The Distribution of Firm Innovative Activity within the Industry

6.3.2.1 Innovating Firms

Innovative output is due to a number of factors, such as technological competence, market opportunities, and the opportunity to appropriate returns. These factors cannot be isolated by simply comparing the share of innovators to non-innovators in our sample.

As seen from Table 6.13, which shows the percentage of product innovators per country, there are significant differences. These are probably due to the specificities of the country samples and to a measurement bias resulting from the short reporting period (1990-1992). Since Table 6.13 also illustrates the share of firms with process innovations--which is highly correlated with the product innovations--we expect that there is also a country bias.

16 The other pertinant information regarding R&D strategies and technological co-operation was already analyzed in Chapter 5.

Table 6.13 Descriptive Statistics for Innovation, R&D, and Investment by Country, Sub-Sector, and Firm Size (Unweighted mean values of intensities and shares of firms in percent)

Share of Total Sales (%) Share of all Firms (%)

Table 6.13a Distribution of Sales Shares According to the Stages of the Product Life Cycle (Unweighted mean shares in percent)

Share of Total Sales (Stages of the Product Life Cycle)

No. of Country Introduction Growth Maturity Decline Observations

Belgium 8 11 26 55 64

Denmark 10 17 30 43 35

France - - - - -

Germany 13 15 25 47 120

Greece 5 17 27 51 21

Ireland 10 11 29 49 80

Italy 8 10 23 59 380

Luxembourg 3 14 36 48 2

Netherlands 9 16 22 54 180

Norway 11 13 21 55 17

Portugal - - - - -

Spain - - - - -

United Kingdom 8 14 19 59 8 All Firms (Sample means)

Segment

24.1 Basic Chemicals 9 11 23 57 210

24.2 Agrochemicals 12 14 20 55 19 24.3 Paints, Varnishes 9 10 22 58 82

24.4 Pharmaceuticals 11 12 29 48 199 24.5 Soap and Detergents 10 10 24 56 86

24.6 Other Chemical Products 9 13 21 57 221 24.7 Man-Made Fibres 8 10 29 53 27

Firm Size (Employees)

5-49 9 9 23 58 201

50-249 10 12 23 54 400

250-499 10 12 27 51 128

500-999 9 12 26 53 82

1000 and more 9 13 25 53 91

Note: This table is not discussed in the report.

We could not include the Greek and Portuguese firms because the only firms which were included in the survey of these countries were the innovative firms. Due to the small sample size, observations from Luxembourg and the U.K. are also excluded. The table shows Italy with the lowest share of innovating firms (47.7 percent). This is probably due to Italy’s large sample size (791 firms, which is 40.8 percent of the entire sample) and the dominance of the 347 small firms with 5 to 49 employees.¹⁷ The country with the next lowest share of product innovators was France (62.6 percent). The largest share of innovators were found for Denmark (89.7 percent) and Germany (89.9 percent).

Figure 6.1 shows the observed average share for innovators. The left bar represents the share of firms which introduced product innovations in the period 1990-1992. Only half of the small firms (with 5 to 49 employees) reported having developed an innovation.

The share of innovators increases significantly (to 68 percent) with firms having 50 to 499 employees. The share converges to about 95 percent of the firms being innovators in the size group of 1,000 employees or more and the largest firms are all innovators.

17 But Italy has--according to our definition of a product innovator--the highest share of product innovators in the sample, that is, 50.2 percent (see second last column in Table 6.13).

Figure 6.1 Firms Involved in R&D and Innovation (as a Percentage of all Chemical Firms in 13 European Countries, 1992)

0%

20%

40%

60%

80%

100%

120%

5-49 50-249 250-499 500-999 1000+

Employees

Percentage of all Firms

Product Innovations 1990-1992 Process Innovations 1990-1992 Innovations Intended 1993-1995 R&D in 1992

R&D Planned Next 3 Years Note: Observations with R&D intensities greater than 30 percent are not

included in this figure.

75

A different picture emerges when analyzing the distribution of innovating firms by industrial sector. The variation among the sectors is quite small. The size effect is somehow equalized when applying a distribution according to the various sectors of the industry. The highest shares are agrochemicals and other chemical products.

Whether innovative activities are planned for the next three years is shown as the third bar (Innovation Intended 1993-1995) in the figure. The share shown in this table is actually lower for some countries and higher for others than the realized values (shown in Table 6.13), as these were estimated innovations. Significantly more innovations are to be for Italy (plus 25.6 percent), France (plus 11 percent) and Norway (plus 10 percent).

6.3.2.2 Innovation Expenditures

The innovation expenditures measured in the CIS are the totals spent on the various stages involved in the process of product innovation. The CIS includes the following activities in this process: R&D; acquisition of patents and licenses; product design; trial production, training and tooling-up; market analysis (excluding launch costs), and other activities. This definition is taken from the OSLO-Manual (OECD 1992). Previous research used a more restrictive definition, which focused on applied research and development expenditures. The CIS data allows one to single out and identify the importance of the expenditures allocated to each stage of the innovation process.

The analysis of R&D effort plays a crucial role in economic analysis.¹⁸ The most common hypothesis in these studies is: that more important innovations require (on average) a larger share of innovation costs allocated for R&D than less important innovations. A second hypothesis states that: larger firms devote a greater percentage of their total innovation costs to R&D than smaller firms. And a third assumption is: that the more experienced firms become with R&D, the greater the likelihood that they will learn and, thus, become more efficient. From this assumption, one would expect experienced firms to use a smaller share of their innovation expenditures for R&D.

The overall picture is illustrated in Figure 6.2. This figure allows one to compare intensities of innovation, R&D and investment (expenditures as a percentage of total sales). The innovation intensity is the highest for firms with 500 to 999 employees. For every other size category, including firms with 1,000 or more employees, the innovation intensity is lower. With R&D intensities, the pattern is different. The R&D intensity of the largest firms is the highest. Structural differences, with respect to industrial sectors, become clear in Figure 6.3. The similarity in the pattern of “innovation-R&D-investment intensity” for the agrochemical and the pharmaceutical sectors are obvious

18 For an overview of empirical research on R&D, see Cohen and Levin (1989). For detailed analysis of the distributions of R&D expenditures in various US industries, see Cohen and Klepper (1992).

but the magnitude is different. In comparison, the R&D intensity is twice as large for the pharmaceutical sector. As was expected, the investment intensity for man-made fibers proved to be the highest in the industry, 50 percent higher than that of the pharmaceutical sector.

How the particular components of innovation expenditures vary according to firm size is shown in Figure 6.4. Again, we see that the R&D share of innovation expenditures increases with firm size. It is nearly twice as large for the largest firms as for the smallest firms. But, for the small firms the category “other innovation expenditures” is about 18 percent of total expenditures--which is much higher than in larger firms.

Figure 6.5 provides a comparison of the structure of innovation expenditures related to industrial sectors. The highest R&D percentages are in agrochemicals and paints and varnishes. There are considerable sector differences noticeable in the resources devoted to product design, trial production, training and tooling-up.