Innovations, Patents and Cash Flow

Abstract

Studies of the innovative activity of firms which focus on R&D spending generally conclude that relatively few firms engage in R&D, but that those who do display a relatively stable pattern of spending on R&D over time. Differences between firms in R&D spending (or in spending intensity) are typically much more important than variations in spending within firms over time. As a consequence, the interesting research question to be addressed in these studies is: ‘Which firms do R&D?’ By contrast, studies of innovative output using patents or counts of major innovations generally show that many of the firms who do produce an innovation do so only sporadically. Few firms put together multi-year spells of sustained patent or ‘major’ innovation production, and the timing of their innovative activities is episodic, idiosyncratic and relatively hard to predict. This adds a second interesting question to the research agenda, namely: ‘When (if ever) do firms innovate?’ At a purely statistical level, answering this second question means finding exogenous variables that display the same kinds of variation as patents or ‘major’ innovation counts; that is, finding independent variables that display a high ratio of within to between variation, plus a tendency towards irregular bursts of sub- or supernormal activity. For economists interested in the determinants of innovative activity, this is likely to rule out factors such as ‘technological opportunity’, ‘conditions of appropriability’ or market structure (all of which tend to be different for different firms or industries, but stable over time). However, potential determinants of innovation, such as demand or the financial state of firms, are both interesting on theoretical grounds and potential candidates on purely statistical grounds.

We would like to thank the Centre for Business Strategy, the Gatsby Foundation and the ESRC for financial assistance. We would also like to thank Richard Blundell, Paul David, Rachel Griffith, Zvi Griliches, Bronwyn Hall, Adam Jaffe, Alfred Kleinknecht, Sam Kortum, Jose Maria Labeaga, Steve Martin, Frank Windmeijer, two referees and participants at: the 1995 RES Conference at Kent, the 1994 NBER Summer School, the CEPR Workshop on R&D Spillovers in Lausanne, the ESRC Network of Industrial Economists meeting in Edinburgh, Dundee University, Newcastle University, Durham University, Harvard University, the Jerome Levy Institute at Bard College, the European University in Florence, the University Catholique de Louvain, the Athens University of Economics and Business and the 1999 TSER workshop on Innovation and Economic Change at Delft University of Technology who provided useful comments on early drafts of this work. The usual disclaimer applies.