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Services vs. Manufacturing – How Does Foreign and Domestic Sales Impact on Their R&D?

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Abstract

While the distinction between manufacturing and services becomes increasingly blurred to some observers, we find, using a panel of Swedish firms, clear evidence that foreign sales (exports) are more important than domestic sales for stimulating R&D. This is particularly clear for manufacturing and this importance of foreign sales has increased over time, simultaneous to an opening up of the Swedish economy. Even though service industries have seen an increase in both R&D and trade over time, it is thus mainly manufacturing that has benefited from increased possibilities for absorptive capacity. This result suggests a clear dichotomy between manufacturing and services in terms of how they react to trade and how they turn towards the foreign market vs. the domestic market to find stimuli for innovation.

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Notes

  1. R&D is, however, an input into the innovation process, not necessarily linked to innovation (Smith 2005). Studies suggest that the number of innovations per employee declines with firm size (Acs and Audretsch 1990, 1991; Kleinknecht et al. 1993; Santarelli and Piergiovanni 1996; Pavitt et al. 1987).

  2. The model disregards e.g. dynamic market effects from cost-cutting on demand and on competition, which is hence assumed to be constant.

  3. This result holds generally such that the average costs with an initial strategy of entering a second foreign market is lower compared to a strategy of just entering on one foreign market if \( \frac{{\mathrm{F}}_2}{\mathrm{F}+{\mathrm{F}}_1}<\frac{{\mathrm{X}}_2}{\mathrm{X}+{\mathrm{X}}_1} \).

  4. We are thankful to an anonymous reviewer for pointing out this absorptive capacity argument.

  5. The same type of trade data are later used in the regressions.

  6. The latter results are available from the authors on request.

  7. The results are mainly unchanged when using the market share of the top four firms (C4) in the sector instead. The HHI index carries information on the dispersion of all firms in a sector whereas the C4 only considers the top four.

  8. For services, the difference is also significant for 1989.

  9. The choice of these instruments were inspired by those used by Gustavsson Tingvall and Karpaty (2011).

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Acknowledgments

We thank Martin Andersson and Johan Blomquist for useful comments on earlier drafts and two anonymous reviewers whose comments helped us improve the manuscript. Davide Castellani provided useful guidance at the later stages. Olof Ejermo acknowledges financing from the Swedish Research Council (Linnaeus Grant No. 349200680) and the Swedish Governmental Agency for Innovation Systems (Grant agreements 2008-00935 and 2010-07370).

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Authors and Affiliations

  1. Centre for Innovation, Research, and Competence in the Learning Economy (CIRCLE), Lund University, P.O. Box 117, SE-221 00, Lund, Sweden

    Olof Ejermo

  2. AgriFood Economics Centre, P.O. Box 730, SE-220 07, Lund, Sweden

    Karin Bergman

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  1. Olof Ejermo
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  2. Karin Bergman
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Correspondence to Olof Ejermo.

Appendix

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Table 8 Sector division
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Ejermo, O., Bergman, K. Services vs. Manufacturing – How Does Foreign and Domestic Sales Impact on Their R&D?. J Ind Compet Trade 14, 367–391 (2014). https://doi.org/10.1007/s10842-013-0165-x

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