Research Policy 33 (2004) 193–207

Innovation capabilities of European nations

Cross-national analyses of patents and sales
of product innovations
Jan Faber∗ , Anneloes Barbara Hesen
Department of Innovation Studies, Copernicus Institute, Utrecht University, P.O. Box 80125, 3508 TC Utrecht, The Netherlands
Received 26 April 2002; received in revised form 24 June 2003; accepted 2 July 2003

Abstract
The relationships among R&D and other innovation activities, patents granted and sales of product innovations influenced
by various specified characteristics of a NIS are investigated at the national level and tested on data for 14 EU nations in
1992 and 1996. The statistical results show patents to depend on sales of product innovations. Furthermore, both national
innovation outcome indicators depend on largely the same macro- and micro-economic conditions while they differ in
additional explanatory conditions, namely governmentally regulated institutional conditions for patents and firm specific
characteristics for sales of product innovations.
© 2003 Elsevier B.V. All rights reserved.
Keywords: National innovation capabilities; Sales; Patents; Product innovations; National Innovation Systems

1. Introduction innovative firms. During the 1990s firms in the lat-

After a decade of economic crisis, globalization
of markets, trade deficits and accompanying political
economic debates and measures taken among gov-
ernments (cf. Kennedy, 1987), Porter (1990) called
attention to contemporary and historic differences
in macro-economic, micro-economic and business
conditions and policies between nations as very im-
portant causes of their differential economic growth
rates today. In his view, national economies dom-
inated by business sectors comprising firms that
are little innovative grow slower in terms of em-
ployment and value added than national economies
dominated by business sectors that are led by rather
∗ Corresponding author.
E-mail address: j.faber@geog.uu.nl (J. Faber).
ter sectors strongly relied on IT induced innovations
in business processes and products resulting in a
wide variety of new and improved customer ori-
ented products and services. Both the US and EU
economies profited to a large extent from these de-
velopments in terms of shrinking unemployment
and increasing GDP (cf. OECD, 2000a). However,
the EU economies performed less well than the US
economy.
In order to investigate these differences in na-
tional innovation performances, Porter and Stern
(1999) have analyzed the relative innovation capabil-
ities of 17 OECD countries from data on the period
1973–1993 in order to predict the yearly numbers of
patents granted by the US patent office USPTO to
firms and citizens residing in each of these countries
(R2 = 0.99).

0048-7333/$ – see front matter © 2003 Elsevier B.V. All rights reserved.
doi:10.1016/S0048-7333(03)00122-7
194 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207
Additionally, Stern et al. (2000) replaced patents
as the variable to be explained by announcements of
renewed and new products in trade and technical jour-
nals and by national shares of the international market
of high technology industry. Patents and announce-
ments of renewed and new products as indicators of
national innovation capabilities are about equally well
predicted by their model (R2 = 0.99), but the pre-
dictions of national market shares of the international
market of high technology industry are less accurate
(R2 = 0.78) (cf. Furman et al., 2002). Neverthe-
less, what all three indicators of innovations have in
common is that they have a low face validity1 regard-
ing the outcome of innovations striven for, namely
bringing new and renewed products successfully to
the market (cf. Griliches, 1990; Acs and Audretsch,
1993; Kleinknecht, 1996).
In order to meet these criticisms, a national aggre-
gate indicator of sales of new and renewed products
has been derived from the Community Innovation Sur-
veys I and II (CIS I and II; Eurostat, 1997, 2000) for
14 EU nations in 1992 and 1996. And the related re-
search question is formulated as, which factors do af-
fect, positively or negatively, the proportions of new
and renewed products in total sales of firms residing
in every EU country? This question will be further in-
vestigated in the rest of this article.
The article is organized as follows. In Section 2,
a model of national innovation capabilities will be
elaborated from the concept of a National Innova-
tion System (NIS). The variables in the model will
be indicated and their expected effects on variables
representing the national innovation performance
will be postulated. Section 3 presents the opera-
tionalizations of the variables specified in the model
together with some related methodological issues.
Section 4 discusses the statistical methods applied
and the results obtained from testing the hypothe-
ses specified for all 14 EU nations in 1992 and
1996. A discussion of the research carried out and
the results obtained will be presented in Section 5
together with the conclusions drawn from this
investigation.
1 Face validity refers to the degree of correspondence between
the content of a theoretical concept (i.e. the concept as meant)
and its measurement on the empirical indicator(s) used (i.e. the
concept as measured) (cf. Riley, 1963).
2. Model of national innovation capabilities
2.1. System theoretic framework of the NIS concept
Porter’s preliminary concept of a NIS is adopted
here for two reasons (cf. Lundvall, 1992). First, sev-
eral case studies in Nelson (1993) show apparent
differences between the NIS’s of countries, for exam-
ple, Denmark and Sweden. Secondly, policies aiming
at supporting innovations or even the national econ-
omy are mostly formulated and implemented on the
national level (cf. Edquist, 1997). Hereby is meant,
that the behavior of innovating firms will depend on
their own decision-making, but that the set of consid-
ered options is shaped by institutions that constitute
constraints and/or incentives for innovations, such
as laws, health regulations, subsidies, taxes, public
expenditures, etc. Additionally, micro-economic con-
ditions (e.g. market conditions, competition, price
setting) and macro-economic conditions (e.g. wealth,
inflation, openness) will influence the decisions about
innovation taken by firms.
In sum, the concept of a NIS comprises two broad
categories of variables: (1) variables related to in-
novation processes within and among firms, and (2)
variables related to the innovation infrastructure sur-
rounding and enabling innovations by firms. These
categories represent the structural dimensions of the
NIS concept.
From a functional perspective, innovations under-
taken by firms can be conceived as transformation pro-
cesses instigated by various input variables and result-
ing in an output represented by variables indicating
product and/or process innovations.
Combining these structure and function oriented
views on innovation implies that variables in both NIS
categories mentioned earlier can be classified as input
variables, transformation/process variables, or output
variables. But the output variables at the (national)
infrastructure level in the second NIS category are
but aggregates of those in the first NIS category (cf.
Faber and Scheper, 1997). This integrated system the-
oretic framework of a NIS is visualized in Fig. 1.2 The
2 For a time dynamic perspective, various feedback relation-
ships should be added to Fig. 1 thereby, defining most categories
of concepts as endogenous in nature. But data requirements for
estimating such a specification are heavy and go beyond the cur-
 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207 195

