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Researcher Name: Pelin Demirel Affiliated Staff: Supervisors: Professor Mariana Mazzucato and Professor Paul Quintas Project Start Date: 01.01.2005 Project End Date: 01.06.2008 Contact Details: Pelin is now a Lecturer in Industrial Economics at Nottingham University Business School. Pelin.Demirel@nottingham.ac.uk Funder: Innogen Background: Targets to increase R&D intensity to 3% in the EU is a core part of the EC’s Lisbon Agenda (2005) which aims to achieve innovation led growth across Europe. Fast growing innovative firms are essential drivers of productivity and economic growth. Yet entrepreneurial small innovative firms do not seem to grow fast enough to drive this innovation led growth (NESTA, 2008). This study investigates the relationship between innovation and firm growth in an R&D intensive industry, the pharmaceutical industry, to better understand the firm level factors that determine whether innovation efforts pay off in terms of higher growth. If innovative firms do not always grow more, which characteristics allow firms to grow most from their innovative efforts? Can this help us understand the ‘productivity paradox’ in this industry in which exponential growth in R&D and patenting has not translated into the discovery of many new drugs? Aims and Objectives: The study investigates the relationship between innovation and firm growth for different “types” of firms within the US pharmaceutical industry. Research Methods: A combination of parametric and non-parametric techniques is used to tackle the questions around firm growth. Parametric techniques such as panel data analysis allow one to have a sound and structured understanding of the growth process. For instance, whether (and how) firm size affects growth can be clearly assessed using such techniques. However, the parametric methodology imposes a pre-set model on the actual data and this can be limiting in terms of our ability to understand what really goes on in the actual data. To step away from such limitations, and following from Bottazzi et al. (2003), the thesis utilizes also non-parametric methods and observe how the firm size distribution (FSD) and firm growth rate distribution (FGD) evolve over time. Key Findings: The findings suggest that innovation (proxied via R&D spending, patents and citations) positively affects growth rates only for some types of firms, with many others not reaping much benefit at all from their innovative efforts. Those firms which grow more due to their innovative efforts are those that are persistent innovators, have biotechnology alliances, and are small. This indicates that market selection operates on a mix of firm characteristics rather than innovation per se and if there are not enough such firms in the industry, this may help to partly understand the ‘productivity paradox’ above. Results also find that it is firms with these three characteristics that are found to shape ‘complex’ non-gaussian properties of firm size and growth (e.g. bimodality of firm size distributions and fat tails in the growth distributions) which have puzzled industrial economists (Cabral and Mata, 2003). Normal size distributions only appear for firms that do not benefit from their innovative efforts! Understanding the structural characteristics of innovation that lead to non-normal distributions in size and growth is fundamental if theory is to inform policy in a useful way. Wider implications for policy: The DIUS Innovation Nation White Paper (DIUS, March 2008) claims that allowing innovation to translate into growth is a key priority of the UK industrial policy. This study suggests that besides trying to raise R&D intensity figures (UK being 6th amongst the G7), it is fundamental for the UK innovation policy to better understand which firm level characteristics allow R&D and patenting activity to have an effect on growth. It is critical to gain insights on how this relationship differs across different sectors. Is ‘persistence’ in innovation important in computers as it is in pharmaceuticals? Is it more important in specific phases of the industry life-cycle? Project Update: Publications: Does Market Selection Reward Innovators? R&D, patents, and growth in the US Pharmaceutical Industry - Innogen and IKD Working Paper Pelin Demirel and Mariana Mazzucato External Links: Further information:
Pelin is now a Lecturer in Industrial Economics at Nottingham University Business School.
Pelin.Demirel@nottingham.ac.uk
Targets to increase R&D intensity to 3% in the EU is a core part of the EC’s Lisbon Agenda (2005) which aims to achieve innovation led growth across Europe.
Fast growing innovative firms are essential drivers of productivity and economic growth. Yet entrepreneurial small innovative firms do not seem to grow fast enough to drive this innovation led growth (NESTA, 2008).
This study investigates the relationship between innovation and firm growth in an R&D intensive industry, the pharmaceutical industry, to better understand the firm level factors that determine whether innovation efforts pay off in terms of higher growth.
If innovative firms do not always grow more, which characteristics allow firms to grow most from their innovative efforts? Can this help us understand the ‘productivity paradox’ in this industry in which exponential growth in R&D and patenting has not translated into the discovery of many new drugs?
A combination of parametric and non-parametric techniques is used to tackle the questions around firm growth.
Parametric techniques such as panel data analysis allow one to have a sound and structured understanding of the growth process. For instance, whether (and how) firm size affects growth can be clearly assessed using such techniques. However, the parametric methodology imposes a pre-set model on the actual data and this can be limiting in terms of our ability to understand what really goes on in the actual data.
To step away from such limitations, and following from Bottazzi et al. (2003), the thesis utilizes also non-parametric methods and observe how the firm size distribution (FSD) and firm growth rate distribution (FGD) evolve over time.
The findings suggest that innovation (proxied via R&D spending, patents and citations) positively affects growth rates only for some types of firms, with many others not reaping much benefit at all from their innovative efforts.
Those firms which grow more due to their innovative efforts are those that are persistent innovators, have biotechnology alliances, and are small.
This indicates that market selection operates on a mix of firm characteristics rather than innovation per se and if there are not enough such firms in the industry, this may help to partly understand the ‘productivity paradox’ above.
Results also find that it is firms with these three characteristics that are found to shape ‘complex’ non-gaussian properties of firm size and growth (e.g. bimodality of firm size distributions and fat tails in the growth distributions) which have puzzled industrial economists (Cabral and Mata, 2003).
Normal size distributions only appear for firms that do not benefit from their innovative efforts! Understanding the structural characteristics of innovation that lead to non-normal distributions in size and growth is fundamental if theory is to inform policy in a useful way.
The DIUS Innovation Nation White Paper (DIUS, March 2008) claims that allowing innovation to translate into growth is a key priority of the UK industrial policy.
This study suggests that besides trying to raise R&D intensity figures (UK being 6th amongst the G7), it is fundamental for the UK innovation policy to better understand which firm level characteristics allow R&D and patenting activity to have an effect on growth.
It is critical to gain insights on how this relationship differs across different sectors. Is ‘persistence’ in innovation important in computers as it is in pharmaceuticals? Is it more important in specific phases of the industry life-cycle?
Does Market Selection Reward Innovators? R&D, patents, and growth in the US Pharmaceutical Industry - Innogen and IKD Working Paper
Pelin Demirel and Mariana Mazzucato
