ÖSTERREICHISCHES INSTITUT FÜR WIRTSCHAFTSFORSCHUNG AUSTRIAN INSTITUTE OF ECONOMIC RESEARCH WIFOWIFO Wien 3, Arsenal, Objekt 20 A-1103 Wien, Postfach 91

ÖSTERREICHISCHES INSTITUT FÜR WIRTSCHAFTSFORSCHUNGAUSTRIAN INSTITUTE OF ECONOMIC RESEARCH

WIFO

Effects of Foreign Ownership on Innovation Activities: Empirical Evidence for 12 European

Countries

Martin Falk

FIW Workshop Foreign Direct Investment, BMWA, March 7th 2008


WIFOMotivation

• importance of foreign affiliates in industrial R&D varies across OECD countries

•Foreign-owned firms have a lower R&D intensity than domestically owned firms (see OECD 2003)

•multinational firms undertake most of their R&D activity at home

•relationship between innovation output and foreign ownership is not clear-cut

•Descriptive statistics: Foreign owned firms are more likely to introduce technological innovations and have higher share of innovative sales

• However, some part of the differences in innovation output between foreign affiliates and domestic firms may be due to a compositional effect

=>simple comparisons are misleading


WIFO Motivation78

7266

5649

4542 40

35

27 27 27 26 25 2520

17 16 147 5 4

0

10

20

30

40

50

60

70

80

90

Hunga

ry

Irelan

d

Austri

a

Belgium

Czech

Rep

ublic

Sweden

Austra

lia

United

King

dom

Canad

a

Nethe

rland

s

Spain

Germ

any

Italy

Franc

e

Portu

gal

Slovak

Rep

ublic

Poland

Finlan

d

United

Sta

tes

Turke

y

Greec

e

Japa

n

R&D expenditures of foreign affiliates in % of total business R&D


WIFO MotivationPercentage of innovating firms (Western European firms)

0.330.29

0.16

0.28

0.23

0.430.41

0.25

0.360.32

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

new products new productsdeveloped in-

house

new marketproducts

newproductionprocesses


dev in-house

domestic firmsforeign owned

Notes: # of obs: 18 000, weighted using sample weights; Source: CIS 3 data.


WIFO MotivationPercentage of innovating firms (Eastern European firms)

0.210.19

0.11

0.160.13

0.340.32

0.20

0.240.22

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

new products new productsdeveloped in-

house

new marketproducts



dev in-house

domestic firmsforeign owned

Notes: # of obs: 10 000, weighted using sample weights; Source: CIS 3 data.


WIFO MotivationShare of new products/market novelties in % (means)

(Western European firms)0.261

0.104

0.222

0.095

0.00

0.05

0.10

0.15

0.20

0.25

0.30

share of turnover of new products share of turnover of new market products

domestic firms

foreign owned


WIFO Motivationshare of new products/market novelties in % (means)

(Eastern European firms)

0.116

0.052

0.142

0.066

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

share of turnover of new products share of turnover of new market products

domestic firms

foreign owned


WIFO MotivationDifferences in the characteristics between foreign and

domestic firms (Eastern Europe)

0.000.100.200.300.400.500.600.700.800.90

exporting

Firms m

ost significa

nt marke

t: local

Firms m

ost significa

nt marke

t: national

Firms m

ost significa

nt marke

t: interna...

firm siz

e (0 th to25 th)

firm siz

e (25 th to 50 th)

firm siz

e (50 th to 75 th)

firm siz

e (75 th to 100 th)

mining & energy

Consumer manufactu

ring

intermediate manufacturing

investment m

anufacturing

distributive

trade

transport & fin

ancial intermediation

business servic

es

foreign owned firmsdomestic firms

% of firms


WIFOMotivation und Outline

•Methods:– Probit estimates of the propensity to innovate– Share equations for turnover with market novelties

and new products estimated by fractional logit estimator

•Outline:– Previous literature– Theoretical background– Empirical model– Data and descriptive statistics– Results– Conclusions


WIFOPrevious studies

•Previous studies of cross-country comparisons of determinants of innovative sales/introduction of new products– Griffith, Huergo, Mairesse and Peters (2006)

for France, Germany, Spain and UK based on CIS 3 data (OXREP)

– Mohnen, Mairesse and Dagenais (2007), for seven EU countries based on CIS 1 (distinction between low and tech ind.) (EINT)