NATIONAL INNOVATION SYSTEM

INNOVATIONS WITHIN AND BETWEEN FIRMS

PROCESS
VARS

INPUT OUTPUT
+/x
VARS VARS

ECONOMIC
CONDITIONS

INPUT VARS PROCESS OUTPUT

VARS VARS

INSTITUTIONAL
CONDITIONS

NATIONAL INNOVATION INFRASTRUCTURE

Fig. 1. A system theoretic framework of the National Innovation System.

delineated categories of variables will be further dis-
entangled on the basis of empirical results and theo-
retical arguments to be presented in Section 2.2.
2.2. Specification of the model of national innovation
capabilities
In this section, the categories of variables depicted
in Fig. 1 will be decomposed into sets of single
variables. These variables constitute the theoretical
model of the NISs of EU countries that will be tested
in Section 4 after being operationalized in Section 3.
The selection of variables belonging to each cate-
gory is based on two criteria: (1) theoretically argued
and empirically confirmed relevance in other innova-
tion studies, and (2) presence of data for the nations
and years of observation included in CIS I and II
(Eurostat, 1997, 2000), i.e. 1992 and 1996.
First, the selection of input, process and output
variables describing innovations within and between
rently available data. Furthermore, the explanation of outputs of
innovations is the subject under investigation.
firms is discussed. After that, the selections of input
variables describing the economic and institutional
conditions prevailing within a NIS, which affect in-
novations by firms, are presented. Innovation process
variables at the level of a NIS, such as advice given by
governmental innovation centers and other agencies
during innovations undertaken by firms, are omitted
here due to lacking comparable data on all EU na-
tions. Fourthly, some contextual factors are described.
A summary concludes this outline giving an overview
of the complete theoretical model that has been
developed.
2.2.1. Input, process and output variables at the
level of the firm
As a point of departure, innovation trajectories
are conceived to consist of three general subsequent
stages, namely of innovation activities leading directly
or indirectly via patenting to sales of substantially
improved and new products. This conceptualization
is based on the following arguments. Due to various
kinds of difficulties encountered during innovation
196 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207
activities conducted, these activities do not all re-
sult in successful product and/or process innovations.
Furthermore, not all innovations are patented. Many
product innovations are brought to the market without
being patented because firms rely on secrecy, tacit
competences, etc. (cf. Arundel and Kabla, 1998).
Moreover, patented product innovations do not nec-
essarily result in successful product introductions in
the market due to lack of adoption by the customers.
On the other hand, patents may also be acquired by
firms for reasons of, among others, fencing previous
successfully introduced product innovations against
substitute product innovations by competitors.
Besides individual firms developing innovations
various innovation trajectories are carried out by
interrelated firms and other organizations. Initially,
scientific interest focused on value systems (cf. Porter
and Millar, 1985); later on, attention shifted to clus-
ters in order to encompass a larger variety of orga-
nizations wherein some have only indirect or lateral
linkages with the innovation trajectory studied (cf.
Porter, 1990). In Roelandt and den Hertog (1999)
many virtues of innovations conducted in clusters
and of the related possibilities of their stimulation
by governmental cluster policies have been empha-
sized. Empirical research demonstrates, however, that
a vast majority of innovation trajectories is carried
out within supplier(s)–producer–customer(s) chains
and if third parties are involved they are mainly con-
sulted for information and knowledgeable advice (cf.
Oerlemans and Meeus, 1995). Cooperation among
firms on innovations within these chains is mainly
informal and eventually supported by contracts con-
cerning supplies. But cooperation among competing
firms on R&D based on mutually agreed cost, bur-
den and knowledge sharing has hardly occurred. This
outcome supports the argument of Teece (1988) that
innovations provide firms with competitive advan-
tages and crucial assets in the future so that they will
be reluctant to cooperate on R&D.
In sum, the following variables have been identi-
fied earlier at the level of firms: (1) output variables,
i.e. patents granted and sales of new and substan-
tially improved products; (2) process variables, i.e.
difficulties encountered during innovation processes,
utilizing external sources of information and R&D
cooperation; and (3) input variables, i.e. innovation
activities. The process or intermediate output vari-
able ‘successful inventions’ has not been taken into
account due to the lack of comparable data.
2.2.2. Economic conditions imposed by the
national innovation infrastructure
The number of innovation trajectories devel-
oped within a nation depends on various struc-
tural characteristics of the national economy. These
structural characteristics give indications about the
micro-economic conditions prevailing within that
nation. Arundel and Kabla (1998) found that the
propensity rate of patenting of firms varies with their
technology inputs, size and attitude towards patent-
ing. These variables seem to differentiate various
sectors of business activities from one another within
the national economy.
As high-tech and medium-tech firms are more
knowledgeable about new technologies more oppor-
tunities for innovations are recognized by them (cf.
Pavitt, 1984). Brouwer and Kleinknecht (1996) pre-
sented empirical results supporting this hypothesis;
within The Netherlands, high-tech firms are more en-
gaged in innovation activities resulting in relatively
more sales of product innovations than low-tech firms.
Large firms (in terms of number of employees) pos-
sess relatively more assets and resources, which en-
able them to generate and attract more easily funds for
innovations. On the contrary, many small and medium
sized enterprises (SMEs) lack the resources (finance,
knowledge, competencies) to develop innovations of
their own and will rely heavily, in various ways, on im-
itating innovations developed by other firms (cf. Acs
and Audretsch, 1990). On the one hand, this implies
that SMEs experience relatively low levels of inno-
vation activities and patents granted (cf. Tidd et al.,
1997). On the other hand, as SMEs will experience
more intense competition on their markets due to their
relatively large numbers they are also stimulated to
introduce product innovations at the market in order
to safeguard their competitive position. These effects
may also be expected at the level of the national econ-
omy if it is dominated by SMEs, that is, a negative
effect on patent acquisition and a positive effect on
