (University of Munich)
    Abstract: The infamous Blackberry case brought new attention to so-called “patent trolls” and began the general association of trolls with “non-practicing” patent holders. This has had important legal consequences: Namely, patent holders have been denied injunctive relief because they did not practice the patents themselves. In this paper we analyze how patent holders –– both non-practicing and vertically integrated –– choose their royalties depending on the structure of the upstream and downstream markets and the types of licensing agreements available. We show that a vertically integrated firm has an incentive to raise its rivals’ costs and to restrict entry on the downstream market; incentives that do not hold for non-integrated patent holders. An automatic presumption that a non-integrated patent holder will charge higher royalties than a vertically integrated company is therefore unfounded. Whether a company charges “excessive” royalties depends on whether there is scope for hold-up, either because of sunk investments on the part of potential licensees or because of “weak” patents held by t he licensor. These factors are orthogonal to whether patent holders are practicing or not.
    Date: 2009–09
  18. By: Michelle S. Goeree; Eric Helland
    Abstract: Every year thousands of firms are engaged in research joint ventures (RJV), where all knowledge gained through R&D is shared among members. Most of the empirical literature assumes members are non-cooperative in the product market. But many RJV members are rivals leaving open the possibility that firms may form RJVs to facilitate collusion. We exploit variation in RJV formation generated by a policy change that affects the collusive benefits but not the research synergies associated with an RJV. We estimate an RJV participation equation and find the decision to join is impacted by the policy change. Our results are consistent with research joint ventures serving a collusive function.
    Keywords: Research and development, research joint ventures, antitrust policy, collusion
    JEL: L24 L44 K21 O32
    Date: 2009–09
  19. By: Philip R. Lane IIIS, Trinity College Dublin and CEPR
    Abstract: This paper examines the links between international financial integration and the level of innovation activity. If financial globalisation boosts innovation, this helps to explain the empirical evidence that indicates that increased financial integration conditionally raises the level of productivity and long-run living standards. Our analysis finds that, conditional on the level of development, more integrated economies do exhibit higher levels of innovation activity but that the impact differs across equity-type and debt-type dimensions of international financial integration. Moreover, the gains from equity-type integration kick in at relatively low income levels, whereas the gains from debt-type integration are only found for high-income countries.
    Date: 2009–09–30
  20. By: Wiberg, Daniel (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper aims to provide a summarize review of recent empirical research, in the field of corporate governance and its relation to performance of firms. Specifically, the focus is on the role of institutional owners in the conflict between controlling shareholders and minority owners. The paper also contributes to the literature on corporate governance and performance by providing some discussion on the statistical methods used in most empirical investigations. Summing up recent studies in the evaluation of firms’ investment performance has shown significant differences in the valuation of firms, depending on the market expectations and industry affiliation. Focusing on the role of institutional owners in relation to firms’ investment performance, the existing empirical evidence suggest that institutional owners have a positive influence on firms’ investment performance. Studies that looks at the role of institutional owners from the perspective of dividend policy has shown that institutional owners demand higher dividends to compensate for aggravated agency conflicts due to vote-differentiated shares. A large body of research investigates the performance of firms from a long run perspective. These studies demonstrate that profits converge over time, but the convergence is incomplete. Investment in R&D is often put forward as an explanation for persistent profits above the norm. Looking at individual mutual funds, and specifically how to measure risk-adjusted performance, investigations generally show that mutual funds underperform in relation to their market benchmark, even when risk-adjusted to the same level of risk.
    Keywords: Corporate Governance; Investment Performance; Investment; nstitutions
    JEL: C23 G30 L25
    Date: 2009–09–28
  21. By: Jakob Madsen; Rabiul Islam; James Ang
    Abstract: This research examines whether technology transfer, research intensity, educational attainment and the ability to absorb foreign technology help explain cross-country differences in productivity growth. Our data comprise a panel of 55 countries including 23 OECD and 32 developing economies over the period 1970-2004. The results show that TFP growth in both OECD and developing countries is positively affected by research intensity, distance to the frontier, research intensity-based absorptive capacity and educational attainment-based absorptive capacity. However, they reveal large differences between developed and developing countries.
    JEL: O30 O40
    Date: 2009–09
  22. By: Lee Branstetter; Kamal Saggi
    Abstract: This paper develops a North-South product model in which Southern imitation and the North-South flow of foreign direct investment (FDI) are endogenously determined. In the model, a strengthening of IPR protection in the South reduces the rate of imitation, which, in turn, increases the flow of FDI. The increase in FDI more than offsets the decline in production undertaken by Southern imitators, so that the South’s share of goods produced by the global economy increases. Furthermore, real wages of Southern workers increase even though prices of goods produced by multinationals exceed those of Southern imitators. The preceding results hold when Northern innovation is endogenously determined; in addition, the rate of innovation increases with a strengthening of Southern IPR protection.
    JEL: F23 F43 O31 O34 O41
    Date: 2009–10
  23. By: Barbara van Mierlo; Cees Leeuwis; Ruud E.H.M. Smits; Rosalinde Klein Woolthuis
    Abstract: In this paper we develop an analytical framework for studying learning processes in the context of efforts to bring about system innovation by building new networks of actors who are willing to work on a change towards sustainable development. We then use it to evaluate two specific intervention programmes carried out by a self-proclaimed ‘system instrument’. The framework integrates elements from the Innovation Systems approach with a social learning perspective. The integrated model proposes essentially that these kinds of systemic instruments can serve to enhance conditions for social learning and that such processes may result in learning effects that contribute to system innovation by combatting system imperfections. The empirical findings confirm the assumption that differences in learning can be explained by the existence or absence of conditions for learning. Similarly, the existence or creation of conducive conditions could be linked to the nature and quality of the interventions of the systemic instrument. We conclude that the investigated part of the hypothesised model has not been refuted and seems to have explanatory power. At the same time we propose that further research is needed among others on the relation between learning, challenging system imperfections and system innovation.
    Keywords: social learning, system innovation, systemic instruments, system imperfections, innovation systems
    Date: 2009–08
  24. By: Abel Lucena (CREB and Department of Business Administration, University of the Balearic Islands, Spain)
    Abstract: This paper examines the antecedents and innovation consequences of the methods firms adopt in organizing their search strategies. From a theoretical perspective, organizational search is described using a typology that shows how firms implement exploration and exploitation search activities that span their organizational boundaries. This typology includes three models of implementation: ambidextrous, specialized, and diversified implementation. From an empirical perspective, the paper examines the performance consequences when applying these models, and compares their capacity to produce complementarities. Additionally, since firms’ choices in matters of organizational search are viewed as endogenous variables, the paper examines the drivers affecting them and identifies the importance of firms’ absorptive capacity and diversified technological opportunities in determining these choices. The empirical design of the paper draws on new data for manufacturing firms in Spain, surveyed between 2003 and 2006.
    Keywords: exploration-exploitation search, absorptive capacity, technological opportunities, complementarities, firm performance.
    JEL: D21 L21 O32
    Date: 2009–10

This nep-ino issue is ©2009 by Steffen Lippert. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.