Abstract

This report studies the micro-evidence on innovation activity at firm level in the UK. The main aim of this report is to assess the network effects generated by individual firms’ decisions on intangible innovation activities, such as investing in internal and external RD introduction of innovation outcomes; firm characteristics, behaviour, motivations and cooperation relations; and knowledge spillovers, based on proximity in both geographic and production spaces. This report focusses on the interrelations between the variables populating these four categories, with the objective of achieving a better understanding of the complex set of relations underlying firm’s innovative activities.Innovation activities play an essential role in determining a firm’s innovation output and productivity. Our main research question is to assess whether, and how, these investments in innovation activities and intangibles not only affect the outcomes of the investing firm, the internal effects, but also generate knowledge spillovers affecting the innovation performance of other firms in the economic systems, the external effects. Our objective is to include the estimates of these external effects and to assess their direction and significance along with the other direct relations linking innovative activities to productivity. To this aim, we construct a set of new variables capturing the spillovers taking place along different dimensions of the innovation activities.After the preliminary exploratory findings, our report introduces an econometric model to assess the role played by different innovative activities and their sector and spatial spillovers, in determining both innovation outcomes and productivity. The model is divided into a three-stage estimation procedure:• In the first stage, we introduce four separate estimations, one for each of the intangible innovation activities – namely Research and Development (R&D), training and advertising (for the purposes of innovation).• The second stage utilises the predicted values obtained from the first stage estimation, together with more covariates, for predicting the outcomes of a firm’s three possible innovation outcomes: product, process and organisational innovations.• Finally, in the last stage we use the estimated firm’s joint probabilities of introducing process, product and organisational innovations to estimate their impact on productivity.

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