successful introductions of product innovations in the
market will occur.
The attitude of firms towards patenting reflects their
orientation on innovation. The relative number of in-
novative firms present within a nation, partly due to
 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207
spill over and imitation, may be conceived as an indi-
cator of this orientation of firms at the national level.
This orientation has not only a positive effect on the
number of patents granted as reported before but also
on the number of successfully introduced product in-
novations (cf. Porter, 1990).
All in all, the composition of the economic base of
a nation affects the amount of successful innovation
activities carried out by firms. This composition is
argued here to be reflected in the technology input
and size distributions of firms and in the degree of
innovation orientation among firms within a nation.
The successful introduction of product innovations
also depends on several macro-economic conditions
shaping prevailing market conditions, for example, the
amount of effective demand within the national econ-
omy (cf. Geroski and Walters, 1995), and the acces-
sibility of foreign markets (cf. Hughes, 1986). Each
of these market conditions enhances, ceteris paribus,
the demand for product innovations and thereby, also
the economies of scale realized in supply, produc-
tion and logistics stimulating extra sales of product
innovations via cost and price reductions. These mar-
ket conditions may also be anticipated in the deci-
sion making about innovation activities to be executed
and patents to be acquired, thereby, exerting stimu-
lating effects on both stages in innovation trajectories
(cf. Stern et al., 2000).
However, also plausible arguments can be given for
opposite effects of both latter conditions mentioned
earlier. This line of argumentation goes as follows.
The amount of effective demand within the national
economy, which is indicated by the size of the na-
tional economy and the prevailing level of economic
prosperity, and the access to foreign markets reduce
the stimulus to innovate because competition becomes
less severe due to (increasingly) high levels of demand.
And finally, it may be argued that if foreign access
of product innovations to the domestic market is not
hindered domestic competition will increase, thereby
reducing the sales of product innovations by domestic
firms and stimulating them to seek market protection
for their product innovations via patenting.
Whichever arguments about the effects of the level
of domestic demand and the openness of the national
economy on the magnitude of innovation activities car-
ried out, the number of patents granted and the sales
of product innovations realized apply cannot be de-
197
termined in advance before empirical testing has been
conducted.
Overall, domestic and foreign market conditions
will affect the patent acquisitions and sales of inno-
vative products by firms residing within a country.
These conditions are reflected in the size of the na-
tional economy, the level of economic prosperity and
the openness of the national economy.
2.2.3. Institutional conditions imposed by the
national innovation infrastructure
In addition to the economic conditions mentioned
earlier, some national innovation infrastructure condi-
tions have been identified, which regulate the inputs
necessary to achieve the level of innovation activities
carried out within a nation during a particular year
(or other period of time), namely, the accessibility of
financial and human resources. Of course, firms de-
cide themselves how much they will invest in inno-
vation projects and in people to carry them out. But
these amounts of innovation investments are partly de-
termined by governmental regulations, which affect
the possibilities of acquiring venture capital and the
costs induced by the level of company taxation; some
nations have regulations that allow company tax re-
ductions for innovating firms. Also the availability of
highly educated and trained personnel on the labor
market affects the propensity of firms to innovate and
to patent innovations (cf. Arundel and Kabla, 1998).
The (anticipated) availability of such personnel results
from, inter alia, (past) public policies and expenditures
on education.
Another national innovation infrastructure condi-
tion consists of public R&D expenditures, which also
stimulate national innovation activities. These expen-
ditures are partly received by firms as subsidies of
R&D, matched funding of R&D or as revenues from
public R&D contracts (i.e. public organizations as
launching customers). Another part of those public
R&D expenditures will be spent on scientific research
carried out within universities as specific contract re-
search via negotiated budgets or as regular research
via normal budget assignments to universities for
education and research. In all instances, innovations
resulting from those publicly supported innovation
activities will be partly patented and partly applied in
product innovations that are successfully introduced
in the market (cf. Porter and Stern, 1999).
198 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207
To sum up, four institutional conditions dependant
on governmental policies are considered with respect
to patent acquisition and sales of innovative products
by firms residing within a country, namely, the avail-
ability of venture capital, the level of company tax-
ation, the availability of highly educated and trained
personnel on the labor market, and public expenditures
on R&D.
2.2.4. Contextual and not specified conditions
In addition to the external conditions on innovation
trajectories discussed before, which are argued to be
relevant components of the national innovation infras-
tructure, also the context of the entrepreneurial climate
prevailing within a nation is taken into account.
The entrepreneurial climate itself may be regarded
as a complex concept with financial, economic, ju-
ridical and various other dimensions, which make it
difficult to define, specify and measure. Neverthe-
less, this climate may be conceived to be reflected in
the risk taking attitude of entrepreneurs. In general,
this risk taking attitude will be stronger when more
entrepreneurs are present trying to keep their enter-
prise viable amidst a larger number of competitors.
And with a generally stronger risk taking attitude,
relatively more entrepreneurs will try to improve the
competitive position of their business by conducting
more innovation activities, seeking market protection
by patenting more innovations, and by trying to in-
troduce successfully more product innovations in the
market.
The variables, which are specified earlier as factors
relevant regarding the differences in successful intro-
ductions of renewed and new products in the market
between nations, represent the concepts in the NIS
model in Fig. 1. Many other characteristics of these
