1. Innovation, productivity and employment in European industries Mario Pianta, Francesco Bogliacino University of Urbino, Universidad EAFIT, Medellin Workshop The impact of innovation on growth and employment” Rome, 23 June 2008

2. Results of the Interim Report of the University of Urbino project, funded by IPTS-Seville THE IMPACT OF R&D AND INNOVATION ON ECONOMIC PERFORMANCE AND EMPLOYMENT: A QUANTITATIVE ANALYSIS BASED ON INNOVATION SURVEY DATA Key questions “How can we identify the nature and summarize the variety of innovation? (at the industry level)” “How do different forms of innovation contribute to better economic performances?” “How do different forms of innovation create or destroy jobs?“

3. The state of the art on variety in innovation Diversity of innovation (Schumpeter, Freeman, Nelson, Dosi, evolutionary approaches) in: - the nature of technology and innovation (role of specif.knowl.,cumulat, path depend., localis.) - the type of innovation (product/process/organis) - the technological capabilities across firms - the technological regimes across industries - national innovation systems across countries - the direction and trajectories of technological change The relevance of the industry level of analysis (Pavitt’s taxonomy, technological regimes, sectoral systems of innovation, etc.)

4. From simplistic representations of technology in economic studies, to the one dimensional focus on R&D or patents, to the complexity shown by innovation surveys How can innovation be studied empirically? Need for models (and data) that account for a more complex pattern of innovation dynamics, and of its impact on economic performances and employment

5. Unit of analysis StrengthsWeaknesses FIRMheterogeneity of firms no representativity business stealing INDUSTRYheterogeneity of industries representativity no business stealing no intra-sector heterogeneity among firms COUNTRYtotal economy aggregate effects no space for variety

6. Developments in models of innovation strategies Introduction of a distinction between: technological competitiveness, through knowledge generation, R&D, product innovation and new markets cost competitiveness, through new processes, greater capital intensity, job reductions, labour saving investment, flexibility and restructuring Context, sources, type of innovation Role of sectoral, national systems of innovation Supply and demand interaction (Pianta, 2001)

7. Distinction between ind. dominated by diff. strategies, with diff. impacts Product innovations (new, improved products, substitutes, etc.): new growing markets, faster dynamics of value added and productivity, greater employment Process innovation (automation, restructuring, reorganisation): lower costs, more competitiveness (in a zero-sum type game), less employment

8. Recent published articles (with F. Crespi) New processes and new products in Europe and Italy, Rivista di Politica Economica, 2008 (with F. Crespi) Diversity in innovation and productivity in Europe, Journal of Evolutionary Economics, 2008 (with Andrea Vaona) Firm size and innovation in European manufacturing, Small Business Economics, 2007 (with F. Crespi) Demand and Innovation in Productivity Growth. International Review of Applied Economics, 2008, 22 (5) (with A.Vaona) Innovation and productivity in European industries, Economics of Innovation and New Technologies, 16 (7) 2007, 485-99. (with F. Crespi) Demand and Innovation in European Industries, Economia Politica - Journal of Analytical and Institutional Economics, 2007, 24 (1): 79-111.

9. Need for a good (sectoral) taxonomy to account for diversity in innovation Innovation trajectories (Dosi (1988)); need to isolate stylized facts about nature and determinants of innovative activity Need to capture the “robust” heterogeneity: the differences that survived, with higher fitness. Pavitt taxonomy 1984 Suppliers Dominated Specialized Suppliers Sale Intensive Science Based Data limited to UK Manufacturing

10. Tidd, Bessant and Pavitt 2005 Suppliers Dominated Specialized Suppliers Sale Intensive Science Based Information Intensive (services) Discussion: Growing importance of services and need to understand them: Evangelista (2000), Evangelista and Savona (2003), Miozzo and Soete (2001) “Robust” heterogeneity and not just variety: differences are everywhere (Sundbo and Gallouij (2001)) Other taxonomies: capabilities and vertical chain position (Castellacci (2007))

11. Developments in databases Sectoral Innovation Database, University of Urbino 22 manuf. sectors, 17 service sectors 8 European countries: France, Germany, Italy, the Netherlands, Portugal, the United Kingdom, Spain, Norway Innovation Surveys CIS 2(1994-1996), CIS3 (1998- 2000), CIS 4 (2002-2004) Large set of economic variables from OECD STAN, KLEMS and Eurostat Input/output databases

