Persistence of Innovation: Stylised Facts and Panel Data Evidence

Abstract

Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp0581.pdf Non-technical SummaryInnovation is widely considered to be a key long-term driving force for economic growth. In 1993, the Community Innovation Surveys (CIS) were initiated in the European countries to investigate firms' innovation activities. However, there is still very little empirical evidence on the dynamics in firms' innovation behaviour. Looking at innovation indicators at the aggregate or industry level, we can identify a high and quite stable share of innovators in Germany over the last ten years. One interesting question, however, cannot be answered by such macroeconomic numbers: Is it the same group of firms that always set themselves at the cutting edge by introducing new products and processes or is there a steady entry into and exit from innovation activities at the firm level, with the aggregate level remaining more or less stable over time?This paper analyses the dynamics in firms' innovation behaviour. In particular, it focuses on the following two questions: First of all, is innovation persistent at the firm-level? And secondly, if persistence is prevalent, what drives this phenomenon? In principle, there are various potential sources for persistent behaviour: First, it might be caused by true state dependence. This means that a causal effect exists in the sense that the decision to innovate in one period itself enhances the probability of innovating in the subsequent period. The theoretical literature delivers several potential explanations for state dependent behaviour: success breeds success, dynamic increasing returns (learning effects) or sunk costs in R&D investments. On the other hand, firms may possess certain characteristics which make them more likely to innovate. To the extent that these characteristics themselves show persistence over time, they will induce persistence in innovation behaviour. Such firm-specific attributes can be classified into observable characteristics, like firm size, competitive environment, skills or financial resources, and unobservable ones. For instance, technological opportunities, managerial abilities or risk attitudes are important for the firms' decision to innovate, but are typically not observed (unobserved heterogeneity).The answers to both questions are important from a theoretical as well as a policy point of view. From a theoretical point of view they are interesting because endogenous growth models differ in their underlying assumptions about the innovation...

Crossing the innovation threshold through mergers and acquisitions

“…First, we consider the degree of persistence in innovation. Several studies show that firms that have innovated or invested in innovation activities at a certain time are more likely to continue these activities in the future (Cefis, 2003;Peters, 2009;Raymond et al, 2010). This reflects the path-dependent and cumulative nature of the innovation process in which 'success breeds success' (Dosi, 1988).…”

What determines how long an innovative spell will last?

“…To mitigate the potential problems in the use of the patent indicators arising from the episodic and irregular nature of patenting, future studies setting out to analyze the temporal dynamics of innovation could adopt a different time frame, such as a 3-year rolling window, as opposed to the annual count, recognizing the nature of innovation as a multiperiod activity (Roper and Hewitt-Dundas 2008;Peters 2009).…”

“…Given that innovative projects are characterized by high risk, firms are invariably forced to finance them by means of internal funding (Peters 2009). It's therefore could be speculated that the initial profitability, at the onset of the spell, provides the critical financial resources for a firm to maintain its innovative activities, year upon year, with no gap in such activities.…”

“…Amongst the various dimensions of innovation, persistence is regarded as a temporal pattern of innovative activities which occurs when a firm that has innovated in one period is again observed as being involved in innovate activity in the subsequent period (Peters 2009), thereby exemplifying a pattern of creative accumulation as described by Schumpeter (1942).…”

“…However, Peters (2009) points to the possibility of spurious state dependence; that is, a suggestion that firms may posses certain characteristics which result in their innovative activities rendering them particularly persistent. In their pioneering work, Geroski et al (1997) relied mainly upon cumulative patent counts and had not sufficiently corroborate firm data in analyzing the longevity of innovative activities.…”