2015 Working Papers Series on Corporate R&D and Innovation 2015 Working Papers Series on Corporate R&D and Innovation

Profits, R&D and Labour

Author: Sara Amoroso
No. 10/2015

A basis assumption in the economic literature is the one of diminishing marginal returns to labour. However, theoretical studies on knowledge and labour specialization assume that an increase in the knowledge investment embodied in the human capital of workers raises the marginal product of labour.

In this paper, we propose a structural approach to test the hypothesis of non-diminishing returns to labour for a panel data set of R&D investing companies, and we explore how the marginal returns to labour vary with their level of knowledge capital (R&D) intensity.

Our econometric analysis provides a number of results. First, we find that more knowledge intensive firms have non-diminishing returns to labour, while less knowledge intensive companies exhibit diminishing returns. Second, independently from the knowledge capital intensity, returns to labour increase with size. Relatively smaller firms have diminishing returns, while larger companies have non-diminishing to increasing returns to labour. However, we show that more knowledge intensive firms can attain the threshold of non-diminishing returns faster than their conterparts.

Top R&D investors and international knowledge seeking: the role of emerging technologies and technological proximity

Authors: Mafini Dosso and Antonio Vezzani
No. 09/2015

This paper sheds new lights on the internationalization of technological activities of the top corporate R&D investors worldwide. In particular, we provide evidence on the technological factors determining their international R&D location strategies. The empirical analysis is based on the patenting activities of the top R&D investors, as reported by the EU Industrial R&D Investment Scoreboard, at the USPTO over the period 2010-2012. The technological proximity to the host country in which these companies seek for new knowledge is a key determinant for their R&D location decision. However, technological proximity has a non-linear effect on the companies' location strategies as they search for new technologies not too close to their knowledge base. Furthermore, top R&D investors worldwide target countries with comparative advantages in emerging technologies. Countries willing to attract high-value investments should create an environment conducive to the creation and development of brand new ideas with a high potential impact on the long term growth.

The impact of skill endowments and collective bargaining on knowledge-intensive greenfield FDI

Authors: Sara Amoroso, Mafini Dosso, Pietro Moncada-Paternò-Castello
No. 08/2015

This paper assesses the contribution of skilled employment and labour market conditions to the ability of attracting knowledge intensive and manufacturing greenfield FDI. We carry out our analysis by controlling for a wide range of labour market features, such as the collective bargaining coverage rate, the non-wage labour costs, and the occupational skills of employment. It departs from the existing literature in two respects. First, it deepens the analysis on the effect of labour market regulations and skill endowments on greenfield FDI inflows. Second, it investigates the extent to which labour market characteristics matter for discriminating among 'resource-seeking' and 'efficiency/strategic asset-seeking' greenfield FDI activities (e.g. manufacturing versus knowledge-intensive foreign investments, respectively). Our empirical analysis suggests that the quality of employment and the technological knowledge base have different impact on the location of knowledge-intensive and on low-cost labour-intensive manufacturing foreign investments. Further, associating the collective bargaining coverage of unions with the level of regulation in the labour market, our results can provide insights into the effectiveness of labour market policies that aim at attracting knowledge-intensive investments.

Employment Effect of Innovation

Authors: d'Artis Kancs and Boriss Siliverstovs
No. 07/2015

This paper estimates and decomposes the employment effect of innovation by R&D intensity levels. Our microeconometric analysis is based on a large international panel data set from the EU Industrial R&D Investment Scoreboard, and our proxy for innovation intensity is a measurable and continuous variable. Employing flexible semi-parametric methods - the generalised propensity score - allows us to recover the full functional relationship between R&D investment and firm employment, and to address important econometric issues, which is not possible in the standard estimation approach used in previous literature. Our results suggest that modest innovators do not create and may even destruct jobs by raising their R&D expenditures. Most of the jobs in the economy are created by innovation followers: increasing innovation by 1% may increase employment up to 0.7%. The job creation effect of innovation reaches its peak when R&D intensity is around 100% of the total capital expenditure, after which the positive employment effect declines and becomes statistically insignificant. Innovation leaders do not create jobs by further increasing their R&D expenditures, which are already very high.

Patent Boxes Design, Patents Location and Local R&D

Authors: Annette Alstadsæter, Salvador Barrios, Gaetan Nicodeme, Agnieszka Maria Skonieczna and Antonio Vezzani
No. 06/2015

Patent boxes have been heavily debated for their role in corporate tax competition. This paper uses firm-level data for the period 2000-2011 for the top 2,000 corporate research and development (R&D) investors worldwide to consider the determinants of patent registration across a large sample of countries. Importantly, we disentangle the effects of corporate income taxation from the tax advantage of patent boxes. We also exploit a new and original dataset on patent box features such as the conditionality on performing research in the country, and their scope. We find that patent boxes have a considerable effect on attracting patents, mostly because of their favourable tax treatment, especially for high-quality patents. Patent boxes with a large scope in terms of tax base definition also have stronger effects on the location of patents. The size of the tax advantage offered through patent box regimes is found to deter local innovative activities, whereas R&D development conditions tend to attenuate this adverse effect. Our simulations show that, on average, countries imposing such development conditions tend to grant a tax advantage that is slightly greater than optimal from a local R&D impact perspective.