concepts have not been selected because of a lack of
comparable data although they have been argued to be
important; for example, marketing strategies of firms,
national anti trust laws and other market regulations,
supplier concentration, sector specifics, geographical
concentration, etc. (cf. Kleinknecht, 1996). Another
variable not included earlier is the international eco-
nomic climate indicated by the phases in the Kon-
dratieff cycle (cf. Clark et al., 1984; Goldstein, 1987).
The international economic climate may be argued to
have a profound effect on the formation of expecta-
tions by economic actors concerning the utilities of
investments, consumption, savings and credit provi-
sions, which also affect the propensity of individual
firms to innovate.
2.2.5. Specification of the theoretical model
In order to explain outcomes of innovation pro-
cesses undertaken by firms residing within any na-
tion, the following input, process and output variables
at the level of firms and at the level of the national
innovation infrastructure have been identified and se-
lected in the previous subsections. Additionally, the
expected positive (+), negative (−) or indeterminate
(+/−) causal effects of the various input and process
variables on the output variables at the level of firms
have been indicated.
• Output variables at the level of firms: patents
granted (+) and sales of innovative products
(patents are expected to result in such sales).
• Process variables at the level of firms: difficulties
encountered during innovation processes (−), uti-
lizing external sources of information (+), and co-
operation on R&D (−).
• Input variables at the level of firms: intensity of
innovation activities, which is indicated by privately
funded R&D expenditures (+) and total innovation
expenditures (+).
• Process variables at the level of the national inno-
vation infrastructure: none (not identified due to the
lack of comparable data).
• Input variables at the level of the national innovation
infrastructure:
(a) Economic conditions
◦ structure of the national economy, which is
indicated by the technology input distribution
(+) and the size distribution of firms (+/−)
and the innovation orientation among firms
(+);
◦ market conditions, which is indicated by the
size of the national economy (+), the level of
economic prosperity (+/−) and the openness
of the national economy (+/−).
(b) Institutional conditions
◦ financial stimulation of innovation activi-
ties, which is indicated by the availability
of venture capital (+), the level of company
taxation (−) and the amount of public R&D
expenditures (+);
 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207
◦ availability of R&D personnel, which is in-
dicated by the average number of years of
education enjoyed by the labor force (+).
(c) Contextual conditions
◦ entrepreneurial climate, which is indicated by
the degree of entrepreneurship within the la-
bor population (+).
In order to control for the effects of various dif-
ferences in size between countries on the results of
the analyses to be carried out, all variables except the
size of the national economy, the level of economic
prosperity and the average number of years of educa-
tion enjoyed by the labor force will be expressed in
proportional units (see Section 3.2).
3. Methodological issues
3.1. Unit of analysis
When one tries to asses the effects of input and pro-
cess variables in the first and second NIS categories on
the output variables in the first NIS category (i.e. the
output of innovations within and among firms) a unit
of analysis problem arises. One solution is to adopt a
multi-level analysis approach. Another solution is to
aggregate the variables in the first category to national
variables representing all innovating firms. As the fo-
cus of this article is on the innovation capabilities of
nations the second solution has been applied in this
article.
This may seem a rather simple answer with which
many will disagree. Surely, national outcomes of inno-
vation activities are aggregates of behaviors conducted
by individuals with respect to the creation, develop-
ment, production and adoption of innovations. Crucial
in these behaviors is individual decision taking, which
is steered by personal characteristics and various envi-
ronmental influences and conditions. This implies that
the appropriate level of analysis, without falling into
the trap of reductionism, is the individual (cf. Faber
and Scheper, 1997). For this reason, Poole et al. (2000)
recommend to study individual innovation trajecto-
ries in order to describe and analyze these individual
behaviors and decision making as the basis of theory
formation on innovation. It may be derived then that
199
any other level of analysis chosen in the study of inno-
vation is, in principle, arbitrary from a methodological
point of view. Organizational departments, organi-
zations, networks of organizations, NISs and other
aggregate levels of analysis are chosen for pragmatic
reasons in order to answer the research question(s)
posed. And if we move from more to less aggregate
units of analysis our insight in relevant and irrelevant
factors concerning innovations will get more detailed
but only at the level of individuals relevant factors
may be discerned as causal factors in the long run.
In this study nations are chosen as the unit of
analysis in order to investigate why European na-
tions differ in innovation capabilities measured in
terms of bringing substantially improved and new
products successfully to the market. And the system
theoretic framework outlined earlier will be helpful
to categorize various relevant factors presented in the
innovation literature as (initial and process regulating)
infrastructure conditions and (inter)organizational
characteristics in order to specify an appropriate model
for testing the predictive power of these factors. In-
sight in what factors contribute to national differences
in innovations is the answer sought for, especially,
because some of these factors represent conditions
that may be manipulated by public policies aiming
to support the national economy. Because many of
these factors, which are defined at the national level,
measure aggregates of numerous factors at the level
of individuals, they provide only a partial answer to
how and why the national differences in innovation
capabilities occurred. But they may also indicate
potentially fruitful directions for further research.
3.2. Measurement problems
The innovation activities of firms are in many stud-
ies indicated by and measured on the expenditures of
R&D projects and innovation projects with a broader
scope. Firms’ expenditures on R&D projects are mea-
sured on privately funded investments in R&D. There
are no discussions about the instrument reliability of
these measurements. But with respect to the measure-
ment of expenditures on innovation projects with a
broader scope including R&D, especially those con-
tained in CIS I and II, various inconsistencies have
