Essays on Determinants and Effects of Barriers to Innovation

Author: Gabriele Pellegrino

Defense date: December 1, 2014

Advisor/s: José García-Quevedo | Maria Savona

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Research fields: Public Economics | Regulation Economics |

The main aim of my doctoral thesis has been to provide new insights regarding the determinants, nature and effects of the barriers to innovation. The thesis is structured in three different but strictly related papers. In the first paper, I try to examine the impact that different types of barriers (cost factors, knowledge factors, market factors, regulation issues) can have in hindering firms’ innovation activity. The analysis of this topic is certainly of policy relevance, as removing or alleviating hindrances might be an effective device to enlarge the population of innovators and increase the innovation performance of the existing base of innovators. However, an overwhelming majority of contributions have confined the analysis to the impact of financial obstacles. The implicit rationale of limiting the analysis on financial constraints is that – once ascertained that firms do not innovate because they lack liquidity or innovation costs are too high– it is straightforward to draw policy implications: financing constraints are removed or at least alleviated by pouring liquidity in the form of additional subsidies/tax credits to increase levels of (mainly R&D) investments. However, firms might encounter different types of obstacles and persist in their systemic failure in engaging in innovation activities and/or in translating financial effort into the actual introduction of successful new goods, services and processes. Accordingly, in the first paper I have tried to add to the evidence on the impact of obstacles to innovation and the implications in terms of innovation policy in three main respects. The results of the estimation show that market structure and lack of demand are as important hindrances for firms as the financing constraints that most traditional literature had emphasized on the basis of cash-flow models. Therefore, it is possible to infer that the presence of strong competitors and the lack of demand are as decisive for firms to give up innovation projects despite an initial investment, as are financial constraints. While in the second chapter of this thesis I have tried to give a broad picture of the negative effects of the different obstacles on the firms’ realization of innovative products and/or processes, in the third chapter the focus is on a specific category of hindrance that could obstruct or slow down the firm’s innovation activity, namely the lack/uncertainty of demand. In particular I try to look at the demand pull perspective in a novel way that is to say from the viewpoint of barriers to innovation. More in detail, by making use of a long comprehensive panel of Spanish firms, I specifically look at the effects of demand uncertainty and stagnancy on firm’s decisions to engage in R&D activities and the amount of financial effort devoted to it. Furthermore I conduct a careful sectoral analysis by giving evidence about whether firms active in high or low tech manufacturing or in knowledge intensive or low tech services are more or less dependent on demand conditions when deciding to perform R&D. The results of the econometric analyses show that uncertain demand and lack of demand are perceived as two completely different barriers. While uncertainty on demand does not seem to constrain R&D efforts, the perception of lack of demand does strongly reduce not only the amount of investment in R&D but also the likelihood of firms to engage in R&D activities. Moreover, sectoral affiliation does not seem to be particular relevant when it relates to demand conditions, giving support to the speculation that positive expectations on market demand is a structural condition to be fulfilled for all firms prior to invest in R&D. While in the first two paper the focus is on the impact that different obstacle factors have in hindering the firms’ innovative activity, in the fourth chapter the main research aim is related to the impact that some factors can have in affecting the firm’s perception of the different type of obstacles to innovation activity. In particular, this work focuses on the role of firm’s age in affecting the firm’s perception of the barriers to innovation. I try to shed some light on these issues by exploring a comprehensive panel of Spanish manufacturing and services firms for the period 2004-2010. The empirical results show that different types of obstacles are perceived differently by firms of different ages. Firstly, a clear-cut negative relationship between firm’s age and firm’s assessment of both internal and external lack of funds is identified. Moreover, firms at the early stages of their life seem to be less sensitive to the effect of lack of qualified personnel when they have to start an innovative project, but more affected by this type of obstacles when they are already engaged in innovation activities. On the other hand, firms in the mature stage of their life are significantly obstructed in their attempt to engage in innovation activity by the lack of qualified personnel. Finally, mature firms appear to assign more importance to obstacles factors related to market and demand conditions than firms characterized by a lower degree of experience.