Looking Around: The Smart Way of Italian SMEs to Innovate

Abstract

In this paper we assess the relevance of both knowledge creation and diffusion processes in affecting Italian SMEs’ propensity to innovate. In doing so a knowledge production function (KPF) is estimated for a representative sample of small and medium manufacturing firms over the period 1998–2003. To account for endogeneity of R&D effort in the KPF, we estimate a Heckman selection model on R&D decisions. The KPF is estimated for three different samples of firms using a standard probit where the probability that SMEs will innovate depends upon intramural R&D effort, regional and industrial spillovers and a vector of interaction and control variables. The main results obtained are the following: first, being located in the South, although does not affect the firm’s choice of starting R&D projects, affects negatively the amount of R&D investments. Second, the probability to innovate is positively related to sectoral spillovers and the magnitude of such impact is decreasing in firms’ size. Third, knowledge diffusion via geographical proximity enhances the probability of the recipient firm to innovate only if it has an appropriate endowment of human capital.