The Diffusion of Innovation

in the Internal Market

2009

Jordi Suriñach.Research Group AQR-IREA. University of Barcelona

copyright rests with the author

I. Introduction

•

Europe’s level of Innovation is lower than its competidors

•

Innovation is the main driving force in economic competitiveness

•

What has been done from Public Policies?

(in the framework of Single Market Programme)

•

Technological Change Process (Trilogy of Schumpeter):

–

Invention

–

Innovation

–

Diffusion

•

Recently: more attention to Knowledge Flows

•

Knowledge Flows require CHANNELS to materialize

I. Introduction

•

Stylized facts in the process of Innovation Diffusion:

–

S-shaped curve: early period of slow take up, second period of relatively rapid adoption and late period of slow approach to satiation

–

Importance of both economic and social factors, that impact on demand side and supply side decisions.

•

Given the importance of Innovation Diffusion, it’s necessary to know its MAIN DETERMINANTS

Time

Number or percentage of adopters S-shaped

diffusion curve

Time

Number or percentage of adopters S-shaped

diffusion curve

I. Introduction: Main determinants of innovation diffusion•

DEMAND SIDE - USERS:

–

Being

aware

of

the

new

technology

–

Being

able

to

use it

(absorptive

capacity)

–

Profitability

of

the

adoption

of

new

technologies

(price, expected

returns, level

of

risk, …)

•

SUPPLY SIDE – SUPPLIERS: Being able to adapt the new technology–

Supplier’s

R&D

and

innovation

–

Supplier’s

financial

means

•

Interaction suppliers-users. 2 types of exchanges:–

Exchange of

tangible assets

(Trade, FDI)

–

Exchange of

intangible assets

(face

to

face

contacts

through

labour

mobility)

•

INSTITUTIONAL DIMENSION. Regulatory environment (IPR, IM, …)–

Competition

and

IPR regime; Financing, Education, National

Policies, EU level

policies…

–

IM modifies

the

functioning

of

markets: can EASE or

BLOCK agents

interaction

I. Introduction: The Role of Internal Market

•

The IM can affect the Innovation diffusion:–

Product Market Integration would theoretically stimulate Innov

and its diffusion

–

Pressures of competition → stimulate innov

in firms

–

Creation of IM →

gaining Scale economies

–

Technology diffusion can be stimulated, thanks to increased FDI flows (IM: more trade)

… BUT NO EVIDENCE OF EFFECT IM ON INNOV DIF.

I. Introduction: The Role of Internal Market

How IM affects innovation diffusion

Awareness about new technologies:

Labour reforms

Trade policies

Increase in cross-border merges and acquisitions

Capital market policies, which facilitates FDI, giving access to foreign capital markets

Awareness to use and adopt new technologies:

Labour reforms

Capital market reforms

Profitability of adoption:

Reforms reinforcing competition

Enlargement of the size of the market (increasing the expected returns)

Facilitation of the mobility of workers, labour market reforms

Normalisation and standardisation procedures, associated with IM

II. Objectives

•

To

analyse

the

drivers

of

innovation

diffusion

through: –

The

development

of

proper measures of

Innov

Diffusion

–

The

identification

of

channels through

which

innovation

diffusion takes

place

–

Analysing

the

main determinants of

this

diffusion

process

in the Internal

Market

•

Analyse

the

effects

of

the

innovation

diffusion

on

growth

•

Derive policy

recommendations

III. Database: CIS

The innovation surveys of the EU (Community Innovation Survey-CIS) provide us with three broad groups of measures:

•

Innovation inputs: R&D, other expenditures related to innovation such as acquisitions of patents and licenses, product design, training of personnel, trial production, and market analysis

•

Innovation outputs: introduction of new products or processes, organizational changes and market innovations

•

Modalities of innovation: sources of information that lead to an innovation, the reasons for innovating, the perceived obstacles to innov, the perceived strength of various appropriability mechanisms, and the cooperation in research and innovation.

The database (1998-2000):The database contains 22 countries. The source is CIS3 micro dataset for 15 of them. For the other 7 countries, the risk of double counting is present because of the use of CIS3 macro dataset.

For this reason,

macro data have been rescaled. 6 sectors

•

Definition of innovation diffusion/adoption.

We consider that innovation adoption occurs when the firm declares that its process or product innovations have been developed :

-

“Mainly together with other enterprises or institutions”

or-

“Mainly by other enterprises or institutions”.

Therefore, our definition refers to innovation adoption and does not allow to address all the issues associated to the process of innovation diffusion.