12. Available variables Basic Economic Information Country of the firm, Sector of the firm, Total population of firms Number of firms part of an enterprise group, Country of head office Total Turnover, Export, Total number of employees, Innovation Activity Number of firms introducing a new or significantly improved product or a new or significantly improved process Number of firms introducing product innovations new to the market, Number of firms introducing a product or service innovation, Number of firms introducing new or significantly improved products only Number of firms introducing a process innovation, Number of firms introducing new or significantly improved processes only Number of firms with cooperation arrangements on innovation Number of innovating firms with cooperation agreements with the group’s enterprises, Number of innovating firms with cooperation agreements with other enterprises (competitors, suppliers, customers, consultants or R&D enterprises); Number of innovating firms with cooperation agreements with public institutions (universities, government or private non profit research institutes)

13. Innovation Performance Turnover due to new or improved products, Turnover due to unchanged products between, Turnover due to new products also new to the market Type of Innovation activity (engagement and expenditure) Research and experimental development within the enterprise, Acquisition of R&D services (extramural R&D), Acquisition of machinery and equipment linked to innovations, Other external knowledge, Training directly linked to technological innovation, Market introduction of technological innovations, Design, other preparation, Total innovation expenditure Type of innovation strategy Extend product range Open up new markets or increase market share Improving product quality Improve production flexibility Inc production capacity Reduce labour costs Reduce materials and energy consumption Reduce environmental damage Fulfilling regulations, standards

14. Contextual Factors and public support Firms receiving public funding for innovation Public funding from local or regional Public funding from central government Public funding from EU Funding from EU 4th or 5th RTD Sources of Innovation Sources from within the enterprise Other enterprises within the enterprise group Suppliers of equipment, materials, components or software Clients or customers Competitors Universities or higher education institutes Government or private non-profit research institutes Professional conferences, meetings, journals Fairs, exhibitions Obstacle to Innovation (innov and non innov firms) Economic Risk Innovation Cost Sources of finance Organisational rigidities Lack of qualified personnel Lack of information on technology Lack of information on markets Regulations, standards Lack of customer responsiveness to new products

15. Patents and other Protection Methods Enterprise applied for at least a patent, Protection through reg of design patterns Protection through trademark Protection through copyright Protection through secrecy Protection through complexity of design Protection through lead-time advantage Innovation as Strategical and Organisational Change (Inn and non innov firms) Implement of new corporate strategies Implement of management techniques Implement of changed organisation structure Changing ent marketing concepts/strategies Significant changes in aesthetic appear

16. Diversity in innovation Test of the Pavitt 2005 taxonomy of 5 classes Test of a Revised Pavitt taxonomy of 4 classes with the allocation of services in different groups (financial serv in Scale intensive)

17. Pavitt 2005 SCIENCE BASED Chemicals Office machinery Manufacture of communication equip. Manufacture of medical, precis.instrum. Computer Research and development INFORMATION INTENSIVE Communications Financ. intermed., Auxil Act. to Fin.Int. Insurance and pension funding, Retail trade Printing & publishing SCALE INTENSIVE Pulp, paper & paper products Oil refining, Rubber & plastics Non-metallic mineral products Basic metals Motor vehicles SPECIALISED SUPPLIERS Mechanical engineering Electrical machinery Other transport equipment Real estate Renting of machinery Other business activities SUPPLIERS DOMINATED Food, drinks, tobacco Textiles, Clothing, Leather Wood & products Fabricated metal products Furniture, miscellaneous Sale, repair of motor vehicles Wholesale trade Hotels & catering Inland transport, Water transport Air transport, Auxil.transport activities

18. Revised Pavitt SCIENCE BASED Chemicals Office machinery Manufacture of communication equip. Manufacture of medical, precis.instrum. Computer Research and development Communications SCALE and INFORMAT. INTENSIVE Pulp, paper & paper products Printing & publishing Oil refining, Rubber & plastics Non-metallic mineral products Basic metals Motor vehicles Financial intermed., Auxil Activ to Fin.Int. Insurance and pension funding, SPECIALISED SUPPLIERS Mechanical engineering Electrical machinery Other transport equipment Real estate Renting of machinery Other business activities SUPPLIERS DOMINATED Food, drinks, tobacco Textiles, Clothing, Leather Wood & products Fabricated metal products Furniture, miscellaneous Sale, repair of motor vehicles Retail trade Wholesale trade Hotels & catering Inland transport, Water transport Air transport, Auxil.transport activities

19. 4 versus 5 class Pavitt taxonomies Descriptive analysis on several innovation variables Multinomial logit of the taxonomy Model on the det. of the shares of innov firms (OLS and Tobit) Model on the det. of innov. turnover (OLS and Tobit) The five-class taxonomy is not robust: statistical tests does not distinguish between Information Intensive and Scale Intensive Sectors

22. R&D exp. per empl.

23. Shares of innov. turnover

24. Multin.Logit for the Rev. Pavitt class.

25. the Wald tests rejected the hypothesis of non-systematic differences among coefficients: for column (1) Test on the det. of share of innovative firms we use the Tobit model since random effects are rejected by the LR test: and (3)

26. Det. of the share of innov. turnover

27. the Wald tests rejected the hypothesis of non-systematic differences among coefficients: for column (1) and (2)

28. Innovation mechanisms in the Revised Pavitt classes For Science Based and Specialised Suppliers industries the main (and only) driver is product innovation New products are relevant for all other groups (with lower coefficients) Demand growth and total innovation expenditure (incl. new processes) are relevant for Scale and Information Intensive industries Innovation is associated to demand reduction for Suppliers Dominated industries.