– Lööf, Heshmati, Asplund and Naas (2002) for Finland, Norway and Sweden bason CIS 2

– Lhuillery, Freitas, Miotti and De Negri (2007), for France, Switzerland and Spain and three Latin american countries


WIFO Theoretical background• Previous literature: CDM model with log of innovative

sales or logit transformed innovative sales and mills ratio/ selection equation

• Innovation output is mainly determined by innovation input but elasticity is below 1:– Crépon, Duguet and Mairesse (1998): elasticities of the

logarithm of turnover with new products with respect to R&D capital per employee between 0.12 and 0.46

– Griffith, Huergo, Mairesse and Peters (2006): impact of the predicted R&D intensity on the logit transformed share of market novelties is higher for Spain and France than that of UK and Germany


WIFO Previous studies• Effects of different types of innovation input activities

– Types: internal R&D, external R&D, acquisition of new knowledge, acquisition of machinery, design, market introduction

– Effects of different types of innovation activities are expected to differ across industries and between young and old firms

– Impact of internal activities is higher in high-tech industries than in low/medium industries

– Importance of non-R&D innovation activities is expected to be higher in services

– internal R&D activities are more important for “radical” (i.e. new to the market) innovations than for incremental innovations (i.e. new to the firm)


WIFO Previous studies• Effects of different innovation sources

– importance of external sources of information for innovation (Von Hippel 1998)

– Firms benefit from customers and end users, lead user

– knowledge potential of universities conferences, meetings and journals is more important in science-based and technology-oriented firms

– knowledge spillovers from rivals are more valuable to less research–intensive firms (see Jovanovic and MacDonald, 1994)


WIFO Previous studies• Firm size

– U-shaped relationship -> small firms and very large firms have a higher R&D and/or innovation intensity (Acs and Audretsch, 1988; Pavitt et al., 1987)

• Foreign ownership– foreign-owned firms are more likely to introduce new

products and new production processes (Sadowski and Sadowski-Rasters, 2006; Frenz and Ietto-Gillies 2007 for the UK)

– Foreign ownership effect should be more pronounced in NMS than in the EU15 countries

• Turnover increase due to M&A• Firms most significant market: If firms market is

international one can expect higher competition


WIFO Empirical model I• Probit equation for the propensity to innovate

• five different types of technological innovations: – introduction of new products– introduction of new products developed in-house– introduction of new market products – introduction of new production processes,– introduction of new production processes developed in-house

ßxy '*

00

01*

*

yif

yify


WIFO Empirical model I• Second step: fairlie technique that decomposes the

foreign ownership difference into the characteristics effect and coefficient effect:

),(,,, dfddfpdpfd XßPXßPXßPXßPYY


WIFO Empirical model II

• Determinants of the share of new market products/market novelties

.6

sec,sec,

11

,,

3

,,

8

,,

7

,,

2

,,

3

,,21

ppp

mmcomco

ggsizegsize

kksourcesksources

llstratlstrat

hhmarkhmark

nnhistnhistfor

dßdßdß

dßdß

dßdßdINQY


WIFO Empirical model

INQ innovation intensity

ford

nhistd

, dummy variables for newly founded firms,

M & A disclosure during the period

gsized

, dummy variables for firm size

lstratd

, dummy variables measuring the innovation strategy

hmarkd

, geographical market

ksourcesd

, dummy variables on the intensity of usage of different innovation sources

mcod

, pd

sec,

country and sector dummy variables

dummy variable for firms that are part of multinationalfirm with headquarter outside the home country


WIFOEmpirical model

• share of innovative sales is bounded between zero and 1 by definition

• Tobit model is not useful in our case because 0 and 1 values arises not because that the variable is unobservable; also logit transformation not useful

• Papke and Woolridge (1996) proposed the called “fractional logit model”

• Estimation method: quasi-maximum likelihood estimator, with heteroscedasticity robust asymptotic variance

ßXßX

ßXFXYEi

iiii exp1

exp

](1ln[)1(](ln[)( '' ßxyßxyßl iiiii


WIFOEmpirical model

• Interpretation based on marginal effects• Separate estimates for EU-West (i.e. BE, DE, ES, GR,

NO, PT) and EU-East (i.e. CZ, EE, HU, LT, LV, SK)


WIFOData

• CIS 3 micro aggregated data, EUROSTAT• Corrected version May 2007 (error in foreign

ownership)– Share of foreign ownership correct data: 11% (old version 21%)

