Banca d Italia lunedì 25 novembre Economic crisis and

Banca d'Italia lunedì 25 novembre Economic crisis and innovation Andrea Filippetti London School of Economics and Political Science, and Italian National Research Council, CNR

Creative destruction or creative accumulation? Schumpeter 1911: economic environment characterized by fierce competition in which the new firm is the driver of innovation activity supported by the creation of new credit by the banking system Schumpeter 1942: emphasized the role of well established large firms; market structure has shifted into oligopolistic competition

Gerhard O. Mensch 1979: Stalemate in Technology

stagnation and innovation for recovery overlap: “at the same time that wide areas of current economic interests are gripped by stagnation, creative progress is building in new areas of activity […] in the technological stalemate, the economy becomes structurally ready for basic innovations”

The SPRU response: It is innovation diffusion that matters! Freeman, Clark and Soete (1982)

In a Schumpeterian vein, there are winners and losers • And the existence of losers is the guarantee that there will be some winners • Nations, industries and companies that will manage to introduce and adapt to the technological change are likely to grow and prosper • Those that will not be able to do so, will be most affected by the economic crisis • Implicit assumption: barriers to enter new technological fields are low

A dissenting voice: Keith Pavitt • Competences are generated in a cumulative pattern • This applies for international patterns of technological accumulation • It also applies at to company level • Little possibility for new entrants when facing large innovative firms

Technological Accumulation To innovate, companies need to develop competences, which are created through experience. Innovators of the future are likely to be the innovators of the past Persistence is the key factor in generating successful innovations Also nations generally continue to innovate in the areas where they are traditionally strong Management literature…

Are creative destruction and technological accumulation sensitive to the business cycle? • During economic expansion, innovative firms lead technological change also by increasing their investment in innovation (supporting technological accumulation) • Economic crises generate turbulence and some new entrants are willing to spend more to innovate, also in blue sky explorations (creative destruction). Resources made available can be used for the purpose

2 levels of analysis • Firm level • Country level

An application with micro data on panel analysis Economic crisis and innovation: Is destruction prevailing over accumulation? Daniele Archibugi, Andrea Filippetti, Marion Frenz http: //www. sciencedirect. com/science/article/ pii/S 004873331200162 X

Our argument • there is a general consensus on the fact that the most innovative firms are also more likely to persist in innovating • firms with a more agile/flexible structure might take better advantage of changing environments and new market opportunities • the unique environment of the current economic crisis might challenge innovation in a cumulative fashion and lead to an environment more closely related to creative destruction

4 hypotheses Hypothesis 1. During a crisis innovation investment concentrates further in those firms that were already highly innovative before the crisis Hypothesis 2. Increased investment in innovation during the crisis is more strongly correlated with two groups of firms – (a) those previously classified as great innovators and (b) those classified as fast growing new entrants Hypothesis 3 Increase in investment in innovation before and during the crisis is positively associated with internal R&D, firm size and firm internal financial resources Hypothesis 4. Firms that follow mixed strategies of exploitation and exploration – ambidextrous firms – are more likely to increase investment in innovation during the crisis compared with before

Data: The UK Innovation Surveys • under 2, 500 enterprises that responded to the latest three waves of the UK version of the CIS (2004, 2006 and 2008) • we analyse a balanced panel with observations at three points in time (T=3).

The dependent variables Variables Total innovation expenditure per employee in 2006 in £ 000 s Total innovation expenditure per employee in 2008 in £ 000 s N. of firms Mean 2, 479 2. 44 2, 485 2. 04 we require a measure of the change in innovation related investment before and during the crisis DV 1. We compute the change in 2008 compared with 2006 and use this as the change in innovation expenditure during the crisis. DV 2. Before the crisis is the change in innovation investment in 2006 compared with 2004

1 2 3 4 5 6 7 8 9 Variable Name Log change in innovation expenditure in 2006 and 2008 Log total innovation expenditure in 2004 and 2006 Great innovators in 2004 Description Log of innovation related investment compared to previous period Hypothesis Dependent variable Log of innovation expenditure in the previous period Control variable Dummy variable. Great innovators are enterprises that introduced new-to-themarket goods and services in 2004 Newly Dummy variable. Enterprises established 2000 between 2000 and 2004, value 1, others 0 Growth of newly Log of the change in turnover compared established firms to previous period for new firms as in 2006 and 2008 defined in (4). This variable takes a value of zero for firms established before 2000 Internal R&D in Dummy variable. Enterprises with internal 2004 and 2006 R&D expenditure in the previous period, value 1, others 0 Log employees in Size of the firm according to the number 2004 and 2006 of employees in the previous period Availability of Dummy variable. Firms which gave in the finance in 2004 previous period medium or high and 2006 importance to the availability of finance as innovation obstacle, value 1, firms that gave no or low importance, value 0 Log sales per Log of sales per employee in the previous employee in 2004 period and 2006 Testing H 1 and H 2 - Great innovators increase innovation expenditure during the crisis Control variable Testing H 2 – Fast growing new enterprises increase innovation expenditure during the crisis Testing H 3 – Enterprises with internal R&D increase innovation expenditure during the crisis Testing H 3 – Large enterprises increase innovation expenditure during the crisis Testing H 3 – Enterprises with internal financial resources increase innovation expenditure during the crisis Testing H 3 – Enterprises with higher sales per employee (as proxy of available internal resources) increase innovation expenditure during the crisis