been reported, such as double counting of compo-
nents of innovations due to outsourcing (cf. Arundel
200 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207
and Kabla, 1998) and partial, possibly selective non-
respons (cf. Cornet and Gelauff, 2002). The latter
authors have constructed an alternative measure of
the innovation intensity of firms within a nation with
respect to innovation projects with a broad scope,
which is based on OECD statistics (OECD, 2000a,b).
Its estimated correlation with the innovation inten-
sity data derived from CIS II equals 0.76 for 14 EU
nations in 1996. This implies that the reported incon-
sistencies in the CIS II national innovation intensity
data are not absent. Nevertheless, the overlap of the
innovation intensities in the CIS II data and the data
based on OECD statistics is still quite considerable
(76%). Because of this overlap, the relative total in-
novation expenditures may be regarded as a proxy
of the innovation intensity of EU nations. Another
reason for this view is the following.
In addition to these remarks, it should be noted that
the statistics on privately funded R&D as well as on
total innovation expenditures might both contain bi-
ased measurements of the concepts involved. There
are many examples of R&D projects, especially those
involving IT, which ran out of budgets. To what ex-
tent are extra budgets assigned and which part of the
R&D expenditures of firms are paid from other reg-
ular budgets, for example, education and training or
marketing? This applies also to innovation projects
with a broad scope. Furthermore, nowadays there is in
every EU nation quite a number of business develop-
ment firms, which operate in certain fields of compe-
tence and co-develop new business concepts for client
organizations as well as for themselves. All their in-
vestments and regular expenditures are innovation ex-
penditures. But are they also accounted as such or as
normal business expenditures? These issues, among
others, lead to the underestimation of privately funded
R&D expenditures and innovation expenditures with
a broad scope (cf. Pavitt et al., 1987).
This underestimation of the magnitude of inno-
vation activities carried out by firms in statistics on
privately funded R&D expenditures and expenditures
on innovations with a broader scope due to (partly)
financing those activities from other regular budgets
may be reflected by direct effects of the possibili-
ties of acquiring venture capital and low levels of
company taxation on patent acquisition and suc-
cessful introductions of product innovations at the
market.
Reasons for overestimated statistics on both inno-
vation indicators lie in the sheer problem of sending
an innovation questionnaire to firms that arouses at-
tention within these firms to their innovative image
and awakens their attitude to comply with this im-
age in their answers to the questions posed. This is
a general problem of social inquiries (cf. Faber and
Scheper, 2003). It also implies that all statistics built
on surveys can at best only be regarded as proxies of
the concepts measured.
Additionally, it should be noted that innovation
activities undertaken by firms are transformation pro-
cesses, but the indicators mentioned earlier are strictly
spoken inputs (or prerequisites) enabling these pro-
cesses to be performed. The same argument applies
to public R&D expenditures and the available human
resources on the labor market. Therefore, all these
variables will be specified as input variables.
The measurement problems concerning innovation
activities of firms also occur with respect to other
variables in the theoretical model. The data on the
explanatory process and dependent output variables at
the level of firms derived from CIS I and II are based
on firms’ data supplied via questionnaires. Whether
or not these primary data are based on firms’ statis-
tics or estimates made by respondents within those
firms is unclear. Consequently, the magnitude of sys-
tematic biases or random measurement errors cannot
be assessed. Therefore, the measurements of the ex-
planatory process and dependent output variables can
only be regarded as proxies of the selected theoretical
concepts.
This applies also to variables representing espe-
cially the institutional conditions prevailing within the
national innovation infrastructure. Variables like the
availability of venture capital and the level of company
taxation reflect national institutional arrangements and
regulations, which make their measurements rather
vulnerable to differences in definitions across nations
although they have received the same label.
The face validity of the indicators used to repre-
sent the theoretical concepts derived in Section 2.2.5
cannot be assessed beyond doubt (cf. footnote 1). But
the correspondence between the postulated causal ef-
fects among these concepts and the estimated statis-
tical parameters indicating the influences among their
indicators also gives information about the validity of
the indicators used to represent the concepts, i.e. the
 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207
construct validity of the operationalizations (cf. Riley,
1963). This construct validity can be derived after sta-
tistical testing of the operationalization of the theoret-
ical model in Section 4.
3.3. Operationalizations of the variables in the
model of national innovation capabilities
The operationalizations of the variables discussed in
Section 2.2 are measured for the following nations and
years of observation because of their presence in CIS
I and II (Eurostat, 1997, 2000): Austria (1996); Bel-
gium (1992, 1996); Denmark (1992, 1996); Finland
(1996); France (1996); Germany (1992, 1996); Ire-
land (1992, 1996); Italy (1992, 1996); The Netherlands
(1992, 1996); Norway (1992, 1996); Portugal (1996);
Spain (1992, 1996); Sweden (1996) and United King-
dom (1996) (N = 22).3,4 The quality of the data used
will be discussed in Section 5.
1. Innovations within and between firms
(a) input variables, which comprise
• privately funded R&D expenditures, which
are measured as the percentage of the gross
value added of all industrial firms spent on
R&D (Hesen, 2001, p. 90); and
• total innovation expenditures (R&D and
non-R&D), which are measured as the per-
centage of the total turnover of industrial
firms spent on innovations (Hesen, 2001,
p. 90).
(b) process (/input) variables, which comprise
• sources of information available to firms,
which are measured as the percentage of in-
dustrial firms that contacted various sources
of information (Hesen, 2001, p. 91);
• cooperation between firms on R&D, which
is measured as the percentage of innovative
3 Nationyears not included are Greece (1992), France (1992),
Luxemburg (1992, 1996) and Portugal (1992) due to sampling
errors (Greece, 1992; Portugal, 1992) or missing data on various
variables (France, 1992; Luxemburg, 1992 and 1996).
4 In the overview of variables presented below references are
