Australian INNOVATION RESEARCH Centre

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Australian INNOVATION RESEARCH Centre

• The neglected innovators non-RD performers
• What do they do and does it matter?
• Anthony Arundel
• UNU-MERIT AIRC

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Co-researchers
Catalina Bordoy
Can Huang
Minna Kanerva
Hugo Hollanders
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• Introduction
• A quick history of the issues

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RD is not correlated with labour productivity
(at the country level)
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Percentage of Innovative and RD Performing
Manufacturing Firms by Firm Size CIS-1 (1993),
8 Countries Combined (Belgium,
Denmark, Germany, Ireland, Italy, Luxembourg,
Netherlands, Norway)
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Innovative firms (product or process innovators)
by RD performance CIS-3 (1998-2000)
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• Innobarometer 2007
• Weighted random quota sample of 4,395 innovative
  firms in all 27 EU countries
• 52.5 of innovative European firms do not perform
  RD or contract it out.

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Innovation modes the percent of firms that
innovate is not a useful indicator
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• Do respondents to RD and innovation surveys
  understand the questions on RD?

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How do non-RD performers innovate?

• Technology adoption / acquisition.
• Minor modifications or incremental changes.
• Imitation including reverse engineering.
• Combining existing knowledge in new ways design,
  engineering.
• User innovation.

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Birds nest stadium, Beijing
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What is RD?

• Research and experimental development (RD)
  comprise creative work undertaken on a systematic
  basis in order to increase the stock of
  knowledge, including knowledge of man, culture
  and society, and the use of this stock of
  knowledge to devise new applications.

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Experimental development

• systematic work, drawing on existing knowledge
  gained from research and/or practical experience,
  which is directed to producing new materials,
  products or devices, to installing new processes,
  systems and services, or to improving
  substantially those already produced or
  installed.

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The Frascati Manual provides a basic criterion
for identifying RD

• There must be an appreciable element of novelty
  and the resolution of scientific and/or
  technological uncertainty, i.e. when the solution
  to a problem is not readily apparent to someone
  familiar with the basic stock of common knowledge
  and techniques for the area concerned (page 34).

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Do innovation surveys under or overestimate RD?

• Kleinknect (1987) four times as many SMEs in the
  Netherlands report RD to innovation surveys than
  to official RD surveys.
• Roper (1999) RD by SMEs (in official RD
  surveys) under reported by 13.9 in the UK and by
  2.4 in Germany.

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Neglected innovators

• Academics Only 9 (5) of 176 papers that
  analysed the European Community Innovation
  Surveys looked at non-RD performing firms.
• Innovation support In Europe, 95 of all funding
  to support innovation goes to RD.
• Policy analysts Key European innovation policy
  documents Innovation RD.
• Innovation surveys The list of innovation
  activities in the CIS predominantly covers
  activities that supplement RD.

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• Innobarometer Survey Results

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Innobarometer survey methodology

• CATI survey conducted in Spring 2007
• Random sample drawn from Dunn and Bradstreet
  register for each EU country, stratified by three
  firm size classes, all business sectors included
• Refers to innovative activities over two years
  2005 and 2006
• Responses from 4,395 innovative firms
• All results weighted to reflect number of firms
  in each country (except count data)

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Questions differences from CIS

• Methods used by firms to innovate
• Develops entirely new products (processes) or
  significantly improving existing ones in-house.
• Develops entirely new products or significantly
  improving existing ones in collaboration with
  other companies, consultants, universities, etc.
• Customizing or modifying products originally
  developed by other companies, organisations or
  individuals.
• Acquiring products developed by other companies,
  organisations or individuals, with little or no
  modification by your company.

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Questions differences from CIS

• Staff time spent on different innovation methods.
• Use of 10 different policies to support
  innovation
• 2 require RD (direct subsidies or tax reductions
  for RD)
• 2 are often linked to RD (networking)
• 6 can be used by both RD and non-RD innovators
  (project finance, subsidies for buildings or
  equipment, trade fair attendance, information on
  market needs, tax reduction for innovation
  expenditures other than RD)

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Respondents by RD status
Only present results for non-RD and RD
innovators
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Characteristics of non-RD innovators based on
econometric analysis

• Compared to RD performers, non-RD innovators
  are more likely to be
• Active in non-manufacturing industries
• Based in Europes lagging countries in terms of
  innovation capabilities (Bulgaria, Greece,
  Hungary, Latvia, Portugal, Slovakia, Romania)
• Sell only to consumers

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How do non-RD performers innovate?

• Do they only innovate through methods that
  require very little creative effort?
• Need an intensity measure for innovative
  effort
• Four methods of innovating
• Share of staff time spent on each method
• Percent of firms providing training for
  innovation
• Still imperfect lack an interval measure of
  quantity of time or expenditure

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Main results for innovation intensity comparing
non-RD innovators and RD performers

• Both groups innovate without performing RD.
• As expected, RD performers are more involved in
  creative activities, but the differences are
  not large.
• More RD performers develop innovations in-house.
• The distribution of time spent on each innovation
  method is similar between the two groups
• Percent of each group that provides training is
  similar.

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Percent of firms that introduced an innovation
without performing RD
Both non-RD and RD performers introduce
innovations without RD.
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2. Most advanced method in use for product or
process innovations
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3. Time Distribution of staff time spent
on each innovation method for product or
process innovations
Note Excludes 33 of respondents who could not
answer this question
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4. Percent of firms providing training or
skill upgrading for product or process
innovations
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Policy support?

• Most innovation policies support RD, but several
  European programmes are open to innovative firms
  that do not perform RD
• Financing innovation projects with no RD
• Subsidies for building infrastructure
• Subsidies for acquiring machinery, equipment
• Tax reductions for non-RD innovation
  expenditures
• Support to attend trade fairs or trade missions
• Information on market needs, conditions, etc

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Policy use percent of firms that have applied
for or received innovation support
Latter includes 2 networking programmes
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Use of or application for any of 6 innovation
support programmes that do not require RD logit
regression results
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Performance penalty?

• Non-RD performing firms could suffer from a
  performance penalty from their decision to
  innovate without performing RD
• Lower price margins on products
• Less productive process technology
• Use categorical measures of a change in turnover
  between 2004 and 2006
• Imperfect would prefer profits with different
  time lags, but cant link Innobarometer data to
  registries

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Distribution of the change in turnover
Note 12.3 of respondents could not answer the
question
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Logistic regression increase in revenues between
2004 and 2006
Caution ordered logit gave very poor results
improvement in prediction poor although
significant (model Chi-square of 93.4)
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Conclusions

• Non-RD innovators spend less on innovation than
  RD performers and have lower innovation
  capabilities.
• But, many of the differences are not large (in so
  far as this study can measure capability).
• Non-RD innovators are significantly less likely
  than RD performers to apply for or benefit from
  programmes to support innovation (after
  controlling for innovation capability)

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Relevance to innovation surveys

• We are not adequately measuring non-RD
  activities in innovation surveys
• Need new questions for innovation surveys that
  better capture what these firms do
• How they innovate
• Innovation capabilities

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Policy relevance

• Simply subsidising RD with the expectation that
  the results will trickle down to other firms is
  not enough most innovative firms conduct
  creative activities in-house.
• Policy how to benefit non-RD performers
• Should they be encouraged to move up the chain of
  creative activity?

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Future work

• Better measures of capability Can the Tasmanian
  Census help through the open question to define
  the most important innovation?
• More in-depth analysis of existing surveys game
  theoretic model of the decision to invest in RD,
  empirically tested using CIS-3 (4) data.