On the trail of the intangible: a theoretical and empirical investigation of innovations and patents in Germany in the years 2006-2019

Objective: We want to better understand what incentives firms to pursue innovations. For this purpose, we set up a new intertemporal principal-agent model. We then proceed to empirically assess the determinants of innovation activities unfolded by German firms between 2006 and 2019 and to also look at the causal factors – related to innovation activities – for the occurrence of patent registration in Germany. Research Design & Methods: In the theoretical part, we make use of intertemporal optimization tools based on the principal-agent model (PAM). In the empirical part, we apply the so-called DuPont decomposition and non-linear regression techniques. Findings: It seems that investment activities in conjunction with product innovations are the major determinants of innovation intensity. The latter (and other innovation related variables) in turn, is (are) responsible for the dynamics of patent registration in Germany. Implications & Recommendations: Our results highlight the importance of smart reward systems in R&D departments in order to incentivize innovative activities. Our findings also point at the significance of a patent regulation friendly to the innovator. Contribution & Value Added: Our findings deliver a new foundation of innovation activities based on an intertemporal principal agent approach which is confirmed by the empirical facts in the case of Germany.