Exploration in 2006 and 2008 Dummy variable. Firms in the upper two Control variable quartiles in the sum of the scores across four-point likert scales in the question: “how important were each of the following factors in your decision to innovate: (i) increase range of goods or services; (ii) entering new markets or increased market share”, value 1, others 0. Exploitation in 2006 and 2008 Dummy variable. Firms in the upper to Control variable quartiles in the sum of the scores across four-point likert scales in the question: “ how important were each of the following factors in your decision to innovate: (i) improving quality of goods or services; (ii) improving flexibility for producing goods or services; (iii) increasing capacity for producing goods or services; (iv) reducing costs per unit produced 12 Ambidexterity in 2006 and 2008 Dummy variable. A firm is in the upper quartiles with respect to both - exploration and exploitation (see 11 and 12), value 1, others 0 Testing H 4 – Enterprises that follow mixed strategies of exploitation and exploration – ambidextrous enterprises, increase innovation expenditure during the crisis 13 IPRs in 2004 and 2006 Control variable 14 Skills in 2006 and 2008 Dummy variable. Firms that declared to use IPR protection in the previous period, value 1, others 0 Log of the proportion of employees that hold a degree at BA/BSc level or above. 15 International markets in 2006 and 2008 Dummy variable. Enterprises that operate outside the UK, value 1, others 0 Control variable 10 11 Control variable

Innovation expenditure of great innovators and other firms, 2006 and 2008 n. of Percent Share of Average firms age innovation innovatio exp. 2006 exp. 2008 exp. 2006 n exp. in £ 000 s 2008 in £ 000 s All other firms 2, 161 87 0. 79 0. 63 563 413 -0. 27 324 13 0. 21 0. 37 981 1, 599 0. 63 2, 485 100 1. 00 618 568 -0. 08 Great innovators Total Change in average innovation exp. 20062008 Hypothesis 1. During a crisis innovation investment concentrates further in those firms that were already highly innovative before the crisis

Regression results Innovation behaviour before and during the crisis. DV: change in innovation expenditure before and during the crisis before the crisis during the crisis Great Innovators 2004 not significant + (**) Newly established 2000 - (***) - (*) Fast grow. new firms t not significant + (**) In-house R&D t-1 not significant + (**) Log employees t-1 + (**) Availability finance t-1 not significant Sales per employee t-1 + (**) Explorative strategy t 0. 31* 0. 6** Exploitative strategy t 0. 6** 0. 38*

Conclusions: • Firms in our sample reduce innovation expenditure in 2008 by 8 percent compared to 2006. No doubt that the crisis has brought some “destruction” • strong support for creative accumulation. Firms identified as the great innovators in 2004 are responsible for a larger share of innovation expenditure in 2008 • being a great innovator does not predict increase in innovation investment before the crisis, but it does during the crisis

. . . continued • another category of firms which is gaining momentum during the crisis: they are the fast growing new firms • this group of firms does not show an above average behaviour in 2006 but it starts to increase expenditure during the crisis.

. . . continued • size and economic performance play a less important role. • presence of in-house R&D activity becomes a major predictor of increase in innovation expenditure during the crisis • firm’s strategy, pursuing an explorative strategy (including looking into new markets), becomes relatively more important.

INNOVATION PERSISTENCE AND THE INSTITUTIONAL SETTING

National Innovation System: the founding fathers Freeman, Lundvall, Nelson 24

National systems of innovation Government Science & technology institutions; e. g. R&D labs, unis Financial institutions e. g. banks, venture capitalists Firms Industry e. g. , competitors, suppliers Source: Smith (2006), p. 295 Education institutions 25

do specific configurations of NSI provide a comparative institutional advantage in times of crisis? Thus the first general question at stake is whether structure matters vis-à-vis demand during a big recession

Data and methodology (1) Innobarometer 2009 (European Commission) – firm level survey on more than 5000 firms across Europe – April 2009 Question no. 1: “Compared to 2006, has the amount spent by your firm on all innovation activities in 2008 increased, decreased, or stayed approximately the same? ” Question no. 2 “In the last six months [November 2008 to April 2009] has your company taken one of the following actions [increased, decreased or maintain the innovation spending] as a direct result of the economic downturn? ”

Data and methodology (2) European Innovation Scoreboard 2008 (EIS) (European Commission) aims at measuring and comparing the innovation performance at country level based on a composite indicator: The EIS Summary Innovation Index: composed of 29 variables addressing 7 dimension of a country’ system of innovation

Firms’ innovation investments: comparison between the three years period 2006 -2008 and the first six months of 2009

Is the crisis impairing the catching-up process of innovation capabilities?