•

Indicator of innovation diffusion/adoption. Share of adopting firms among innovative firms.

Innovative firms are those who innovate on product or process or

both and who have ongoing or abandoned innovation activities

IV. Measure of the indicator of innovation diffusion

V. Major descriptive statistics1. Magnitude of adoption activities: 39% of EU innovative firms relies on innovation adoption,

whereas the remainder “generates″

internal

innovation. However, this rate greatly varies according to countries and sectors

V. Major descriptive statistics

V. Major descriptive statistics

2. Nature of adoption activities: - Mainly process oriented: For all the countries, the adoption rate is higher for process innovation

(41% on average) than for product

innovation (28% on average). This contrasts with innovation rate

which is more product oriented: 24 % of EU firms make process innovations whereas 28% perform product innovations

- Mainly cooperation-based oriented: Cooperation activities are driving innovation adoption at the EU level while the acquisition of innovations from external innovators is a less important source of adoption of innovation (both process and product)

27%

19%

14%

9%

59%

71%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Process

Product

cooperation-based adoption Other organisation-based adoption No adoption

V. Major descriptive statistics

Adoption nature by country for product innovation

Adoption nature by country for process innovation

V. Major descriptive statistics Adoption nature by sector for product innovation

Computer and other business

services

Manufacture industry

Extractive industry

Average

Financial activities

Transport and communication

Wholesale trade

Electricity, gaz and water production and distribution

10%

15%

20%

25%

30%

35%

40%

45%

0% 5% 10% 15% 20% 25% 30% 35%

Co

op

erat

ion

-bas

ed p

rod

uct

ad

op

tio

n

Other organisation based product adoption

Bubble size corresponds to the product innovationrate

Adoption nature by sector for process innovatio

Extractives industry

Computer and other business services

Manufacture industry

Financial activitiesAverage

Wholesale trade

Transport and communication

Electricity, gaz and water production and distribution

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0% 5% 10% 15% 20% 25% 30% 35%

Co

op

era

tio

n-b

ase

d p

roce

ss i

nn

ov

ati

on

Other organisation based process adoptionBubble size corresponds to the process innovationrate

V. Major descriptive statistics3. Evolution of adoption:

The comparison between two waves of the CIS (1998-2000 and 2002- 2004) shows that the average adoption innov rate increases between

the two periods.

•

This is mainly due to process adoption

that increases by 4.2 points of %. On the opposite, the product adoption remains stable.

•

This increase is not

necessarily associated with a global increase in innovation.

•

This

increase

is

specially

true

in the

more cooperation-based

oriented innovation adoption

•

This increase can be observed in most countries and for several sectors. Among other factors, the development of the Internal Market

may at least

partly explain this evolution.

V. Major descriptive statisticsPotential determinants of innovation adoption

DETERMINANTS CORRELATION OBTAINED WITH INNOVATION ADOPTION RATES

A. Innovation inputs

Sources of information for innovation Non-significant Innovation expenditure Positive although not always significant Human capital resources Non-significant Organisational changes Positive and significant in some cases Cooperation in joint R&D Non-significant

B. Market features

Competition Non-significant Barriers to competition Non-significant Trade Non-significant Barriers to trade Negative and significant

C. Regulatory environment

Protection methods for inventions Patenting Positive and significant (without France and

Sweden) Other legal and informal protection methods

Non-significant

Security of property rights Positive and significant (without Luxembourg)

Internal Market regulations Transposition Deficit

(high value: high transposition of EU directives)

Positive and significant

Product Market Regulations by EFW (high value: better performance of regulations)

Positive and significant

Product Market Regulations by OECD (high value: tighter and burdensome regulation)

Negative and significant

V. Major descriptive statisticsTypology of countries according to their adoption, innovation and cooperation level

Italy

Spain

Portugal

GermanyBelgium

Bulgaria

Austria

Romania

Czech Republic

Iceland

Slovakia

Netherlands

France

Greece

Sweden

Estonia

Norway

Luxembourg

Latvia

Lithuania Finland

Hungary

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

,5 -2,0 -1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 2,0 2,5

Cooperation level

Innovation potential and adoption level

human resources in S&T level

61

2

3

4

5

Countries in italics are not well represented on the two axes in terms of relative contributions.

V. Major descriptive statistics

V. Major descriptive statistics5. Typology of countriesI. High innovation with high levels of Human Resources in S&T

(Belgium, Germany the Netherlands). Use patents and all invention protection methods. High competition index and low levels of barrier to trade and Product Market Regulation.

