Innovation and business performance - a provisional multi-regional analysis



reflects the commercial success of firms' innovation activity but provides little insight
into the technological complexity or 'quality' of the developments made. Patent
applications as, used by CDM (1998), arguably provides a more robust indicator of
the technological integrity of firms' innovation activity but gives little insight into the
commercial value of any developments. Another measure - innovation intensity or
product changes per employee - used by LR provides a more direct indicator of the
volume of outputs from firms' innovation activity but may reflect both incremental
changes and radical product developments and, like patents, provides little insight into
the commercial success of firms' innovation activity.

The final element of the model describes the relationship between innovation and
business performance, and takes the form of a standard production function
augmented with the innovation indicator. Depending on the performance measure
being considered we also allow for possible links to the firm's market position and
internal resource base. CDM, for example, include the skill composition of the
business which they argue reflects the differences in the efficiency of skilled relative
to unskilled labour (p.123). That is, business performance (BPERFi) is given by:

BPERFi =λ0+λ1INNOVi+λ2MPOSi+λ3RBASEi+τi                     (5)

The emphasis in the CDM and LH studies is on labour productivity (value added per
employee) and its growth.

The complete model to be estimated then consists of the recursive system of equations
(3), (4) and (5).

3. Study Regions and Data Sources

The study regions were chosen to highlight core-periphery differences within the EU,
and to illustrate the impact of different types of RIS (Figures 2 and 3). Bavaria and
Baden-Württemberg are both within the ‘core’ group of the EU regions, with GDP per
capita consistently above the EU average (Table 1). Northern Ireland, the Republic of
Ireland and Scotland had GDP per capita significantly below the EU average in 1990-
1991 but have since experienced very different subsequent growth profiles. In
Northern Ireland, GDP per capita has continued to lag 20-25 per cent below the EU
average while dramatic economic growth rates in the Republic of Ireland have seen
GDP per capita rise sharply. Indeed, by 1996, GDP per capita in the Republic of
Ireland was 96 per cent of the EU average, compared to only 80 per cent in Northern
Ireland (Table 1)
4. Similar patterns are evident in unemployment rates with Baden-
Württemberg and Bavaria having consistently less unemployment than the EU

4. Some care is necessary in interpreting these GDP figures for the Republic of
Ireland due to the importance of profits repatriated by externally-owned
companies. In 1996, this meant that GNP at market prices was only 88.8 per cent
of GDP (Source: CSO, Table 3, NIE Dept of Finance). In 1990 the same figure
was 89.7 per cent. In other words while the GDP figures for the Republic of
Ireland given in Figure 1 overestimate the average level of per capita income in the
Republic of Ireland the growth profile from 1991 onwards does give a realistic
impression of welfare changes.



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