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Profits, R&D and Innovation: a Model and a Test

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In this article we investigate both conceptually and empirically the relationship between three interconnected elements of the Schumpeterian engine of progress: the ability of industries R&D efforts to turn out successful innovations; the ability of innovations to lead to high entrepreneurial profits; the commitment of industries to invest profits in further technological efforts. We build a simultaneous three-equation model with appropriate lags and we test it at industry level for 38 manufacturing and service sectors on eight European countries over two time periods from 1994 to 2006. The results show that the model effectively accounts for the dynamics of European industries. Our main results are that demand and innovation are the key determinants for firm profitability; second that both technology adoption and R&D concur to improve innovative performance; third, that R&D is path dependent and is negatively related to the distance from the frontier. Finally, manufacturing and services show similar behaviour.

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  • Francesco Bogliacino & Mario Pianta, 2010. "Profits, R&D and Innovation: a Model and a Test," JRC Working Papers on Corporate R&D and Innovation 2010-05, Joint Research Centre (Seville site).
    • Handle: RePEc:ipt:wpaper:201005
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    1. Evangelista, Rinaldo & Savona, Maria, 2003. "Innovation, employment and skills in services. Firm and sectoral evidence," Structural Change and Economic Dynamics, Elsevier, vol. 14(4), pages 449-474, December.
    2. Wakelin, Katharine, 2001. "Productivity growth and R&D expenditure in UK manufacturing firms," Research Policy, Elsevier, vol. 30(7), pages 1079-1090, August.
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    1. Matteo Lucchese & Mario Pianta, 2012. "Innovation and Employment in Economic Cycles," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 54(2), pages 341-359, June.
    2. Heredia Pérez, Jorge A. & Geldes, Cristian & Kunc, Martin H. & Flores, Alejandro, 2019. "New approach to the innovation process in emerging economies: The manufacturing sector case in Chile and Peru," Technovation, Elsevier, vol. 79(C), pages 35-55.
    3. Francesco Bogliacino & Mario Pianta, 2016. "The Pavitt Taxonomy, revisited: patterns of innovation in manufacturing and services," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(2), pages 153-180, August.
    4. Nascia, Leopoldo & Pianta, Mario, 2018. "Research and innovation policy in Italy," MPRA Paper 89510, University Library of Munich, Germany.
    5. Dario Guarascio & Mario Pianta & Matteo Lucchese & Francesco Bogliacino, 2015. "Business cycles, technology and exports," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 32(2), pages 167-200, August.
    6. Francesco Bogliacino & Dario Guarascio & Valeria Cirillo, 2015. "Where Does the Surplus Go? Disentangling the Capital-Labor Distributive Conflict," Documentos de Trabajo - Escuela de Economía 013535, Universidad Nacional de Colombia -FCE - CID.
    7. Giorgio Calcagnini & Germana Giombini & Giuseppe Travaglini, 2021. "The Productivity Gap Among Major European Countries, USA and Japan," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 7(1), pages 59-78, March.
    8. Andrea Coveri & Mario Pianta, 2019. "The Structural Dynamics of Income Distribution:Technology, Wages and Profits," Working Papers 1901, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2019.
    9. Francesco Bogliacino & Dario Guarascio & Valeria Cirillo, 2018. "The dynamics of profits and wages: technology, offshoring and demand," Industry and Innovation, Taylor & Francis Journals, vol. 25(8), pages 778-808, September.
    10. Dario Guarascio & Mario Pianta & Francesco Bogliacino, 2017. "Export, R&D and New Products: A Model and a Test on European Industries," Economic Complexity and Evolution, in: Andreas Pyka & Uwe Cantner (ed.), Foundations of Economic Change, pages 393-432, Springer.
    11. Cristiano Antonelli & Claudio Fassio, 2016. "Globalization and the Knowledge-Driven Economy," Economic Development Quarterly, , vol. 30(1), pages 3-14, February.
    12. Boukhatem, Jamel & Djelassi, Mouldi, 2020. "Liquidity risk in the Saudi banking system: Is there any Islamic banking specificity?," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 206-219.
    13. Liu, Xiaohui & Hodgkinson, Ian R. & Chuang, Fu-Mei, 2014. "Foreign competition, domestic knowledge base and innovation activities: Evidence from Chinese high-tech industries," Research Policy, Elsevier, vol. 43(2), pages 414-422.
    14. Bramucci, Alessandro, 2016. "Offshoring, employment and wages," IPE Working Papers 71/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    15. Alessandro Bramucci, 2015. "Offshoring, Employment and Wages Abstract: This paper reviews the debate on the economic effect of the international fragmentation of production also known as ?offshoring? and provides a preliminary i," Working Papers 1506, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2015.
    16. Daniele Pianeselli, 2019. "Upwind sailors. Financial profile of innovative Italian firms during the double-dip recession," Questioni di Economia e Finanza (Occasional Papers) 515, Bank of Italy, Economic Research and International Relations Area.
    17. Haji Ali Beigi, Maryam, 2021. "External knowledge diversity, competition intensity and innovation performance in logistics: Implications for less versus more innovative industries," Ilmenau Economics Discussion Papers 157, Ilmenau University of Technology, Institute of Economics.
    18. Matteo Deleidi & Claudia Fontanari & Santiago J. Gahn, 2022. "Autonomous Demand and Technical Change: Exploring the Kaldor-Verdoorn Law on a Global Level," Working Papers PKWP2212, Post Keynesian Economics Society (PKES).
    19. Bogliacino, Francesco & Cardona, Sebastian Gómez, 2014. "Capabilities and investment in R&D: An analysis on European data," Structural Change and Economic Dynamics, Elsevier, vol. 31(C), pages 101-111.
    20. Teixeira, Aurora A.C. & Queirós, Anabela S.S., 2016. "Economic growth, human capital and structural change: A dynamic panel data analysis," Research Policy, Elsevier, vol. 45(8), pages 1636-1648.
    21. Emanuele Brancati & Raffaele Brancati & Dario Guarascio & Andrea Maresca & Manuel Romagnoli & Antonello Zanfei, 2018. "Firm-level Drivers of Export Performance and External Competitiveness in Italy," European Economy - Discussion Papers 2015 - 087, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    22. Pianta, Mario & Reljic, Jelena, 2021. "Employment quality, economic performance and wages in Europe. Exploring the virtuous circle," MPRA Paper 109797, University Library of Munich, Germany.

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    More about this item

    Keywords

    Profits; R&D; Innovation; System Two Stages Least Squares;
    All these keywords.

    JEL classification:

    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • L8 - Industrial Organization - - Industry Studies: Services
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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