II. High innovation with high levels of Human Resources in S&T, and high rates of cooperation (Finland, Sweden, Norway). Intensive

invention protection methods and low levels of barrier to trade and Product Market Regulation.

III. Average innovation performance countries with weak cooperation (Spain, Italy, Portugal). Average number of employees with high educational innovative firms and below the average in Human Resources in S&T. Low level

of trade (in exports and in innovative firms with international markets).

IV. Austria. Between type I (High Innovation and Adoption) and III (R&D expenditure, cooperation and Human Resources in S&T are lower).

V. Weak innovation with strong cooperation activities (Lithuania, Latvia, Estonia and Hungary). Also, low level of economic freedom

VI.

Weak innovation with low cooperation activities (Greece, Czech Republic, Slovakia, Bulgaria and Romania). Low R&D and HK . Protection methods not very used and low economic freedom.

VII. Specific Profiles (France, Luxembourg and Iceland)

V. Major descriptive statistics

6. Impact of adoption on productivity

(i) The average productivity level is positively and significantly correlated with the innovation adoption rate, although with a moderate value of 27.1%, confirming the theoretical assumptions.

(ii) The adoption of innovation affects productivity in those countries that already experience high levels of productivity, which may support the hypothesis of absorptive capacity,

(iii) When considering separately product and process innovations we observe a significantly positive relationship for product adoption, whereas the relationship between productivity and adoption of process innovations is not significant.

(iv) The analysis at the sectoral level highlights that we observe a significant positive correlation between productivity and adoption rate in Manufacturing industries only.

VI. Econometric methodology and results

Internal Market reforms⇒Channels (Cooperation, Competition, Trade) ⇒Innovation diffusion

Internal

market

Proxies Trade CooperationCompetition

FIRST STAGE REGRESSIONS

Trade CooperationCompetition

Innovation

Adoption

SECOND STAGE REGRESSION

Step 1

Step 2

VI. Impact of IM regulations on Innovation Adoption

Instrumental variables techniques

have

been

used

in order

to estimate

the

impact

of IM regulations

on the

channels

of diffusion

(Trade, Cooperation

and Competition) and finally

on the

extent

of Innovation

adoption

across

countries and sectors

icicCic DUMZTradeIMTrade ,3210, νβααα ++++=

icicCic DUMZCoopIMCoop ,3210, εββββ ++++=

icicCic DUMZCompIMComp ,3210, ξβγλγ ++++=

icCiicicicicic DUMDUMZIDCompTradeCoopInnoAdopt ,654,,3,2,10, ξλλλλλλλ +++++++=

USE OF COMMAND AND CONTROL OF REGULATIONGeneral RegulationsRoad Freight RegulationsRetail distribution regulationsAir travel regulationsRailways regulations

USE OF COMMAND AND CONTROL OF REGULATIONGeneral RegulationsRoad Freight RegulationsRetail distribution regulationsAir travel regulationsRailways regulations

INVOLVEMENT IN BUSINESS OPERATIONS

FREEDOM TO TRADE

Taxes on Intern. TradeHidden import barriersSize of trade sectorIntern. Capital Controls

Taxes on Intern. TradeHidden import barriersSize of trade sectorIntern. Capital Controls

TRADE

COMPETITION

STATE CONTROL

PUBLIC OWNERSHIPSCOPE OF PUBLIC ENTERPRISE SECTOR1) National Govt. rules at least one main productive sector of the economy

SCOPE OF PUBLIC ENTERPRISE SECTOR1) National Govt. rules at least one main productive sector of the economy

SIZE OF PUBLIC ENTERPRISE SECTOR1) Size of Govt. enterprise as a share of the economy

SIZE OF PUBLIC ENTERPRISE SECTOR 1) Size of Govt. enterprise as a share of the economy

DIRECT CONTROL OVER BUSINESSGolden sharesSpecial Voting rules for Govt.

DIRECT CONTROL OVER BUSINESSGolden sharesSpecial Voting rules for Govt.

SECTORAL AND AD HOC STATE AID

TRANSFER AND SUBSIDIES AS % OF GDP

WORKING DAYS AND CONTACT BODIES TO OPEN A BUSINESS

COOPERATION

MOST PEOPLE CAN BE TRUSTED

REGULATORY AND ADMINISTRATIVE OPACITY

COMMUNICATIONTransparencyGeneral policy for plain languages, information etc.

