Microfirms and innovation in the service sector
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Microfirms and innovation in the service sector David B. Audretsch & Alexander S. Kritikos & Alexander Schiersch
Accepted: 27 May 2020 # The Author(s) 2020
Abstract In the context of microfirms, this paper analyzes whether the link between the three aspects involving innovative activities—R&D, innovative output, and productivity—hold for knowledge-intensive services. With especially high start-up rates and the majority of employees in microfirms, knowledge-intensive services (KIS) have a starkly different profile from manufacturing. Results from our structural models indicate that KIS firms benefit from innovation activities through increased labor productivity with highly skilled employees being similarly important compared to R&D for creating innovation output in microfirms. Moreover, the firm size advantage of large firms found for manufacturing almost disappears in KIS, with start-ups D. B. Audretsch Institute for Development Strategies at Indiana University Bloomington, Bloomington, IN, USA A. S. Kritikos : A. Schiersch German Institute for Economic Research (DIW Berlin), Berlin, Germany
A. Schiersch e-mail: [email protected] A. S. Kritikos University of Potsdam, Potsdam, Germany A. S. Kritikos IZA, Bonn, Germany A. S. Kritikos (*) IAB, Nuremberg, Germany e-mail: [email protected]
and young firms having a higher probability of initiating innovation activities and of successfully turning knowledge into innovation output than mature firms. Keywords Microfirms . MSMEs . R&D . Service sector . Innovation . Productivity JEL classification L25 . L26 . L60 . L80 . O31 . O33
1 Introduction A robust literature confirms that firm size is positively associated with the decision to invest in R&D (see, inter alia, Hall et al. 2009, Baumann and Kritikos 2016). Yet, the literature primarily studies manufacturing firms, with knowledge-intensive services (KIS) that have a large innovation potential within the service sector,1 being analyzed to a lower extent. However, firms in KIS industries are playing an increasingly important role, as reflected by their start-up rates (Fritsch et al. 2015; Konon et al. 2018) and job growth when compared to manufacturing. Moreover, while the majority of employees in the manufacturing sector works in large firms, the opposite is true for KIS industries. As such, it is important to better understand how microfirms—in comparison with larger and mature firms—in the KIS 1 This is not to say that other parts of the service sector have no innovation potential. See, for instance, Ordanini and Parasuraman (2011) who analyze innovation outcomes in other areas of the service sector.
D. B. Audretsch et al.
industries engage in and benefit from innovation activities. Empirical research on whether firms in KIS industries innovate and are able to turn innovative products and services into higher productivity typically concentrates on firms with at least 10, if not 20, employees (see, e.g., Lööf and Heshmati 2006). The nascent research on the innovative activities of microfirms in the KIS industries,
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