made to Hesen (2001), because the data published by Eurostat, the
OECD and other sources needed a large number of (re)calculations
before comparable figures between the nations and years of obser-
vation included in the analyses were obtained. Appropriate refer-
ences to the original sources of data used are given in Hesen (2001)
together with appendices explaining the performed (re)calculations.
201
industrial firms in all industrial firms coop-
erating with another firm on R&D (Hesen,
2001, p. 91); and
• difficulties encountered by firms during in-
novation projects, which are measured as
the percentage of industrial firms experi-
encing such innovation difficulties (Hesen,
2001, p. 89).
(c) output variables, which comprise
• patents granted, which are measured as the
number of patents granted by the EPO to all
organizations and citizens residing within a
nation per billion GDP of that nation in ECU
at 1996 market prices (Hesen, 2001, p. 91);
and
• sales of product innovations by firms, which
is measured as the percentage of the total
sales of industrial firms realized from sales
of new and substantially improved products
(Hesen, 2001, p. 92).
2. National innovation infrastructure represented by
only input variables
(a) economic conditions, which comprise
• the structure of the economy, which is rep-
resented by three indicators, namely, the
technology input distribution over indus-
trial sectors measured as the percentage
of total industrial value added generated
by high-tech and medium-tech industrial
firms (Hesen, 2001, p. 84, 151), the rela-
tive presence of small and medium-sized
enterprises measured as the percentage of
total industrial value added generated by
SMEs (Hesen, 2001, p. 84) and the rela-
tive presence of innovative firms within the
national economy measured as the percent-
age of innovative industrial firms among
all industrial firms (Hesen, 2001, p. 136);
and
• prevailing market conditions, which
are represented by three indicators,
namely, the size of the economy, which is
measured as the GDP in billions ECU at
1996 market prices (OECD, 2000a); the
level of economic prosperity, which is mea-
sured as the GDP per capita in 1000 ECU
at 1996 market prices (OECD, 2000a); and
the openness of the economy, which is
202 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207
measured as the excess in trade exposure5
of the national economy (Hesen, 2001,
p. 83 following Bassanini et al., 2001).
(b) institutional conditions, which comprise
• the possibilities of financing innovation
projects, which is measured as the percent-
age of venture capital in the GDP (Hesen,
2001, p. 85);
• the fiscal climate wherein firms operate,
which is measured as the percentage of
company taxes in the GDP (OECD, 1999);
• the availability of personnel on the labor
market for conducting innovation activities
measured as the average number of years
of education enjoyed by the labor force
(Bassanini and Scarpetta, 2001);
• public R&D expenditures, which are mea-
sured as their percentage of the GDP
(OECD, 2000b); and
• entrepreneurship, which is measured as the
percentage of the labor force registered as
entrepreneur (Hesen, 2001, p. 89).
4. Statistical results on the model of national
innovation capabilities
All hypotheses about the postulated effects of input
and process variables at the level of firms and the eco-
nomic and institutional conditions as input variables
from the national innovation infrastructure on the
output variables at the level of firms (see Section 2.2)
have been specified in a linear model consisting of two
regression equations for patents granted and relative
sales of new and substantially improved products.6
Both regression equations represent the general
5 Trade exposure = exports/GDP+(1−(exports/GDP))(imports/
(production + imports − exports)).
6 Porter and Stern (1999) specified their output variable ‘patents
per million inhabitants’ as a Cobb–Douglas function of their input
variables. However, when the estimated regression coefficients,
which are obtained after log-transforming the original equation,
are specified in the original (multiplicative) production function
one gets puzzled trying to understand the meaning of the model
because of the various dimensions of the explanatory variables
specified. Because of the same variability in the dimensions of
the variables selected in previous sections of this article a simple
additive standardized model has been specified. The functional
specification is left here as a topic for further research in the future.
theoretical model specified in Section 2.2.5. In order
to test the validity of this general theoretical model,
the data on the empirical indicators defined for every
EU country in 1992 and 1996 are contained in one
sample for statistical analyses (N = 22). The estima-
tion of the unknown regression coefficients specified
in the linear model and the testing of their signifi-
cance, that is, of the hypotheses specified before, will
be discussed in Section 4.1.
4.1. Estimation of the model of national
innovation capabilities
In order to estimate the regression equations of
‘patents granted’ and ‘relative sales of innovative
products’ the following procedures have been applied.
As the units of measurement of most variables differ
largely from one another, thereby, leading to problems
with the interpretation of the meaning of estimated
regression coefficients, all measurements of the de-
pendent and independent variables in both regression
equations have been standardized. The estimated
regression coefficients are then partial correlations
between the dependent and independent variables
(cf. Wonnacott and Wonnacott, 1990). The regression
equations with standardized variables have been spec-
ified in LISRELTM (cf. Jöreskog and Sörbom, 1993)
for simultaneous estimation of all unknown regres-
sion coefficients (and other parameters) by means of
the maximum likelihood (ML) method. LISRELTM
allows, for methodological reasons, also the specifica-
tion of only a limited number of correlations among
the independent variables. Correlations among inde-
pendent variables, whose estimated values differ sig-
nificantly from zero (P = 0.10), have been specified.
The hypothesized effects of the selected explana-
tory variables on ‘patents granted’ and ‘relative sales
of innovative products’ and the estimated values (with
t-values) of the unknown standardized regression co-
efficients representing them, which are produced by
LISRELTM , are presented in Table 1.7
7 Significant positive correlations are estimated for the following
pairs of independent variables: (PRR&D, IE), (PRR&D, PUR&D),
(IE, COOP), (IE, PUR&D), (SIF, COOP), (COOP, EP), (COOP,
VC), (GDP, AE), (TD, IF), (SME, EP), (IF, AE), (OPEN, VC),
(EP, AE), (EP, IF), (PUR&D, AE), (VC, CT) and (VC, AE).
Significant negative correlations are estimated for the following
pairs of independent variables: (SIF, SME), (SIF, CT), (DIFF, CT),
 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207 203