• Coverage– Belgium, Czech Republic, Estonia, Germany, Hungary, Norway,

Spain, Greece, Lithuania, Latvia, Portugal and Slovakia

• Austria ist not included because Stat Austria refused to allow access to the data

# of obs probit: 28,000 Number of obs. for the fractional logit model

– EU East: 5000; EU West: 6400

• Estimation sample for the fractional logit is restricted to firms with information on type of innovation activities

• Pure “process innovators” are excluded


WIFO Descriptive Statistics

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

share of turnovernew products

firms with zeroturnover of new

products

share of turnovermarket

novelties

firms with zeroturnover of market

novelties

Innovation intensity

West East


WIFO

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Newly

found

ed fir

m

turno

ver g

rowth

due t

o merg

ers ...

sales

redu

ction

due t

o disc

losure

foreig

n owne

rship

Firms m

ost s

ig. m

arket:

regio

nal

Firms m

ost s

ig. m

arket

natio

nal

Firm

s m

sig

. mar

ket i

nter

n

firm si

ze (0

th to

25th)

firm si

ze (2

5th to

50th)

firm si

ze (5

0th to

75th)

firm si

ze (7

5th to

100th

)

EastWest

Descriptive statistics


WIFO Descriptive statistics

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

intramural R

&D

extramural R

&D

acquisition of m

achinery and equipment

acquisition of o

ther exte

rnal knowledge

Training

market intro

duction of in

novatio

n

design and other p

reparation

WestEast


WIFO

• sample including Western European firms– Foreign ownership is marginally significant for new

products developed in-house and new market products (effect 1.4 and 1.9 percentage points)

• sample including Eastern European firms– Foreign ownership is strongly significant for all types of

technological innovations (effects: 3.4 and 4.5 percentage points)

• Sector, size, country dummy variables and dummy for exporters are all significant

• Fairlie decomposition of the foreign ownership effect on the propensity to innovate:– Western European firms: 90 % of the difference in

innovativeness can be explained by different characteristics

– Eastern European firms : Between half and two thirds of the difference in innovativeness between foreign and domestically-owned firms.

Empirical results: probit estimates


WIFO Probit estimates for Western European countries (marg. effects)

dF/dx z dF/dx zforeign-owned firm (yes/no) 0.014 1.68 0.019 1.68newly founded firm (yes/no) 0.040 2.47 0.035 1.78exporting (yes/no) 0.046 6.80 0.085 10.09turnover increase due to M&A (yes/no) 0.068 4.99 0.100 5.83turnover reduction due to closure (yes/no) -0.057 -2.78 -0.061 -2.30Firms most significant market (ref local):national market (yes/no) 0.066 9.14 0.121 13.61international market (yes/no) 0.099 9.95 0.162 13.54firm size dummy variables:firm size class turnover (25th to 50 th ) 0.040 4.44 0.054 4.95firm size class turnover (51st to 75 th) 0.092 9.68 0.127 11.25firm size class turnover (76 th to 100 th) 0.178 17.19 0.274 22.62industry dummy variables (ref consumer man.)Mining & energy -0.081 -5.25 -0.124 -6.28Intermediate manufacturing 0.025 2.87 0.022 2.00Investment manufacturing 0.076 8.37 0.092 8.27Distributive trade -0.055 -4.62 -0.137 -9.36Transport & financial intermediation -0.035 -3.30 -0.064 -4.95Business services 0.216 15.92 0.232 14.85country dummy variables yes yes

new products dev. in-house

market novelties


WIFO Probit estimates for Eastern European countries (marg. effects)

firm size class foreign-owned firm (yes/no)

exporting

(yes/no)turnover (25th to 50th)

firm size turnover (51st to 7 th)

firm sizeturnover (76 th to 100 th)

new products dF/dx 0.045 0.072 0.082 0.169 0.316z 3.14 5.7 5.51 11.03 19.49

new products dev. in-house dF/dx 0.047 0.068 0.073 0.163 0.303z 3.37 5.58 5.02 10.85 18.9

new market productsdF/dx 0.045 0.052 0.044 0.086 0.191z 4.19 5.47 3.73 6.91 13.96

new production processesdF/dx 0.034 0.045 0.075 0.167 0.316z 2.72 4.05 5.34 11.43 20.16

new production processes dev in-housedF/dx 0.039 0.043 0.07 0.148 0.286z 3.34 4.06 5.24 10.57 18.77


