Explaining the decisions to carry out product and process innovations: the Spanish case

We investigate the determinants of innovation activity making a distinction between product and process innovations. We analyse a pseudo production function of innovations where among the explanatory variables, special attention is paid to firm and market characteristics. The study is applied to a large sample (approximatedly 1000 firms) of Spanish manufacturing firms during the period 1990-1993. There are important implications arising from the empirical results: i) Product and process innovations are intimately related independently of the model used in the estimation. ii) The control by unobserved firm effects as the ability and experience of manager is so important as to affect the conclusions on the managerial decissions about which type of innovation develop. iii) Given the feedback effects amongst innovation decisions and other factors determining them, it is also very important to consider a version of the model that allows correlation among those unobserved effects and explanatory variables. iv) The probability to innovate is higher in capital intensive firms and in firms with export activities. v) Market competition encourages the decision to innovate up to threshold. vi) The past firm experience and the managerial quality play a significant role in the probability to innovate. vii) Product and process innovation decisions are complementary.