Table 1
Hypothesized and estimated standardized effects of various explanatory NIS variables on ‘patents granted’ and ‘relative sales of innovative
products’ (N = 22)
Explanatory variables Acronym Patents granted Relative sales of innovative products

Hypothesized Estimated t-value Hypothesized Estimated t-value

effects regression effects regression
coefficients coefficient
Patents granted Patents + −0.552 −24537
Privately financed R&D PRR&D + −0.076 −0.595 + −1.210 −9.107
Innovation expenditures IE + 0.179 1.318 + 1.398 9.593
External sources of information SIF + 0.206 3.245 + 1.289 16.060
Cooperation between firms on R&D COOP − −0.181 −2.593 − −0.623 −7.532
Difficulties during innovations DIFF − −0.227 −2.644 − 0.173 1.693
Technology distribution of firms TD + 0.124 2.043 + 0.279 4.087
Presence of small and SME − −0.095 −1.195 + 0.417 4.896
medium sized firms
Presence of innovative firms IF + 0.055 0.584 + 0.222 2.278
Gross domestic product GDP + 0.250 4.547 + 0.635 7.937
Economic prosperity EP +/− −0.174 −1.356 +/− −0.096 −0.699
Openness of the national economy OPEN +/− 0.341 8.649 +/− −0.005 −0.059
Availability of venture capital VC + 0.053 0.624 + 0.031 0.353
Level of company taxation CT − −0.179 −1.850 − 0.049 0.457
Average length of education AE + 0.046 0.223 + 0.392 1.850
of the labor force
Public expenditures on R&D PUR&D + 0.986 15.304 + 0.956 4.128
Entrepreneurship ES + 0.257 3.532 + 0.870 9.201
R2 0.982 0.982

χ2 = 170.616 with d.f. = 107 (P = 0.00).

Table 1 shows that many hypothesized effects of the
explanatory variables on ‘patents granted’ and ‘rela-
tive sales of innovative products’ are not confirmed
by their estimated regression coefficients. Various re-
gression coefficients are estimated to be statistically
insignificant (i.e. |t| < 1.72 for P > 0.10), to have
a sign of influence opposite to their hypothesized in-
fluence, or both. Of the 33 hypothesized effects on
both ‘patents granted’ and ‘relative sales of innovative
products’ only 19 are confirmed by the correspond-
ing estimated regression coefficients. Furthermore, es-
timates of regression coefficients >|1.00| are produced
by LISRELTM indicating an impossible, unreliable
and unstable solution of the specified model, which is
confirmed by a probability of fit equal to 0.
Subsequently, the best fitting model has been ex-
plored, specified and estimated with a probability of fit
(DIFF, AE), (TD, PUR&D), (SME, PUR&D), (IF, CT), (IF, ES),
(PW, ES), (PUR&D, ES), and (AE, ES).
of 99%. Several independent variables have been re-
moved during the exploratory analysis due to insignif-
icant or eventually incompatible effects on ‘patents
granted’, ‘relative sales of innovative products’ or
both, i.e. ‘privately funded R&D expenditures’, ‘co-
operation between firms on R&D’, ‘technology input
distribution over industrial sectors’, ‘average number
of years of education enjoyed by the labor force’ and
‘entrepreneurship’.
The finally estimated regression coefficients con-
firm the postulated effects and are found to be statisti-
cally significant. These estimated regression equations
are presented in Table 2.8
8 Significant positive correlations are estimated for the fol-
lowing pairs of independent variables: (IE, EP), (IE, PUR&D),
(GDP, OPEN), (SME, OPEN), (IF, EP), (OPEN, VC), (PW,
PUR&D) and (VC, CT). Significant negative correlations are es-
timated for the following pairs of independent variables: (SIF,
GDP), (SIF, SME), (SIF, CT), (DIFF, CT), (SME, IF) and
(PW, VC).
204 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207

Table 2
Estimated effects of various standardized explanatory NIS variables in the best specification of ‘patents granted’ and ‘relative sales of
innovative products’ (N = 22)
Explanatory variables Acronym Patents granted Relative sales of innovative products

Hypothesized Estimated t-value Hypothesized Estimated t-value

effects regression effects regression
coefficient coefficient
Sales of innovative products Sales +/− 0.105 1.760
Innovation expenditures IE + + 0.421 3.749
External sources of information SIF + + 0.688 6.000
Difficulties during innovations DIFF − −0.333 −5.127 −
Presence of small and SME − −0.146 −3.239 + 0.621 4.686
medium sized enterprises
Presence of innovative firms IF + + 0.591 4.870
Gross domestic product GDP + 0.691 6.361 + 0.310 5.551
Economic prosperity EP +/− −0.226 −3.198 +/− −0.465 −3.935
Openness of the national Economy OPEN +/− 0.319 4.951 +/− −0.454 −4.150
Availability of venture capital VC + 0.200 2.644 +
Level of company taxation CT − −0.299 −3.603 −
Public expenditures on R&D PUR&D + 0.839 12.525 +
R2 0.961 0.784

χ2 = 35.868 with d.f. = 59 (P = 0.99).

