Innovation Studies

The research done by the Innovation Studies group is based on the Community Innovation Survey and R&D survey data and methodologies, but is by no means limited to these.

The Innovation Studies group works closely with the Department of Managerial Economics, Strategy and Innovation at the K.U.Leuven. Among others, the research areas are:


Effects of public innovation policies

Innovation is generally considered as a major driver of economic growth and is one important source (along with human capital) of countries' wealth. Consequently, governments in OECD countries devote considerable amounts of money to research and development (R&D) activities to develop and maintain the technological competitiveness of their economies (see e.g. OECD, 2004). Among many others, one well documented prominent example that knowledge and innovation are nowadays regarded as key factors for sustaining and enhancing growth and competitiveness is the so-called European Action Plan 2010. European governments observed that a gap in investment in R&D and technology between member states and their main "competitors" emerged: for instance, the recent gap between the European Union and the United States amounts EUR 120 billion per year and is widening (cf. European Commission, 2003). As governments fear that this may have severe implications for the long-term potential for innovation, growth and employment creation in Europe, the European Council member states decided on the European Action Plan, that is, the intensification of activities towards research, development and technology such that the R&D to GDP ratio is increased from 1.9% to 3.0% in the European Union by 2010, where two thirds of total R&D should be financed by the business sector. In order to achieve that goal, national governments engaged in reconsidering their innovation policy and reinforcing instruments towards this target.

Public authorities expect that increasing R&D investment causes intensified technological progress and finally accelerates growth in the long-run. With respect to R&D in the business sector, the assumed relationships behind the Action Plan are that, first, public R&D policies stimulate private spending, and, second, that additionally induced R&D leads to new products or processes that improve competitiveness and foster growth.

Our research investigates whether the imposed relationships between R&D policies, private R&D investments, and technological progress hold in reality. Economic theory casts some doubts on the effectiveness of such policies. In this field of research we focus our discussion on direct subsidies granted to firms and R&D tax credits, since they are the most prominent tools in today's innovation policy in many European countries.

For this line of research, we make use of econometric treatment effects estimation methods to address questions, such as

  1. the relationship between R&D input and R&D subsidies. The main question is whether public R&D investment crowds out private R&D investment;
  2. does publicly induced additional R&D translate into innovation output?
  3. the effects of programs funding collaborative research among companies, or between companies and public research institutions. Public schemes for funding of collaborative research became prominent tools in European innovation policy during the last decades.


Investment in R&D and Innovation

Innovations typically result from investment in research and development (R&D). From that perspective, R&D activities of firms can be seen as private investments in the creation of knowledge. This basic fact makes investment in R&D projects different from other types of investment. In knowledge-based economies, investment in the creation of new knowledge is a crucial factor for economic development and growth. Potential under-investment may have detrimental effects on competitiveness, on the creation of jobs and on long-run economic performance.

Under-investment in knowledge creation may occur for two main reasons that reduce incentives for private investments in industrial innovation. First, private returns to investment in R&D, that is returns to the company or organization undertaking the investment, are lower than social returns due to knowledge spillovers. Second, capital market imperfections, in particular information asymmetries between the parties involved, may lead to financing constraints for such investment reducing private returns even more. Hence - from a welfare perspective - competitive markets may produce too little R&D due to positive externalities and information asymmetries in lending and investing relationships. Both types of market failures are usually regarded as justification for government intervention that aims at promoting R&D investment. This line of research focuses on the latter argument, i.e. financing constraints due to information asymmetries.

Utilizing R&D and innovation survey data, our research analyzes possible implications of the presence of financing constraints in the knowledge economy. Micro-econometric panel data techniques are used to estimate investment models of various kinds where we, for instance, distinguish between incremental and radical innovation, research versus development expenditure or investigate the impact of financial constraints for small versus large firms.
Closely related to these research topics are studies of investment under uncertainty. Real options theory predicts that firms might delay investments, and thus invest less, in markets where uncertainty is high when compared to decision making under no or low uncertainty. We study this prediction empirically in various dimensions. For instance, do public subsidies that reduce the price of R&D moderate negative effects of uncertainty of outcome? Does patent protection mitigate negative effects of uncertainty? How do effects differ between uncertainty on the demand side and the supply side, the latter being product market competition and rivalry?


Innovation and Firm Performance

The group does not only study innovation input, but also conducts research on how innovation input in terms of investments and management techniques affect innovation output and ultimately overall firm performance in terms of profitability or productivity. Among other approaches, several different dimensions of the relationship between innovation input and output have been researched in the recent past. For instance:

  1. the effects of R&D and innovation on firm-level productivity in Flanders;
  2. the importance of regional location factors on firm-level innovation performance in Flanders;
  3. the contribution of knowledge management systems (including idea management and employee suggestion schemes), and other dimensions such as design innovation to firm-level innovation performance;
  4. to what extent firms can utilize knowledge spill-overs from rivals, customers, or suppliers, for the improvement of performance in terms of productivity and profitability.


Innovation and Corporate Governance

Since pioneering work of Knight and Schumpeter and the beginning of the discussion on innovation, great emphasis has been placed on the central role of the entrepreneur in the innovation process. Although this view has certainly been valid for the times where the major industrial firms were founded, today the vast majority of the large firms is led by managers. This introduces a classical principal-agent problem. More specifically, the manager is not able to appropriate all returns from his or her efforts (as the firm ownership is held by the principals, i.e. the shareholders), which results in an incentive problem as the manager may not necessarily behave in the interest of the owners. While the current corporate governance literature considers the effect of leadership by employees versus owners frequently, the aspect of innovation has received far less attention.

Closely related to firm leadership by managers is the question whether control is exerted by the shareholders. If capital is concentrated, the owners have clear incentives to monitor the managers, as given the large amount of capital invested the return from this activity is significant. Moreover, in most cases the shareholders are very familiar with the situation of a firm and its environment, by which the problem of asymmetric information is reduced. This situation is different with diversified shares, as it is frequently the case in the modern corporation. With diversified shares the well-known free-rider problem arises, because every activity of an individual shareholder in order to increase efficiency of the management has to be shared with numerous other shareholders. Furthermore, the individual shareholder with widely diversified shares has neither the knowledge of the specific situation the firm is facing nor does she/he have a monetary incentive to intervene, because the financial stake is only small.

An example for solving the managerial incentive problem is to create a commitment by debt. It is argued in the literature that debt keeps a tight reign on managerial agency costs. This governance role of debt comes from the threat of bankruptcy, the reduction of free cash flow and monitoring by the creditors.

Although there are many empirical studies on corporate governance dealing with e.g. the determinants of remuneration (size versus profitability), growth, and investment, the relationship between corporate governance and innovative activity is less frequently analyzed. However, some studies exist, and interestingly they lead to more ambiguous results than the theoretical contributions.

Our research investigates the differences between owner-led firms and manager-led firms with respect to innovation input and output. Furthermore, our research discusses the effects of dispersed versus concentrated capital ownership on investment into innovative activity. While the market for equity capital might exert insufficient control on top managements’ behavior, this weakness may be mitigated by a suitable degree of debt financing, which has also been analyzed empirically. In general, it turns out that managerial firms are more innovative than owner-led firms. This phenomenon can be explained by a possible over-investment with regard to profitability as managers attach more weight to pursuing growth options because their remuneration may be linked to growth or firm size in addition to profitability. However, close control exerted through dominant capital owners or debt commitment and thus close monitoring by creditors reduces the difference between owner-led firms and managerial firms.