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innovation and export behaviour at the firm level

innovation and export behaviour at the firm level

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Research Policy 26 1998 829\u2013841
Innovation and export behaviour at the firm level
Katharine Wakelin)
MERIT, P.O. Box 616, 6200 MD Maastricht, Netherlands
Received 28 February 1997; revised 20 October 1997; accepted 12 November 1997
Abstract

This paper considers the role of innovation in determining export behaviour for a sample of UK firms including both innovating and non-innovating firms. Export behaviour is defined both as the probability of a firm exporting and the propensity to export of the exporting firms. An empirical model of the determinants of export behaviour is estimated, and the determinants are found to vary between innovating and non-innovating firms. Non-innovative firms are found to be more likely to export than innovative firms of the same size. However, the number of past innovations has a positive impact on the probability of an innovative firm exporting. The paper concludes that the capacity to innovate changes the behaviour of the firm relative to non-innovating firms.q 1998 Elsevier Science B.V. All rights reserved.

Keywords:Innovation; Export behaviour; Firm level
1. Introduction
There is considerable macroeconomic evidence
that differences in innovation, in addition to relative
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prices, can influence export behaviour see for in-
stance Fagerberg, 1988, for the OECD countries and
.

Greenhalgh, 1990, for the UK . This paper aims to extend that analysis to the firm level, considering the role of innovation in determining export behaviour for a sample of UK firms. The impact of innovation on firm performance is treated in two ways: the direct impact of being an innovative firm; and the role of spillovers of innovations from other firms. In contrast to other microeconomic studies which have used R&D expenditure as a proxy for innovation,

)Corresponding author. Tel.:q31-43-3883886; fax:q31-43-
3216518; e-mail: k.wakelin@merit.unimaas.nl.
this paper uses the innovation history of the firms
taken from the SPRU innovation survey.

The role of innovation in trade behaviour is of particular interest in the case of the UK. As a number of studies have pointed out, the UK\u2019s trade performance in manufacturing, as shown by the UK share in world manufacturing trade, has been declin- ing for much of the post-war period, although this trend may have been reversed in the 1980s.1 It is

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frequently noted for instance by Thirlwall, 1986 that it is in the area of non-price competitiveness that the UK economy is particularly weak, reflecting, among other factors, the poor skills of the work

1
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See for instance Landesmann and Snell 1989 and Anderton
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1992 for examinations of the UK\u2019s changing trade patterns in
the 1980s. This decline in trade share does not necessarily indicate
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a decline in \u2018competitiveness\u2019; Fagerberg 1988 gives a broad
definition of competitiveness.
0048-7333r98r$19.00q 1998 Elsevier Science B.V. All rights reserved.
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PIIS0048-7333 97 00051-6
(
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K. Wakelinr Research Policy 26 1998 829\u2013841
830

force, poor product design and quality, after sales service, and reliability. There have been a number of studies investigating the impact of non-price compet- itiveness on UK trade at a sectoral level. Greenhalgh

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1990 , Buxton et al. 1991 and Greenhalgh et al.
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1994 , have found some evidence of a positive role for innovation in trade performance. In this paper the impact on export behaviour of being an innovating firm is estimated, while controlling for other factors which influence exports. In addition, the level of innovation in the sector, and the use of innovations in the sector are also considered as determinants of firm export behaviour.

The paper is set out as follows. Section 2 outlines the characteristics of innovation at the firm level, and summarises other empirical work concerning the de- terminants of exports at the level of the firm. Section 3 presents the data set to be used and the empirical model to be tested; Section 4 gives some descriptive statistics. Section 5 considers the model specifica- tion, and discusses the results for the probability of a firm exporting, and for the propensity of firms to export. Section 6 concludes.

2. Firm behaviour

It is at the firm level that decisions about the commitment of resources to innovation, and the in- novative strategy of the firm are made. It is also principally at the level of the firm that the benefits of innovation are enjoyed: in terms of cost reductions, new markets and potential monopoly rents. This makes the firm a suitable unit of analysis when considering the role of technology in export be- haviour. The sector, and more broadly the country in which the firm is located, provide the context for these decisions, and have a strong influence on them. Considering the relationship between innovation and exports for firms in a single country does not reflect on the larger issues of a country\u2019s competitiveness

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however this is defined . The exports of each firm give no indication of the imported content of the firm\u2019s output, nor the level of import penetration within the industry in which the firm operates.

The tacit and non-codifiable nature of technology, the importance of learning-by-doing and learning- by-using in technological change and the potential to appropriate at least some of the benefits of innova-

tion may lead to the accumulation of innovations by individual firms.2As technology is not always codi- fiable, the transfer and diffusion of it can occur only slowly. Firms accumulate skills from using new technologies, learning via the production process, and from the implementation of innovations. Innova-

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tion becomes a cumulative process Rosenberg, 1976,
.
3
1982 , which is at least partly specific to the firm.

One outcome from these firm specific innovation patterns is that asymmetries exist among firms in terms of their technological capabilities and their general economic performance. These asymmetries provide the motivation for examining differences in export behaviour between innovating and non-in- novating firms.