4.2. Results on the model of national innovation
capabilities
Table 2 shows that on the national level the acqui-
sition of patents does not stimulate the sale of new or
substantially improved products at the national level
but the other way around. The following argument can
be given for this counterintuitive result. If more prod-
uct innovations are successfully introduced at the mar-
ket a signal is given about its readiness for adoption
of product innovations, which stimulates firms to un-
dertake more R&D in order to produce inventions that
may be patented, i.e. the market shows a lower risk of
no adoption of also more radical product innovations.
This confirms the demand-pull hypothesis formulated
by Schmookler (1966).
Continuing the review of the results presented in
Table 2 it can be concluded that additionally
1. the relative number of patents granted to citizens,
firms and other organizations residing within an EU
nation is
(a) positively affected by: the size of the economy;
foreign competition on the domestic market;
the availability of venture capital; and the pub-
lic R&D intensity, and
(b) negatively affected by: problems encountered
by firms during their innovation activities; the
presence of a relatively large number of small
and medium sized firms within a country; a
high level of economic prosperity; and a rela-
tively large burden of company taxes on firms.
2. the relative turnover of industrial firms residing
within an EU nation, which is due to the sales of
new and substantially improved products, is
(a) positively affected by: the intensity of total in-
novation expenditures by firms; the consulta-
tion of various external sources of information;
the presence of a relatively large number of
small and medium sized firms within a coun-
try; the relative number of innovative firms; and
the size of the national economy, and
(b) negatively affected by: a high level of economic
prosperity; and foreign competition on the do-
mestic market.
One of the most peculiar results presented earlier
is that privately funded R&D expenditures by firms
do not contribute significantly to patents acquisition
and sales of product innovations on the national level.
Only public R&D expenditures and venture capital
acquisition contribute to patent acquisition, while the
 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207
intensity of all innovation expenditures by firms con-
tribute to sales of product innovations. With the ab-
sent effect of privately funded R&D expenditures, the
latter effect suggests that non-R&D expenditures by
firms on innovation activities stimulate product inno-
vations, which are successfully introduced in the mar-
ket. This is further stimulated by their consultation of
various sources of information, which may comprise
information exchange with customers, suppliers and
competitors (via entrepreneurs’ organizations, busi-
ness journals and/or consultancies) possibly reflecting
submerged effects of customer orientation and infor-
mal cooperation of firms during innovation activities.
The effects of the openness of the national econ-
omy on patents granted and relative sales of product
innovations by firms, respectively, imply that foreign
competition reduces the successful sales of domes-
tically produced product innovations and stimulates
firms to seek market protection via patents. Further-
more, a high level of economic prosperity prevailing
within a country may be interpreted to represent high
levels of domestic demand for many goods and ser-
vices, which reduces the urge of market protection for
firms via patent acquisition and improvement of their
competitive position via the introduction of product
innovations in the market.
All other effects of explanatory variables on patent
acquisition and relative sales of product innovations
by firms are as expected.
5. Discussion and conclusions
‘Why do nations differ in innovation capabilities?’
is the central question investigated in this article. As
Furman et al. (2002) measured national innovation
capabilities on patents granted and announcements
of product innovations in trade and technical journals
as upstream indicators and market shares of the in-
ternational market of high technology industry and
GDP controlled for the size of the labor force and the
capital stock as downstream indicators, a better and
more direct indicator of these capabilities has been
used in this article, which is based on the CIS I and II
measurements of sales of new and substantially im-
proved products by firms within EU-nations in years
1992 and 1996. The model, which has been specified
to predict ‘patents granted’ to and ‘relative sales of
205
product innovations’ by firms within each EU-nation,
contains explanatory variables representing innova-
tion activities carried out at the level of firms and
prevailing economic and institutional conditions con-
straining these activities.
The statistical results on the specified model of
national innovation capabilities largely support this
conceptualization. National relative sales of product
innovations of the investigated EU-countries are ex-
plained for 78% by macro-economic conditions, the
structure of the national economy and innovation
and related activities conducted at the level of firms.
National numbers of patents granted by the EPO are
explained for 96% by governmentally induced and
regulated institutional conditions, macro-economic
conditions, the structure of the national economy
and demand-pull exerted by the market of product
innovations.
Comparison of the results on national relative sales
of product innovations with another recent study of
this indicator at the level of individual firms (cf.
Klomp and van Leeuwen, 2001) demonstrates a strik-
ing difference in the variance explained, i.e. 78%
versus 6%. The latter study contains many more de-
tailed explanatory variables at the level of the firm but
lacks explanatory variables representing the structure
of the national economy and macro-economic condi-
tions. This applies also to an older study by Brouwer
and Kleinknecht (1996), which is based on the CIS 1
data only, although their model explains 36% of the
variance in the proportion of new products in total
sales of firms.
Comparison of the results on national num-
bers of patents granted (EPO-based) with those
(USPTO-based) obtained by Furman et al. (2002)
shows almost no difference in variance explained,
96% versus 97%. Both studies utilize about the same
kinds of explanatory variables although differences in
estimated effects occur due to very small differences
in the set of selected explanatory variables and differ-
ences in the measurement of the explanatory variables.
For example, Furman et al. estimated a significant ef-
fect of privately funded R&D expenditures on patents
granted, which represents the influence of innovation
activities carried out at the level of firms. However,
from the results presented in this article it seems as if
the national institutional and economic infrastructure
conditions shape the innovation activities carried out
206 J. Faber, A.B. Hesen / Research Policy 33 (2004) 193–207
at the level of firms and supersede the effects of these
activities on national patent acquisition. Clarification
of these differences requires further research.
Comparison of the results on national numbers of
patents granted with the results on the number of
patent applications by individual firms obtained by
Brouwer and Kleinknecht (1999) (both based on EPO
data) demonstrates a considerable difference in vari-
ance explained, i.e. 96% versus 66%. As mentioned
with respect to the study of Klomp and van Leeuwen
(2001), also in this study of Brouwer and Kleinknecht
the explanatory variables represent mainly innovation
and related activities carried out by firms. National in-
stitutional and economic infrastructural conditions are
also lacking in this study.
To conclude, macro-economic conditions and the
structure of the national economy have profound ef-
fects on national patent acquisitions as well as on na-
tional relative sales of product innovations. In addition,
the former dependent variable is also considerably af-
fected by governmentally induced and regulated insti-
tutional supportive arrangements. The latter dependent
variable is strongly affected by variables related to the
innovation activities carried out at the level of firms.
As a comment on these new results, it should
be noted that this article presents the results of a
cross-sectional study at the national level based on
only 22 observations. Future research should focus
on the reanalysis of the model presented in Table 2
at the level of individual firms. This will ask for a
multi-level model representing national, possibly sec-
tor specific, and firm specific factors affecting patent
acquisitions and relative sales of product innovations
by individual firms. This model should then be tested
in a multi-sample design (cf. Faber, 1991) for the
national samples of individual firms in CIS I and II.
Acknowledgements
The authors thank Kees Andriesse, Leon Oerlemans
and two anonymous referees for their comments on an
earlier version of this article.
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