Survey of the literature on innovation and economic performance

Despite very strong differences in their treatment of technological change in economic theory, both the neoclassical and the more Schumpetarian (and evolutionary) economic approaches often assume that market selection rewards the most innovative firms. However, despite such strong assumptions, empirical evidence on whether innovative firms perform better than non-innovative firms remains inconclusive. If innovators do not grow more, does this imply that market selection fails? And does the different impact of innovation on industrial performance (measured by firm growth and profitability) and financial performance (measured by market value and stock returns) signal differences in how industrial and financial markets react to firm level efforts around innovation? This discussion paper reviews the literature on the interaction between innovation and economic/financial performance, and outlines the way that work within FINNOV Work Package 2 (SELECTION), Co-Evolution of Industry Dynamics and Financial Dynamics, will contribute to better understanding this interaction

Stock Price Volatility and Patent Citation Dynamics: the case of the pharmaceutical industry

Recent finance literature highlights the role of technological change in increasing firm specific and aggregate stock price volatility (Campbell et al. 2001, Shiller 2000, Pastor and Veronesi 2005). Yet innovation data is not used in these analyses, leaving the direct relationship between innovation and volatility untested. Our aim is to investigate more closely the relationship between stock price volatility and innovation using firm level patent citation data. The analysis builds on the empirical work by Mazzucato (2002; 2003) where it is found that stock price volatility is highest during periods in the industry life-cycle when innovation is the most '˜competence-destroying'. Here we ask whether firms which invest more in innovation (more R&D and more patents) and/or which have '˜more important' innovations (patents with more citations) experience more volatility. We focus the analysis on firms in the pharmaceutical and biotechnology industries between 1974 and 1999. Results suggest that there is a positive and significant relationship between idiosyncratic risk, R&D intensity and the various patent related measures. Preliminary support is also found for the '˜rational bubble' hypothesis linking both the level and volatility of stock prices to innovation

Indices that capture creative destruction: questions and implications

The paper argues that micro and macro economists interested in the dynamics of creative destruction can gain important insights by using indices that capture the effect of innovation on the relative position of firms. This is due to the uneven and 'destructive' effect that radical innovation has on firm rankings. One such index is the market share instability index. On the financial side, the excess volatility of stock prices and idiosyncratic risk also appear to capture the uneven dynamics of creative destruction. The paper concludes by considering the implications of these propositions for economy-wide growth during periods of radical innovation (e.g. GPTs)

High growth firms, innovation and competition: the case of the US pharmaceutical industry

Innovation is key to economic growth. But firms, across sectors and regions, are highly skewed in their ability to engage with innovation, and even more skewed in their ability to translate investments in innovation into higher growth. While there was initially much attention on 'small' firms (SMEs), due to the assumption that they are more entrepreneurial and innovative, recent evidence that small firms contribute less to innovation and employment than commonly believed, has caused attention to move towards 'high growth innovative' firms (HGF). There is, however, the risk that this newly emphasized category of firms is also being 'hyped up' given how short a time period 'high growth' lasts, and how 'high growth' appears to only be important when combined with other firm specific conditions. Our paper is dedicated to exploring under what conditions high growth firms matter, in a dynamic setting over the history of the US pharmaceutical industry from 1963-2002. Following Coad and Rao (2008), we use quantile regression techniques to study the R&D-growth relationship in high growth firms compared to low growth firms. We find that the relationship is influenced by a mix of firm level characteristics including R&D intensity, R&D scale and venture capital funding. But more importantly we find that this relationship is sensitive to the changing competitive environment over the industry's history

Innovation and Idiosyncratic Risk

The paper studies whether “idiosyncratic riskâ€, i.e. the degree to which firm and industry specific returns are more volatile than aggregate market returns, is higher in innovative industries which are characterized by more risk and uncertainty. Volatility is studied both at the industry level (for 34 different industries from 1974-2003) and at the firm level (for 5 industries with different levels of innovativeness: biotech, pharmaceuticals, computers, textile, agriculture). Findings are mixed. A relationship between innovation and volatility emerges most strongly with firm level data, when firm dimension is accounted for, and when time varying volatility is explicitly studied via GARCH analysis. The latter highlights the distinctive behavior of returns during the course of the industry life-cycle.idiosyncratic risk, volatility, innovation, industry life cycle

The Dynamics of Knowledge Accumulation, Regulation and Appropriability in the Pharma-Biotech Sector: Policy Issues

Discussion of reasons for regulation in the pharmaceutical industr

From market-fixing to market-creating: a new framework for economic policy

Many countries are pursuing innovation-led ‘smart’ growth, which requires certain types of long-run strategic investments. This paper argues that such investments require public policies that aim to create markets, rather than just ‘fixing’ market failures (or system failures). Such ‘mission-oriented’ investments have led to men walking on the moon (which created spillovers across the economy) and are today catalyzing investments to tackle climate change around the world. In the two above mentioned cases, public agencies not only ‘de-risked’ the private sector, but also led the way in terms of shaping and creating new technological opportunities and market landscapes. Only then was the private sector willing to invest. This paper considers four key questions that arise from a ‘market creating’ framework: (1) decision-making on the direction of change; (2) the nature of (public and private) organizations that can welcome the underlying uncertainty and discovery process; (3) the evaluation of mission oriented and market-creation policies; and (4) the ways in which both risks and rewards can be shared so that ‘smart’ innovation-led growth can also result in ‘inclusive’ growth

The BBC as market shaper and creator

Accusations that the BBC is ‘crowding out’ the broadcasting market are flawed. We need a new framework to assess its contribution to industry and society within the UK and abroad

The Future of the BBC: the BBC as Market Shaper and Creator

Mariana Mazzucato is a Professor in the Economics of Innovation at the Science Policy Research Unit (SPRU) of the University of Sussex, and recently became a member of Labour leader Jeremy Corbyn’s new economic advisory committee. Here she tackles accusations that the BBC is ‘crowding out’ the broadcasting market in the UK, and offers suggestions as to how to assess the BBC’s potential to create new market landscapes

The green entrepreneurial state

The paper considers the direct, strategic investments that have been made by international public institutions creating and shaping (not only fixing) green technology. It builds on the key themes found in the The Entrepreneurial State: debunking public vs. private sector myths