The majority of firm level studies considering innovation have concentrated on testing the Schum- peterian hypothesis of a positive relationship be- tween firm size and innovation. However, a number has examined the relationship between innovation

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and exports. Kumar and Siddharthan 1994 analysed the relationship between R&D expenditure and ex- ports for 640 Indian firms from 1988 to 1990 grouped according to industry: they found R&D expenditure to be an important factor in low and medium tech- nology industries, and concluded that India does not have a competitive advantage in high technology sectors, but innovation positively influences her per-

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formance in other sectors. Willmore 1992 concen- trated on the role of transnationals in Brazil\u2019s trade, estimating both the determinants of exports and those of imports. He found no significant role for R&D expenditure as a determinant of exports, although R&D appeared to play a small negative role with respect to imports: technological effort led to in- creased domestic inputs and less reliance on imports.

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Hirsch and Bijaoui 1985 considered the relation- ship between R&D expenditure and export be- haviour for Israel; a small country which experi- enced a rapid rise in exports in the 1970s. They tested the importance of innovation advantages for 111 Israeli firms, all of which had undertaken R & D expenditure and were thus classified as innovators.

2
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See for instance Dosi 1984, 1988 and Freeman 1982 .
3
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Blundell et al. 1995 found evidence of \u2018history dependence\u2019
in patterns of firm innovation.
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K. Wakelinr Research Policy 26 1998 829\u2013841
831

Initially, the authors contrasted the propensity to export of their innovating firms with the average propensity to export in each sector, and found that the innovating firms, grouped into sectors, had a higher propensity to export than the sector average. In the model which followed, they found lagged R & D expenditure to be significant in explaining the rate of change of exports in a cross-section. The size of the firm, measured by sales, and the change in firm sales, taken as an indicator of \u2018other firm characteristics\u2019 were also significant. The authors concluded that innovation is an important factor in explaining export performance; they also noted that while a minimum size is probably required to export, beyond that firm size is not a major factor.

The majority of firm level studies have used R & D expenditure as an indicator for innovation, and as a basis for the classification for firms as innova- tors. Taking information from an innovation survey, as in this paper, has the benefit of not excluding those firms too small to have a separate R&D department, or even a R & D budget, yet which nev-

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ertheless innovate Pavitt et al., 1987 . The distribu- tion of such firms may be concentrated in some sectors, such as the engineering and instrumentation sectors, in which many innovations are produced as part of the production process rather than through R&D. By using the actual number of innovations produced to classify firms as innovators, the size bias of R&D expenditure as an innovation proxy can be avoided.4

3. The data set and empirical model

The empirical analysis presented here aims to assess the importance of different determinants of trade behaviour, in particular the role of innovation. The differences between innovating and non-innovat- ing firms are treated in two different ways. First, a dummy variable is included which takes the value of one for firms which have innovated; this is designed

4There have been some studies combining this innovation
survey with other firm data to investigate a range of issues, see for
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instance the work of Blundell et al. 1995 on the historical
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.
dependence of innovation, and Geroski and Machin 1993 for the
relationship between innovation and firm profitability.

to test if there is a fixed effect as a result of being an innovator. In addition, the number of innovations a firm has had in the past is also included. Second, the estimates are made separately for the two groups of firms, innovators and non-innovators, to see if the determinants of trade behaviour vary across these two groups; this separation is tested relative to a model with all firms pooled together. The latter approach indicates that being an innovator funda- mentally changes the nature of the firm, so that innovating firms need to be treated differently from non-innovating firms.

The data set used in this paper is a microeco- nomic data set of UK firms which covers 320 firms for a period of 5 years from 1988\u20131992 and ac- counts for over half of total UK manufacturing out- put over the 5 years.5 It consists of two sub-sam- ples. The first sample of innovating firms is chosen from the firms covered by the SPRU innovation survey. The definition used for the inclusion of an innovation in the survey was \u2018the successful com- mercial introduction of new or improved products, processes or materials\u2019. Only the firms in manufac- turing sectors were then chosen. As Pavitt et al.

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1987 point out, 90% of the innovations were ex- ploited by firms with their principal activity in man- ufacturing, so this selection covers the majority of innovations. The second sample consists of firms chosen randomly from the population of UK firms; the innovating firms, which are defined as firms included in the SPRU survey, are then removed from the sample to leave a sample of non-innovating firms.6 Only firms in the manufacturing sector were then chosen from this sample. Approximately one third of the firms are quoted on the UK stock market, while two thirds are not: the latter are expected to be generally much smaller in size.

In order to separate differences between sectors from differences between firms, firms were ran- domly selected so that there are equal numbers of

5For details of the data sources, see Appendix A and for more
details on the selection and choice of firms, see the work of
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Wakelin 1997 .
6The firms are picked randomly from two data sources; Datas-

tream for the quoted firms, and ICC for non-quoted firms. Datas- tream covers all quoted firms, while ICC has data on more than half a million non-quoted firms.

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