Output Additionality of Public Support for Innovation: Evidence for Irish Manufacturing Plants

Abstract

Public support for private R&D and innovation is part of most national and regional innovation support regimes. In this article, we estimate the effect of public innovation support on innovation outputs in Ireland and Northern Ireland. Three dimensions of output additionality are considered: extensive additionality, in which public support encourages a larger proportion of the population of firms to innovate; improved product additionality, in which there is an increase in the average importance of incremental innovation; new product additionality, in which there is an increase in the average importance of more radical innovation. Using an instrumental variable approach, our results are generally positive, with public support for innovation having positive, and generally significant, extensive, improved and new product additionality effects. These results hold both for all plants and indigenously owned plants, a specific target of policy in both jurisdictions. The suggestion is that grant aid to firms can be effective in both encouraging firms to initiate new innovation and improve the quality and sophistication of their innovation activity. Our results also emphasize the importance for innovation of in-house R&D, supply-chain linkages, skill levels and capital investment, all of which may be the focus of complementary policy initiatives.

Acknowledgements

The authors acknowledge the valuable comments received from delegates at the 5th British/Irish and Israeli Regional Science workshop—pushing forward the Frontiers, and the Higher Education Authority, Ireland for providing financial support for this research.

Notes

In the UK, for example, 29% of the innovation budget comprises subsidy or grant schemes compared with 22% in the Netherlands, 25% in France, 47% in Finland and 42% in the US. New Zealand is a marked exception with almost no innovation grants and innovation support offered primarily through fiscal measures (EU, 2003, Table 5).

For a more general discussion of the market failure justification for innovation policy, see, for example, Metcalfe (1997).

This clearly depends on the extent of additionality in publicly financed, private R&D (Griliches, 1995). Interestingly, for the US, Mamuneas and Nadiri (1996) identify some differences between sectors in this respect, finding a substitute relationship in low-tech industries and a weak substitute relationship in high-tech sectors. Thus, there is evidence of some crowding out, particularly in the low-tech sectors (see also Goolsbee, 1998; David et al., 2000).

Luukkonen (2000) also indicates that participation in the collaborative EU Framework programmes by Finnish firms laid the basis for future R&D by contributing to firms' involvement and influence in standards negotiations, viz., participation “provided background information for standardisation negotiations … [and] … facilitated their contacts, since the experts of the companies could get better acquainted with each other, which again helped their interactions. It was a question of an intangible impact” (p. 716)

Sakakibara (1997, p. 462), for example, indicates that the managers of publicly supported collaborative R&D projects in Japan rated the researcher training as the most important benefit which their companies derived from their project. Somewhat surprisingly, this “intangible” benefit from collaborative R&D was seen as more important than “increase in the awareness of R&D in general”, “breakthrough in a critical technology” and “accelerated development of the technology”.

More specific evidence of the complementarity of publicly supported R&D and firms' other internally funded R&D activity comes from Ballesteros and Rico (2001). They conduct an econometric analysis of the Spanish “Concerted Projects” support scheme and demonstrate that Spanish firms which were more R&D intensive were also more likely to make use of government funding for collaborative university–business R&D projects.

Powell (1998), for example, points out, in the context of R&D collaboration in technology-intensive industries, that “a firm's portfolio of collaborations is both a resource and a signal to markets, as well as to other potential partners, of the quality of the firm's activities and product” (p. 231).

Irwin and Klenow (1996), for example, examined the Sematech collaborative R&D facility, set up by the US semiconductor industry in 1987 with substantial financial support from government. They compared the R&D intensity of Sematech member and non-member companies and concluded that participation in the Sematech collaboration reduced members' R&D spending by 9%.

For a detailed comparison see O'Malley and Roper (2003).

GDP is conventionally used in making international comparisons. However, in the case of the Republic of Ireland, GNP is generally regarded as more meaningful, since it excludes the substantial profits of foreign multinational companies that are withdrawn from the country.

UK and EU data from OECD Historical Statistics 1970–1999.

Although see Lenihan et al. (2005) on the ambiguity of objectives of much Irish industrial policy and consequent difficulties in ex post evaluation.

Cogan and McDevitt (2000, p. 11) describe EU involvement in R&D in Ireland as having been of “critical importance” to Irish S&T policy. They describe three benefits of the EU involvement. First, they cite the organizational and institutional learning it engendered. They state, rather philosophically, that Ireland missed out on the industrial revolution and somehow expected to catch up with other nations by using imported innovation and without building up a domestic innovation and R&D capability. Secondly, the EU structural funds brought with it a disciplined evaluation of policy, something which was missing from policy prior to this. Thirdly, rather than concentrating on research that had little bearing on Irish industry, the structural funds were geared towards stimulating a self-sustaining capacity for innovation.

See Roper (1998) on Compete (which is a government scheme) and Roper (2001) for a more detailed overview of the innovation support regime in Northern Ireland.

Following some institutional changes in 1998, the Research and Technical Innovation (RTI) scheme was implemented through Enterprise Ireland, the agency specifically charged with developing the capacity of indigenous Irish firms.

This is consistent with the broad empirical evidence reviewed by Griliches (1995).

More specifically, we construct intensity scores for each plant's knowledge sourcing through supply-chain and non-supply-chain collaboration based on the number of types of organization with which the firm is undertaking collaborative innovation activity. For example, we identify five types of potential supply-chain partners (customers, suppliers, competitors, other group companies and joint ventures): plants undertaking innovation collaboration with three of these types of partner “score” 60%; plants collaborating with all five types of partner score 100%.

Details of each wave of the survey can be found in Roper et al. (1996), Roper and Hewitt-Dundas (1998), Roper and Anderson (2000) and Roper et al. (2004).

Average annual grant expenditure in Northern Ireland over the 1994–2001 period was [euro]22.6 m compared with an average of [euro]28.31 in Ireland. Manufacturing employment in Ireland in 2001 was 268,000 and in Northern Ireland was 100,186. Sources: Figure 1, Department of Trade, Enterprise and Investment, Belfast; Central Statistical Office, Dublin.

Full details of these models for indigenously owned firms are available from the authors on request.