Are large innovative firms more efficient?

One of the characteristics of the Spanish economy is the high percentage of small and medium-sized firms. Size is one of the factors that condition the managerial organization of the firm and their efficiency and productivity. On the other hand, it is a well-established connection between productivity and innovative activities and size has been found a highly significant variable in explaining differences in firm’s innovative activities and the returns of R&D expenditures. Our objective is to analyze if there are differences in the innovative activities and the returns of R&D expenditure between small and large Spanish manufacturing firms. We analyse the performance of the small and medium-sized manufacturing firms during the period 2004–2009. We centre our analysis in the relationship between innovative activity and firm size. We analyze, firstly, if innovative firms are more technical efficiency than not innovative firms; secondly, if the innovative activities (process or product innovations) are different depending on the firm’s size; and finally if large firms obtain more returns from their investment on R&D. We also take into account other variables that could affect the relationship between productivity and innovative activities: industrial sector, market structure, or firms’ financial conditions.We follow the stochastic frontier approach, which allows us to measure the technical inefficiency of a production unit as the ratio of a firm’s production over its optimal level.If a firm produces this optimal level of output, it is technically efficient and it will be on the frontier. If a firm produces less than is technically feasible, given both, the technology and a level of inputs, it is inefficient and we can measure the degree of firms’ inefficiency and simultaneously which are the inefficiency determinants. We use a micro panel data set to simultaneously estimate a stochastic frontier production function and the inefficiency determinants using an unbalanced panel of manufacturing firms. Our preliminary results show that innovative firms are more efficient than non-innovative firms; we obtain that size is a significant determinant to the decision to undertake innovative activities and that large firms tend to be more innovative but obtain lower returns to R&D expenditures.