WIFOFairlie decomposition of the foreign ownership effect on the propensity

to innovate

dom-estic foreign-firms owned

new market products 0.140 0.256 -0.116 -0.053 -0.063 -0.063 0.005 0.003 -0.008

(54) (100) (-7) (-5) (12)

percentage of Results of the decomposition analysis

differ-ence

un-explained

ex-plained

firm size effect

sector effects

country effects

other effects


WIFO

• sample including Western European firms– Foreign ownership is not significant

• sample including Eastern European firms– Foreign ownership is strongly significant for both types

(i.e new products and market novelties)• Use of different innovation sources, innovation

input/strategies are more important in achieving a high share of new products/market novelties

• Blinder-Oaxaca decomposition of the foreign ownership effect:– Eastern European firms : Difference in innovativeness is

nit due tu differences in the characterisitcs

Empirical results: share equations


WIFOResults of the share equation: new products

dF/dxa z dF/dxa zforeign ownership 0.008 0.87 0.024 2.73innovation intensity 0.217 8.00 0.133 4.43newly founded firm 0.047 2.38 0.048 2.66turnover growth due to mergers & acquisitions

0.020 1.45 0.027 2.23

sales reduction due to closure -0.010 -0.36 -0.016 -1.15Firms most significant market: national market (ref. local)

-0.004 -0.47 0.007 0.90

Firms most significant market: international market

0.027 2.50 0.030 3.58

firm size class turnover (25 th to 50 th) -0.004 -0.37 -0.002 -0.25

firm size class turnover (50 th to 75 th) -0.038 -3.62 -0.018 -2.20

firm size class turnover (75 th to 100 th) -0.073 -6.62 -0.028 -3.27innovation sources yes yesInnovation strategy yes yesCountry dummies yes yesSector dummies yes yes

Western European

Eastern European


WIFOResults of the share equation: market

noveltiesdF/dxa z dF/dxa z

foreign ownership 0.009 1.55 0.011 2.02innovation intensity 0.105 7.35 0.070 4.27newly founded firm 0.057 3.39 0.006 0.55turnover growth due to mergers & acquisitions 0.014 1.49 0.025 2.76sales reduction due to closure -0.014 -0.90 0.000 -0.04Firms most significant market: national market (ref. local) 0.000 0.06 0.002 0.34Firms most significant market: international market 0.014 1.93 0.011 2.15firm size class turnover (25 th to 50 th) -0.001 -0.19 0.003 0.45firm size class turnover (50 th to 75 th) -0.012 -1.75 -0.007 -1.44firm size class turnover (75 th to 100 th) -0.034 -4.66 -0.012 -2.23innovation sources yes yesInnovation strategy yes yesCountry dummies yes yesSector dummies yes yes

Western European

Eastern European


WIFOResults of the share equation: Blinder-

Oaxaca decomposition

dom-estic foreign-firms owned

new market products 0.140 0.256 -0.116 -0.053 -0.063 -0.063 0.005 0.003 -0.008

(54) (100) (-7) (-5) (12)

percentage of Results of the decomposition analysis

differ-ence

un-explained

ex-plained

firm size effect

sector effects

country effects

other effects


WIFO• relationship between foreign ownership and innovation activities using CIS

3 micro-aggregated data for 12 European countries. • Probit estimates

– New Member States: the probability to innovate is significantly higher for foreign-owned firms than for domestic firms

– Western European: foreign ownership is only marginally significant. – differences in the percentage of innovating firms between foreign owned and

domestic firms are mainly due to different characteristics

• Results for the share equation:– New Member States: foreign-owned firms are significantly more innovative than

domestic firms. – overall difference in the share of innovative sales between foreign-owned and

domestic firms is mainly due to differences in the coefficients =>pure effect

• Other significant determinants of innovation output: innovation strategy, innovation sources

• explanation: in the New Member States foreign-owned firms are younger than in West. EU countries => learning curve effect is inverted u-shaped?

Conclusions

Documents

ÖSTERREICHISCHES INSTITUT FÜR WIRTSCHAFTSFORSCHUNG AUSTRIAN INSTITUTE OF ECONOMIC RESEARCH WIFOWIFO Wien 3, Arsenal, Objekt 20 A-1103 Wien, Postfach 91