Introduction: I would like to first thank you for attending my presentation. This is my first presentation of this research, so please do not hesitate to interrupt and ask questions. Name From? New Mexico in the States. What doing now? I am currently a PhD student in the innovation and environmental sciences department.
I asked myself whether we knew SMEs could benefit from cyclical downturns, and recessions, by innovating. I am to investigate some typical macro-economic variable effect on innovations in SME in the Netherlands. (Go over results)
Schumpeter 1934 and Schmookler 1966 created the terminology of supply push and pull of technology innovations in an economy. While we accept that were technological opportunities, knowledge resources, etc, are present, innovations do rather well, but this is far from the whole story as Geroski and Gregg would say. Schumpeter creative destruction from new and small firms. Schmookler says that demand is important, but not just demand but changing competition structures that firms are influenced by is important. To illustrate this, Mowery and Rosenberg in 1979 say we should demonstrate that demand conditions change over time. So far very little research on changing demand structures has been done with SME innovation research. Heger (2004) asked whether the decision to innovate in SME manufacturing firms was pro- or counter-cyclical but finds various evidence of both. Koellinger & Thurik (2009) research the business startup rates during the business cycle and find that typically, new firms are created more before a recession is over and only wane well before a recession occurs. Importantly, we can say demand can have either pro- or counter- or no effect. But what are the mechanisms behind the ‘demand’ effect? We now will illustrate the possible effects of the macro-economy on the business cycle.
First I look into the general effects on SME innovation from GDP growth. Why GDP growth? Because it is a catch-all measurement of value added for a national economy. It represents the growth or lack of growth in a simple figure that has the longest reaching capabilities. Second I look into different components of macro-economy on innovation. Why others? Because GDP is a catch-all it may mask some of the effects from different markets such as labor, financial, etc. Need to test these mechanisms as well. Why not others? From theory we know demand influences innovation but do not know the timing here. The most reasonable and feasible measureable variables are consumption, unemployment and interest rates.
Innovation as luxury Geroski and Gregg (1997) Limited ability of markets to absorb new products and services. Consumer spending power. Limited window of opportunity for innovations to be introduced successfully before imitators. Expectation of SME managers on future consumer preference and power, moves pro-cyclically with macro-economy. Recession lowers power and scope, so managers choose to launch innovations when economy recovers. For process innovations, more growth prospects urge more investments into new efficiency gains and processes. Opportunity for business expansion creates opportunity for new processes. Pitstop – One sum operation; opportunity cost as innovation becomes less costly, more innovation during recession. Strategic process – highly innovative firms will choose to innovate constantly, despite the macroeconomic conditions. The timeframe may be longer than the cycle. Sunk costs into innovative projects.
Repeat innovation as luxury and opportunity to invest. Access to labor – Product - employees matter, especially for SMEs. labor market becomes more competitive, attract new employees. Process - innovations, the need to gain efficiency when you are unable to attract new employees becomes crucial to survival. We expect then that as the labor market competitiveness increases, the macro-economy slows, the need for efficiency gains increases; hence a counter-cyclical attachment as labor becomes cheaper Constrained Financing: relatively small balance sheets and riskiness increases interest rates that banks or financier ask of them. However, this may not be true for crisis and recession;
Pooled cross-section approach excludes longitudinal study. Response rates of 50 – 60%. Read slide
The definitions of product innovations are radical, or new to the industry, not imitation because they only follow new introductions. We use logistic regressions because of the binary response variable. Importantly, we correct for timeframe of the dependent variable by averaging the macroeconomic indicator over the past three years. We tried lags but have no evidence of anything. It certainly seems possible that when asked about the innovation activity over the past three years then answers are averaged, hence, the effects of the business cycle will be averaged.
Here we control for some typical SME innovation characteristics like the use of universities, research centers, outside people etc. Also, between firms their may be some formal or informal contracts to assist in innovations. Strategic partnerships etc. Measure innovation intensity we controlled for the number of employees dedicated to innovation. An important control here is the size. This likely captures many aspects of innovativeness for SMEs that are not included in the survey. For example financing, resources, business structure, culture etc. Because the effect of firm size is not linear, one additional employee means more for a very small operation than to a larger company, we transformed natural log. Survival bias on the one hand innovative firms are more likely to survive because they have better capabilities, on the other hand innovative firms reveal more risky behavior and are thus more likely to fail => since we do not know the net result of these two mechanisms, we cannot say much sensible about the effect of the survival bias on the (mis) interpretation of our cross-sectional results.
Looking at the macroeconomic indicators: 2000 to 2002 – stagnation and economic decline of 4.4% with unemployment as high as 6.3% due to slowing trade, the Dot.com burst, and the September 11 th attacks. 2008-2009 growth drops to -4.9% and unemployment up to 5%. Extremely low interest rates and steep decline unlike 2000 -2002.
Closely related to the real GDP of the economy.
Steady decrease from 5.42% to 3.37%; economic growth from 2006 to 2007 but rates lowered in 2009.
At first glance, in 2006 the year of highest growth the most innovations. In 2002, 2008, and 2009 the lowest. High percentage but decreasing process innovations. Interestingly, both show upswing during last year.
Logistic Regression Analysis for product innovations at the aggregate-level Note the pro-cyclical for GDP, positive effects; evidence of strategic innovation for man/trade.
With components there is positive for DC and UN supporting the luxury and access to employs. Negative means that the financing conditions have negative effect.
Product and service innovations are pro-cyclical; innovation as a strategic process No evidence of strategic process for highly innovative service firms. Opportunity to invest as economy is growing. For example, buying a new computer is more likely when economy is growing.
Innovation as Luxury (although not a aggregate but in quartiles); Evidence of more access to skilled labor, evidence that interest rates do indicate innovations. Process; opportunity to invest and cheap labor replacing process over the cycle. This ultimately means that when we say “demand matters” its what competition structure that you are talking about for what innovation; Schmookler. This does not support the general thesis that SMEs are bringing new innovations more during recessions, generally, but may agree when only highly innovative industries are included.
Again, thank you for the opportunity to discuss this research and please, if you have any questions and comments.