R&;D in SMEs: a paradox?

This paper has three objectives: (1) to survey the relevant literature addressing the (apparent) paradox of Research & Development investments carried out within Small and Medium Enterprises; (2) to provide focused summaries of the articles in this special issue; (3) to draw some general conclusions in terms of policy implications.

Absorptive capacity and R&;D tax policy: Are in-house and external contract R&;D substitutes or complements?

Firms fund research and development (R&;D) to generate commercializable innovations and to increase their ability to understand and absorb knowledge from elsewhere. This dual role and opposed incentive structure of internal R&;D create a significant question for both theory and R&;D policy: Is internal R&;D a complement or substitute for external R&;D? We develop a model and novel technique for empirically estimating R&;D substitution elasticities. We focus on bio-pharmaceutical and software industries in California and Massachusetts, where tax credit rates changed differently over time for the two types of R&;D, creating a natural experiment. The effective tax prices for the two R&;D types differ from type to type, firm to firm, state to state, and year to year. This allows us to examine changes in the composition of firms’ R&;D budgets between in-house R&;D and external basic research when the relative tax prices of each category of research change. We find evidence of a substitute relationship both for a sample comprising exclusively small firms as well as for a more general distribution of firm sizes.     

R&D: Who does the R,who does the D?

This paper examines the determinants of the allocation of national R&D resources between research and development activities. We derive conditions under which a firm being outdistanced by a foreign rival in a two-stage international patent race would drop out, and relate those conditions to home-market size and to the race's cost and risk characteristics. Because of this “discouragement effect”, firms located in smaller markets appear as if they were, on average, less successful in transforming research expertise into commercial product development. We also show that in a two-sector model (R and D), the proportion of R&D resources going into product development as opposed to research increases with country size. Moreover, starting from a symmetric game and increasing the size of one country induces the opposite effect on other countries (a shift of R&D resources from development to research) through strategic interaction among research teams.     

Is the R&;D behaviour of fast-growing SMEs different? Evidence from CIS III data for 16 countries

This paper studies the R&;D behaviour of fast growing SMEs using CIS III data for 16 countries. We group the countries into three categories of countries having roughly the same stage of technological development. Our first finding is that R&;D is more important to high-growth SMEs in countries that are closer to the technological frontier. The second finding is that high-growth SMEs are only more innovative than non-high-growth SMEs in countries close to the technological frontier. This suggests that gazelles derive much of their drive from the exploitation of comparative advantages. From a policy perspective, this indicates that there are important limits to centralising policies that aim to foster high-growth SMEs.     

Entrepreneurial Risk: Have We Been Asking the Wrong Question?

Entrepreneurs are often thought to engage in "risky" behaviors. Thus, they may be seen as more willing than average to take risks. We offer a dissenting view. Central to entrepreneurship is the alertness perspective which suggests that entrepreneurs may assess opportunities and threats differently than non-entrepreneurs. That differential assessment may be understood in terms of Bayesian probability. The Bayesian model argues that differing assessments of prospective outcomes may be attributable to differences in prior information. This perspective on risk assessment has implications for entrepreneurial decision making, whether to launch a new venture or adopt a growth strategy. The literature is reviewed, a synthesis is offered, a numerical example is developed, and a research agenda is proposed.     

How to improve the performance of R&;D alliance? An empirical analysis based on China’s pharmaceutical industry

The separation of science resources and the manufacturing industry in China has given rise to R&;D alliances between R&;D institutes and sponsoring enterprises. As a result, R&;D alliance of various types has become a main route of technology innovation in China. Drawing upon relevant literature on R&;D alliance management, this research empirically explores the impacts of relationship pattern, control strategy chosen by sponsoring enterprises, and alliance members’ continuity expectation on alliance performance. Results show that motivation-based alliance control approaches, including proper allocation of alliance control rights, sustained strengthening of alliance members’ continuity expectation, and enhancement of mutual relationship and friendship among alliance members, are more effective than process or outcome control approaches for improving alliance performance.     

What's Wrong With the Federal Reserve: What Would Restore Independence?

The actual degree of independence of the Federal Reserve has varied over the years. This paper traces its history and finds that the Federal Reserve has been most successful in its dual full-employment, low inflation mandate when it follows fixed rules, and focuses on the intermediate term rather than trying to react to short-term developments under political pressure. Going forward, monetary policy should emphasize on annual monetary growth more and short-term interest rates less. A number of policies are recommended to support this overall emphasis on intermediate-term stability.     