The impact of the current recession on firms’ innovation investments

Change in the behaviour of the firm related to its innovation investment as a response to the crisis vis-à-vis the period before the crisis

Innovation investment change in response to the crisis 60. 0 50. 0 % 40. 0 30. 0 20. 0 10. 0 counter-cyclical neutral

Operationalizing the national innovation system • point out those country-specific features which have a role in offsetting the cyclical behaviour of the firms, and therefore that have a positive influence on persistency of innovation investment. • The following different characteristics of the NSI have been derived from the EIS: – – i. the stock of knowledge; ii. the quality of the human resources; I ii. the depth of the financial and credit system; iv. the specialization of the country

Operationalizing short-term conditions The drops in the domestic demand export, 1 st term 2008 – 3 rd term 2009

Ordered logit model, robust estimates (dependent variable: INVchange)

Is innovation cyclical or persistent? • One of the most significant results of our analysis is that about sixty-five per cent of the firms declare to have kept their innovation investment unchanged in spite of the crisis • This somehow confirms the importance of: – technological accumulation (stressed, among others, by Nelson and Winter, 1982; Grandstrand et al. , 1997; Patel and Pavitt, 1997), – and lends substantial support to the persistency of innovative activities over time (Geroski et al. , 1997; Cefis and Orsenigo, 2001).

The uneven effects of the crisis and the role of National Systems of Innovation • the crisis has not been of the same magnitude across all European countries. On the contrary, we have shown that the most negatively affected by the downturn are those EU New Member States which were catching up over the 2006 -2008 period • We have attempted to explain this evidence on the ground of the structural characteristics of the NSI and the role played by domestic demand export. The structural characteristics of the NSI seem to play a more relevant role than demand.

The role of the institutional framework Innovation, labour market institutions and skills

Social protection and the formation of skills

Labour market institutions • different institutional arrangements have been identified namely along three main dimensions: – (i. ) unemployment security, – (ii. ) employment protection, and – (iii. ) vocational and educational training (VET).

Labour attachment • the attachment of factors of production to a firm favors incremental innovation and discourages radical innovation • CMEs specialize in incremental innovation because employment protection, low inter-firm mobility, insider control of firms and weak markets for corporate control • LMEs are said to specialize in radical innovation because the factors of production can be rapidly mobilized for a promising new project, and demobilized if it fails

2 types of attachment mechanisms • Institutional constraints: i. e. EP - that make it costly for the firm to shed labor; this type of exogenous attachment encourages investment in specific skill and generates ongoing teams of skilled production workers (exogenous) • attachment is not imposed institutionally through EP, but created endogenously by skill. A worker with experience in a particular firm, or a team of such workers, may generate for a firm a quasi-rent – a situation in which the worker is more valuable when employed by the firm than in the worker’s next-best employment

Country-level variables Country Austria Belgium Czech Republic Denmark Finland France Germany Greece Hungary Ireland Italy Luxembourg Netherlands Norway Poland Portugal Slovak Republic Spain Sweden Switzerland United Kingdom Absolute values Employment protection index (EP) 1. 93 2. 18 1. 96 1. 5 1. 96 3. 05 2. 12 2. 73 1. 65 1. 11 1. 89 3. 25 1. 95 2. 69 1. 9 3. 15 1. 44 2. 98 1. 87 1. 14 0. 75 Replacement rate (RR) 62. 21 63. 14 67. 36 77. 76 72. 4 71. 38 66. 46 49. 14 73. 22 59. 62 65. 52 87. 64 77. 95 72. 22 64. 14 78. 91 59. 78 72. 83 70. 52 79. 65 57. 05 Vocational and education training (VT) 77. 05 55. 76 73. 72 53. 74 54. 79 43. 8 57. 48 32. 06 26. 64 32. 67 59. 77 60. 37 67. 64 55. 24 46. 54 33. 24 71. 88 43. 83 59. 46 64. 8 23. 61

conclusions • RR (our measure of unemployment protection) and VET are complementary. • So are EP and VET. • When both forms of income insurance are low, VET is actually associated with lower levels of innovation persistence

• income insurance / VET systems have a comparative advantage in the production of specific skills, this supports the view that specific skills are better for sustaining innovation during a crisis than general skills. • We find no substantial difference between the performance of flexicurity (high RR, high VET) and non-liberal (strong EP, high VET) systems.