Francesco Crespi University of “Roma Tre” Mario Pianta University of Urbino ISAE - Monitoring Italy 2007, Rome 18th October 2007 New processes, old patterns. Process vs. product innovation in Europe

Research questions Which are the mechanisms leading to current innovative performance in European Industries and in Italy? How do different innovative strategies affect the direction of technological change in terms of new products or processes? Is there any peculiar innovation pattern in Italy? Is there any systematic difference between manufacturing and service sectors in the way different technological strategies affect innovation?

Key concepts I The Schumpeterian insight on the variety of innovation and business strategies is the starting point of this investigation (Schumpeter, 1934); A conceptual distinction can be made between product and process innovations (Scherer, 1991; Cohen and Klepper 1994; Pianta, 2001; Antonucci and Pianta, 2002; Edquist, Hommen and McKelvey, 2001); Existence of specific forms of technological change, in specific national systems of innovation (Lundvall, 1992); Sectoral dimension as the most appropriate level of investigation, as the technological regime in each industry affects the opportunities for innovation and the strategies of firms (Malerba, 2002, 2004);

Key concepts II Pianta (2001) has identified the major distinction between a strategy of technological competitiveness, and a strategy of active price competitiveness. A strategy of technological competitiveness is associated to a dominance of product innovation, requires substantial internal innovative efforts (research, development, design, as well as new investment), a strong inventive activity reflected in patenting, a stream of new products, with the objective of increasing market shares and opening up new markets. A strategy of active price competitiveness, rooted in process innovation, focuses on increased efficiency achieved through innovation in cost-saving processes, introduction of new machinery, larger markets associated to a decrease in price, with a key relevance of the objective of increasing production flexibility.

Key concepts III The distinction between a strategy of technological competitiveness, and a strategy of active price competitiveness has been applied to cross-sectional studies on:  The determinants of innovation: Crespi and Pianta (2007), Pianta and Vaona (2007);  The impact of innovation on Employment: Antonucci and Pianta (2001), Mastrostefano and Pianta (2004);  The impact of innovation on productivity: Crespi and Pianta (2008 a,b), Vaona and Pianta (2008);  The impact of innovation on distribution: Pianta and Tancioni (2008).

Improvements with respect to previous work New original database containing data for CIS2-3-4; Possibility of testing separate models for the determinants of product and process innovation; Possibility of tackling the issue of causal relationships between variables; Possibility of analysing country-case studies.

Three Models General case : Explaining the relationships between innovation inputs and strategies and general innovative performance, with the two mechanisms below. The model for process innovation : explaining process innovation through investment in new capital equipment and strategies oriented to cost competitiveness. The model for product innovation : explaining product innovation through investment in research activities and strategies for technological competitiveness.

INijt = αMAijt+ βRDijt + µMKijt + γLBijt+λIEij +e ijt IN the percentage of firms that have introduced product or process innovations as indicator of the overall innovation activities. MA the percentage of firms acquiring new machinery and equipments linked to innovation; RD the percentage of firms with R&D activities; MK the percentage of firms aiming at opening up new markets or increasing market share; LB the percentage of firms aiming at reducing labour costs; IE individual fixed effect; e error term; t time, i sectors, j countries. THE GENERAL MODEL

THE MODEL FOR PROCESS INNOVATION PCijt = αCOijt+ µMAijt + γLBijt+λIEij +e ijt PC is the percentage of firms that have introduced process innovations; CO the percentage of firms with cooperation arrangements on innovation; MA the percentage of firms acquiring new machinery and equipments linked to innovation; LB the percentage of firms aiming at reducing labour costs; IE individual fixed effect; e error term; t time, i sectors, j countries.

THE MODEL FOR PRODUCT INNOVATION PDijt = αCOijt+ βRDijt + µMKijt + UNijt +FSijt +λIEij +eijt PD the percentage of firms that have introduced product innovations; CO the percentage of firms with cooperation arrangements on innovation; RD the percentage of firms with R&D activities; MK the percentage of firms aiming at opening up new markets or increasing market share; UN the percentage of firms acquiring information from university; FS the average firm size measured as the average number of employee per firm; IE individual fixed effect; e error term; t time, i sectors, j countries.

Data: Innovation Survey CIS 2( ), CIS3 ( ), CIS 4 ( ) 22 manuf. sectors, 17 service sectors 8 European countries: France, Germany, Italy, the Netherlands, Portugal, the United Kingdom, Spain, Norway

Econometric methodology Hausman Test to check the relevance of individual effects; Fixed Effects to control for unobserved heterogeneity; Robustness checks for endogeneity problems: use of GMM estimator.

Results for the general model Both strategies of technological and price competitiveness appear to play a role in shaping industries' share of innovative firms; Different results when the general model is applied to explain product and process innovation:  R&D and a market oriented strategies are more relevant for product innovation;  The acquisition of new machinery and the search for lower labour costs are more important for process innovation. In Italy the acquisition of new machinery and the objective or reducing labour costs represent key innovative factors; Need for more specific models.

Main results and conclusions The distinction between the strategies of technological competitiveness and active price competitiveness helps to interpret the different mechanisms leading to product and process innovation; Such a distinction helps to highlight some features of the Italian Innovation System:  Italy fits very well with the model of active price competitiveness Limited difference between manufacturing and service industries in the operation of the two mechanisms; The main results are robust to econometric tests confirming the identification of causal relationships among variables.

Prospects for future research Complementarity test between product and process innovation; Inclusion of variables on Innovation Expenditures; Inclusion of demand variables in order to control for the pulling effect of demand on innovation; More in depth analysis of country cases; More focus on specific groups of sectors following Pavitt’s taxonomy. Use of the database for analysing the impact of innovation on performances: growth, productivity, employment, distribution…