In technology intensive sectors such as the automobile industry or anything remotely related to IT, there is an ever-demanding need for flexibility, change and thus innovation. We would expect tremendous amounts of expenditures regarding innovation and R&D to keep competitors at an arm’s length. However, research[1] has shown that our expectations may not always be completely in line with reality. Underinvestment problems concerning innovation and R&D could arise due to two main obstacles specific to technology intensive sectors: asymmetric information between firms and potential investors as well as limited collateral assets such as PP&E could vastly abbreviate entrance of external funds.
Furthermore, research[1] stated that the severity of these appropriability problems tends to be greater for firms at the high-end spectrum of technology intensity. This because these firms focus more on product innovation rather than process innovation in which the details and enhancements of the former are more difficult to conceal to competition than that of the latter.
As stated in research [2], the motivation to innovate for a firm is the difference in profit that a firm is able to earn if it invests in R&D compared to what it would earn if it did not make the investment. Many variables determine this, to name a few: characteristics of the invention, strength of intellectual property protection, the dynamics of R&D, and many more. Economic investigation does not offer us a prognosis about the effects of competition on innovation which covers all different market and technological conditions. This makes the reason for our research all the more interesting.
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Furthermore, we think that for some companies it is necessary to innovate, because otherwise they will fall behind. Analysis[2] shows that some firms are obliged to innovate in order to stay ahead when competitors develop new competitive products. This obligation to innovate may be caused by the fact that products (or services) become quickly outdated, thus giving us a reason to look at product innovation.
Easier said than done, because most firms usually do not differentiate the practice of R&D for process and product innovation.[3] This allows us to research this topic as whether or not products become outdated quickly. We expect this to be the case for products which require frequent software updates, such as Iphone’s for example.
Assisted by the datasets provided, our paper will assess whether these appropriability problems and financing constraints differ from sector to sector and thus how innovation expenditures fluctuate in terms of different economic sectors. To achieve a relation we will use ‘iages’ as our dependent variable and put this in a linear regression with ‘branche_S’ as our independent variable. This topic will be explained in depth in the empirical analysis.
Innovation during a World Crisis
We have discussed the impact of several market characteristics on the innovation expenditures, however there are some other variables (which are not mentioned in the data) that can have a large impact on innovation and the way we work. A pandemic is one of them.
COVID-19 has had a profound effect on the economy and our daily lives. Consumers are now willing to pay more for safety features, which provides the producers a great incentive to start innovating in new business practices and technologies. There is a rise in demand for digital products and content, therefore companies will have to intensify the speed of innovation to meet this new demand.[4]
If we look back at the history of the previous pandemics and their effects, we expect to see a wave of innovation.[5] Pandemics accelerate change by providing an environment for launching and testing new ideas, for example: SARS started the eCommerce revolution.
Not only should the B2C market focus on innovation, the pharmaceutical industry should as well. Pharmaceutical innovation is not a predictable process with uneven and not foreseeable outcomes timing, it is pushed by technology and scientific research. Innovation in this industry is centered around a competition based model, competition boosts innovation and spurs the invention of new and better drugs.
However, in recent years, the pharmaceutical industry is being criticised for its lack of innovation. So the debate around innovation in these times puts forward an interesting question since almost 70% of the European population believes pharmaceutical companies will play a crucial role. “Can innovation be turned on and off by demand, or should we continually work to foster a stronger culture of research and innovation to protect our citizens?”[6]
Despite it being a difficult period for them too, the pharma industry is taking its responsibility and has driven up their innovation expenditures by a significant amount, resulting in already a lot of promising results. Although letting companies compete with each other in terms of innovation doesn’t grant the best outcome. In times like these it is important that information is shared with each other so that no investment is redundant.