R&;D,Size and Firm Growth in Taiwan‘s Electronics Industry

This paper documents the relationship between R&D, firm size, and growth rate for a panel data of Taiwanese electronics firms. Using GMM method to control for endogeneity of R&D, the main finding is that an increase in R&D induces a higher growth rate and this impact is particularly higher for small firms. Testing Gibrat’s law shows that small firms indeed have a higher growth rate than their larger counterparts, while size is independent with firm growth in the group of large-sized firms, supporting the weak form of Gibrat’s law.     

Preventing Customer Churn in the Mobile Telecommunication Industry: Is Mobile Money Usage the Missing Link?

The paper examines the influence of mobile money usage on customer continuance intention (CCI). The study conveniently sampled 507 mobile money users to test the research model using PLS-SEM. Satisfaction, trust and active usage of mobile money were found to influence CCI. Active usage of mobile money was also confirmed as a mediator in the relationship between satisfaction and trust, on customer continuance. The study thus validated a theoretical model of customer continuance intention as it relates to mobile money usage. It has also provided a new perspective on managing customer churn in an emerging market.     

Effectiveness of R&;D tax incentives in small and large enterprises in Québec

In this paper we evaluate the effectiveness of R&D tax incentives in Quebec, using manufacturing firm data from 1997 to 2003 originating from R&D surveys, annual surveys of manufactures and administrative data. The estimated price elasticity of R&D is –0.10 in the short run and –0.14 in the long run, with slightly higher elasticities for small firms than for large firms. We show that there is a deadweight loss associated with level-based R&D tax incentives that is particularly acute for large firms. For small firms it is not sizeable enough to suppress the R&D additionality, at least not for quite a number of years after the initial tax change. Incremental R&D tax credits do not suffer from this deadweight loss and are from that perspective preferable to level-based tax incentives.

Europe's Growth Crisis: When and How Will It End?

This paper analyses Europe's growth problem. Recovery from the recent global financial crisis and ‘great recession’ has been slower than after previous recessions in most advanced countries and areas, especially Europe. But the European growth problem is structural in character and it started much earlier. This paper analyses the structural causes of the European growth problem, evaluates the policies that Europe adopted to overcome it, and concludes that even with the appropriate policies, the prospects for accelerating growth in Europe will be difficult, especially in the context of Brexit and the slowdown of world growth in general.     

R&;D,International Trade and Creative Destruction—Empirical Findings from Finnish Manufacturing Industries*

The determinants of productivity-enhancing micro-level restructuring are examined empirically with a panel of the twelve Finnish manufacturing industries. It is hypothesized that R&D leads to productivity diversity among plants, which in turn leads to the gradual reshuffling of input shares in the presence of dynamic competitive pressure. The effect of the creative destruction on industry productivity growth is measured with the between-component of productivity decomposition. Econometric results indicate with reasonable robustness that R&D generates creative destruction with a lag of several years. Some evidence is found that imports stimulate productivity-enhancing restructuring, especially when domestic R&D is low.JEL classification: O12, 014, 019, O31, O47*This paper is based on the chapter 8 of my PhD thesis which has been accepted by the Helsinki School of Economics (2003). The research has received financial support from Tekes (the National Technology Agency), and from the Yrjö Jahnsson Foundation. This paper has benefited from comments by Petri Böckerman, Pekka Ilmakunnas, Kabor Kezdi, and Petri Rouvinen, to whom I am grateful. I am also thankful to the referees for helpful comments. Lisa Roponen has checked my English. An earlier version of this paper has been presented at the EARIE 2002 conference in Madrid and at the Summer at CEU Workshop in Budapest in 2003. Data work and computations have been carried out at Statistics Finland, in accordance with the terms and conditions of confidentiality. I also wish to thank many individuals at Statistics Finland for their guidance regarding the properties of the data. Please contact the Research Laboratory of the Business Structures Unit, Statistics Finland, FIN-00022, Finland, for access to these data. The usual disclaimer applies.     

Movies and the Mystery of the Missing Trade: Is Hollywood Good for U.S. Exporters?