29. Innovation and productivity “How do different forms of innovation contribute to better economic performances?”

30. Growth of lab. product. (% ann)

31. Hierarchy of productivity perf. SB at 3.5% annual growth SII at 2% SD and SS at 1% (but SS has high job creation) This has implications on the overall perf. of national economies

32. The general model Lab. Product. growth is expected to be influenced (posit.) by tech compet variables, cost compet variables, demand variables METHOD OLS estimates, adjust for heteroschedasticity, and intra-group correlation at industry level Weighted regressions, with employment level of each industry general regression for all industries; then separate regressions for each Revised Pavitt groups with more specific variables

35. Results of specific models: Science Based search for techn. compet. (R&D and patents); role of suppliers of equipment as the source of (process) innovation (user-producer interactions); demand growth is important (increasing returns) Scale and Information Intensive industries mainly cost compet. (suppl. of equipm. as source of new processes); mid-level skills of workers with second. educat.; search for new markets has no effect; demand growth (new serv). Specialised Suppliers more complex results; techn. compet. (R&D) and cost compet. (aim at lower lab. costs or more flex. processes); spec. role of interaction with clients; demand growth is highly important. Suppliers Dominated cost competitiveness, (search for more flex.); clients as sources of innovation; mid-level skills of workers with second. educ.; demand plays a role (lower coeff)

36. Innovation and employment “How do different forms of innovation create or destroy jobs?“

37. Empl. growth is expected to be influenced by tech compet variables (+) cost compet variables (-) demand variables (+) wage growth (-) METHOD OLS estimates, adjust for heteroschedasticity, and intra- group correlation at industry level Weighted regressions, with employment level of each industry general regression for all industries; then separate regressions for each Revised Pavitt groups with more specific variables

38. Change in employm. (ann.%)

39. Change in employm. (ann.%)

40. Gen. model for empl. change

41. General findings Job losses are found in the majority of manufacturing and service industries; in some SB and SS ind. there is job creation. General negative effects of all innov. var. on jobs. in partic. strategies for cost competitiveness based on labour saving process innovations have strong effects on job losses Demand growth has a positive effect, wage costs are a factor reducing employment.

43. Results of specific models: Science Based New jobs linked to search for new markets and exports (not R&D); new processes, search for lower lab costs and wage growth reduce empl. Scale and Information Intensive industries Job losses associated to cost competitiveness (suppl. of equipm. as source of new processes); innov turnover, demand (new serv) and exports have a positive effect Specialised Suppliers New jobs linked to search for flexib. production and demand; negative effect of innov variables, clients as sources of innov and wages Suppliers Dominated Job losses linked to overall negative effects of innov variables and wages, positive effects of demand

44. Integrating the findings Strong specificity of the results for the 4 Revised Pavitt classes: they do capture different mechanisms of innov. and econ perf. Productivity growth is supported by the two strategies of tech compet and cost compet in different ways: Both for SB (3.5% product growth) and SS Cost compet only for SII and SD (1-2% growth) Demands is always relevant

45. Why weak posit. links innov-empl? Science Based with strong innov, new demand and product: why weak links? a. high int’l competition, winners and losers across EU countries, no gen. effect of tech compet.? b. have the large no. of (mid skill) jobs gone abroad in int’l product. systems? Specialised Suppliers with small size, no linear model of innov, no role of innov intensities: a. niche effects? b. have the jobs gone to client industries?

46. Why strong negat innov-empl links? Scale and Info Intensive & Suppliers Dominat: Dominance of cost compet strategy, using innovat. in several ways for restructuring and job losses Innov is necessary, but the gains in terms of cost compet are small (half the product. growth of SB: lots of innov induced job losses lead to small productivity gains) Demand is the only opportunity for job creation in these sectors

47. Further research on empl effects Diversity of employm effects on skill groups: test of specific complementarities between different innovations and skills Is there a role of int’l production? Beyond the job losses to imports? Are innov-led productivity gains kept in countries, but jobs transfered abroad?