Key Enabling Technologies and Smart Specialization Strategies. European Regional Evidence from Patent Data

Authors: Sandro Montresor and Francesco Quatraro
No. 05/2015

The paper aims at investigating whether Key Enabling Technologies (KETs) can have a role in facilitating regional Smart Specialization Strategies (S3). Drawing on the economic geography approach to S3, we formulate some hypotheses about the impact that KETs-related knowledge can have on the construction of new regional technological advantages (RTAs). By crossing regional data on patent applications, in KETs-mapped classes of the International Patent Classification (IPC), with a number of regional economic indicators, we test these hypotheses on a panel of 26 European countries over the period 1980-2010. KETs show a positive impact on the construction of new RTAs, pointing to a new 'enabling' role for them. KETs also exert a negative moderating role on the RTAs impact of the density of related pre-existing technologies, pointing to the KETs capacity of making the latter less binding in pursuing S3. Overall, the net-impact of KETs is positive, pointing to a new case for plugging KETs in the S3 policy tool-box.

Multinationality, R&D and Productivity Evidence from the top R&D investors worldwide

Authors: Davide Castellani, Sandro Montresor, Torben Schubert and Antonio Vezzani
No. 04/2015

The paper investigates the impact that the multinational scope of firms' activities can have on their productivity. First, we argue that such an impact is both direct and indirect, and that the latter is channelled through higher incentives to invest in R&D. Second, we posit that the composition of these direct and indirect effects is different if multinationality is measured at the intensive margin (higher share of multinational on total activities) rather than at the extensive margin (greater geographical dispersion of multinational activities). Using a large sample of top R&D investors in the world, we propose an econometric model based on an R&D and a productivity equation, which are both allowed to depend on multinationality. With this model we can disentangle the direct and indirect effects of multinationality on productivity appropriately. We find i) a positive direct impact of multinational intensity on productivity, while the geographical dispersion of multinationality is negatively correlated with productivity; ii) multinationality (along both dimensions) has a positive indirect impact through higher investments in R&D; iii) this positive indirect effect is however not large enough to compensate the negative direct one at the extensive margin. Results are largely consistent with a theoretical approach that combines transaction cost theory with an economic analysis of how incentives to invest in R&D depend on multinationality.

Macro-economic Models for R&D and Innovation Policies

Author: Francesco Di Comite and d'Artis Kancs
No. 03/2015

This report compares R&D modelling approaches in four macroeconomic models used by the European Commission for ex-ante policy impact assessment: one Dynamic Stochastic General Equilibrium (DSGE) model - QUEST; one Spatial Computable General Equilibrium (SCGE) model - RHOMOLO; one Computable General Equilibrium (CGE) model - GEM-E3; and one macro-economic model - NEMESIS. The report critically compares particularly those parts of the four models that are relevant to R&D transmission mechanisms and interfaces for implementing policy shocks. Given than R&D investment decisions are inherently dynamic, QUEST appears to be the most suitable model for assessing the impact of R&D and innovation policies over time, as it is the only model with inter-temporal optimisation of economic agents. In order to addess questions related to geographic concentration of innovative activities and spatial knowledge spillovers, RHOMOLO has a comparative advantage, as it is the only one which models regional economies and spatial interactions between them explicitly. Due to its detailed treatment of energy sectors and environmental issues, GEM-E3 appears to be the most suitable model for assessing the impact of innovation in clean energy. For a more detailed modelling of different types of innovation measures, NEMESIS can provide valuable insights thanks to its richness in estimating and accounting for specific channels of innovation. We also identify avenues for future research, which in our view could improve the modelling of R&D and innovation policites both from a conceptual and empirical perspective.

Determinants of R&D offshoring

Author: Gavin Murphy and Iulia Siedschlag
No. 02/2015

We analyse determinants of an enterprise's decision to offshore R&D activities using a novel data set for enterprises in Ireland over the period 2001-2006. Our results suggest that, on average, other things equal, enterprises integrated in international production and innovation networks, and enterprises which used information and communication technologies (ICT) more intensively were more likely to offshore R&D. Furthermore, characteristics of the import source region had an important influence on enterprise offshoring behaviour, with offshoring to regions outside of the advanced European Union's economies being less likely.

R&D profitability: the role of risk and Knightian uncertainty

Author: Sara Amoroso, Pietro Moncada-Paterno-Castello and Antonio Vezzani
No. 01/2015

This paper provides the first empirical attempt of linking firms' profits and investment in R&D revisiting Knight's (1921) distinction between uncertainty and risk. Along with the risky profit-maximizing scenario, identifying a second, off-setting, unpredictable bias that leads to heterogeneous returns to R&D investments is crucial to fully understand the drivers of corporate profits.