Research has shown that consumers have a preference for goods based on the origin of production. This is important because it suggests that, in some cases, even lowering trade barriers may not significantly increase trade flows. In particular, flows may be lower than are predicted by trade theories such as Heckscher-Ohlin. Despite evidence that home consumption bias exists in many countries, it is only recently that research has begun to examine the sources of this bias.

This article fills a gap in the literature by testing a model that addresses the source of this consumption bias. The paper's model incorporates consumers' exposure to foreign products and culture through media imports and tourist visits as factors affecting consumers' preferences for foreign products. Using panel data from 19 countries, the article's results support the hypothesis that lagged exports of U.S. movies have a positive impact on other U.S. exports. Some evidence is also found of a positive effect of tourist visits on U.S. exports.

Since U.S. media exports may generate demand for other U.S. goods and services, opening up foreign media markets should receive a higher priority in U.S. trade negotiations. Another interesting implication of the paper is that overall U.S. export losses resulting from media piracy may be lower than previously calculated, as the consumption of pirated media products may increase demand for other U.S. exports.     

Ethics in Nanotechnology: What’s Being Done? What’s Missing?

Nanotechnology shows great promise in a variety of applications with attractive economic and societal benefits. However, societal issues associated with nanotechnology are still a concern to the general public. While numerous technological advancements in nanotechnology have been achieved over the past decade, research into the broader societal issues of nanotechnology is still in its early phases. Based on the data from the Web of Science database, we applied the main path analysis, cluster analysis and text mining tools to explore the main research fronts and hierarchical structure of these societal issues. We found that the research studies fell into four categories: “General Toxicity and EHS (Environment, Health and Safety),” “Medicine and Cytotoxicity,” “Assessment and Regulation,” and “Environment and Ecotoxicity.” These research studies have disclosed much information about the potential effect of nanotechnology on public health and the environment. Relatively speaking, the studies on the assessment, regulation, preventive solutions, and environmental protection are just emerging. This finding indicates that an abundance of effort should be conducted on these emerging themes to maximize the benefits of nanotechnology while minimizing its potential harm. The implications for various parties in this domain are also presented.     

Scaling‐up Foreign Aid: Will the ‘Big Push’ Work?

International donors are substantially scaling‐up aid programmes. At the same time, there are widespread reservations over how much aid recipient countries can use effectively. Such concerns are supported by the aid effectiveness literature which finds that there are limits to the amounts of aid recipients can efficiently absorb. This article demonstrates that a ‘big push’ in foreign aid will not lead to diminishing returns as long as donors get the inter‐country allocation of aid right. This is true even if donors provide aid at levels equal to the well‐known target of 0.7 per cent of their gross national income.     

Science and Technology Take-off in China?: Sources of Rising R&D Intensity

China's ratio of research and development (R&D) spending to its gross domestic product (GDP) more than doubled from 0.6 per cent in 1996 to 1.4 per cent in 2005. This study documents the pattern of science and technology (S & T) take-off, characterized by an abrupt increase in the R&D to GDP ratio. This abrupt increase, observed in many of the now Organization for Economic Cooperation and Development (OECD) countries, typically drives R&D intensity from below 1 per cent to the range of 2–3 per cent. The question addressed in this work is whether China has begun a similar S & T take-off. The study reviews several conditions identified in the endogenous growth literature that drives R&D intensification and notes their emergence in China during the past decade. It also speculates why China's R&D intensification appears to be starting at such a low level of income per capita.     

Market-oriented institutional change and R&D investments: Do business groups enhance advantage?

Emerging market firms (EMFs) are increasingly relying on innovation to find their competitive advantage, but our understanding of how institutional change affects firm innovation has been limited. We analyzed Korean manufacturing firms from 1994 to 2006 to test the proposition that market-oriented institutional change in an emerging economy alleviates firms’ financing constraints and monitoring problems and improves the effectiveness of their innovation activities. Institutional evolution in the economy was found to affect Korean business groups and independent firms differently. Institutional change reduced the financing constraints on independent firms more than for business group affiliates in R&D investment. Independent firms, however, appeared less capable than group affiliates of translating the benefits of improved institutional environments into efficient R&D investment. This asymmetry may lead to a wider gap in the efficiency of R&D investment between business group affiliates and independent firms.