COMMUNICATIONTransparencyGeneral policy for plain languages, information etc.SIMPLIFICATIONProgram to reduce administrative burdensNumber of licenses and permits required

SIMPLIFICATIONProgram to reduce administrative burdensNumber of licenses and permits required

SCIENCE AND TECHNOLOGY GRADUATES (HK)

PRICE CONTROLSAir TravelRoad FreightRetail DistributionTelecommunications

PRICE CONTROLSAir TravelRoad FreightRetail DistributionTelecommunications

TDI COMPETITION

LICENCES AND PERMITS SYSTEMLICENCES AND PERMITS SYSTEM

(+)

(-)

(-)

(-)

(-)

(-)(-) (+)

(+)

(+)

(-)

FIGURE III.1: IM AND TRANSMISSION CHANNELS

Policy implications and related issues

The results

have been obtained thanks to a statistical analysis which includes some limitations:

1)

Our measure of diffusion focuses on adoption, and therefore does not allow us to cover the whole diffusion process.

2)

The database used is of weak

quality

(due to double counting problems and missing observations). Therefore the policy recommendations should be considered very carefully.

!

Policy implications and related issuesFour main policy recommendations may be drawn from the study:

Cooperation Innovation adoption

Trust

Communication and simplification procedures

Human

capital

1. Policies contributing to reinforce social trust within countries especially through “communication and simplification procedures” are likely to develop cooperation among firms and consequently to achieve higher levels of diffusion/adoption and increase the efficiency of innovation adoption. Strengthening human capital also appears as an efficient way to enhance cooperation and consequently innovation adoption.

Policy implications and related issuesFour main policy recommendations may be drawn from the study.

Competition Product adoption

Public ownership

Transfer and subsidies

Administrative burdens

Productivity

2. Policies reducing public ownership, administrative burdens and national government controls should be implemented at the EU level in order to achieve higher levels of competition and eventually higher shares of adoption of external product and productivity growth.

Policy implications and related issuesFour main policy recommendations may be drawn from the study.

Trade Product adoption

Price control

Regulation

Freedom

to trade

Productivity

3. Policies reducing prices controls or national government controls on the transport sector are likely to foster international trade. It should be noted that such policies would essentially increase innovation more than “adoption of innovation”.

Policy implications and related issuesFour main policy recommendations may be drawn from the study.

4. If we are to contribute to a better understanding of how countries can react to European incentives, specific national profiles must be taken into account, following the four groups distinguished in the descriptive part.

Group 1 (Belgium, Finland, Germany, Netherlands and may be to a lesser extent Norway and Sweden):

The virtuous circle linking innovation and adoption is at work. These countries dispose of the necessary absorptive capacities and they are already well integrated within the EU.

Reinforcing the IM regulations

will certainly have the expected effects on innovation diffusion and productivity.

Policy implications and related issuesFour main policy recommendations may be drawn from the study.

4. If we are to contribute to a better understanding of how countries can react to European incentives, specific national profiles must be taken into account, following the four groups distinguished in the descriptive part.

Group 2 (Austria, Iceland, Italy, Portugal and Spain):

These countries display high rates of adoption but some weaknesses in their innovation potential and a low level of cooperation prevent these countries to completely enter within the virtuous circle of innovation/adoption. Developing IM regulations oriented towards the reinforcement of cooperation may particularly benefit to these countries in order to reinforce at the same time their innovative potential and their capacity to absorb the adopted innovations.

Policy implications and related issuesFour main policy recommendations may be drawn from the study.

4. If we are to contribute to a better understanding of how countries can react to European incentives, specific national profiles must be taken into account, following the four groups distinguished in the descriptive part.

Group 3 (France and Luxembourg):

The virtuous circle innovation/adoption is not acting efficiently due to

a lack of innovation diffusion. As these countries already dispose of the necessary absorptive capacities,

developing the three channels of

transmission through IM regulations might usefully improve the efficiency of their national innovation dynamics.

Policy implications and related issuesFour main policy recommendations may be drawn from the study.

4. If we are to contribute to a better understanding of how countries can react to European incentives, specific national profiles must be taken into account, following the four groups distinguished in the descriptive part.

Group 4 (Eastern countries: Czech Republic, Greece, Hungary, Latvia, Lithuania, Romania, Slovakia and Estonia):

Acting towards a better integration to the EU using the policies presented above may permit to reinforce their capacity to adopt innovation. We should underline however that such a policy might have no effect if it is not accompanied by actions aiming at reinforcing the own innovative potential

of these countries in order to boost their absorptive

capacity.

Study on the

Diffusion of Innovation

in the Internal Market

2009