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«Der Open-Access-Publikationsserver der ZBW – Leibniz-Informationszentrum Wirtschaft The Open Access Publication Server of the ZBW – Leibniz ...»

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Der Open-Access-Publikationsserver der ZBW – Leibniz-Informationszentrum Wirtschaft

The Open Access Publication Server of the ZBW – Leibniz Information Centre for Economics

Cequera, Daniel; Klein, Gordon J.

Working Paper

Endogenous Firm Heterogeneity, ICT

and R&D Incentives

ZEW Discussion Papers, No. 08-126

Provided in cooperation with:

Zentrum für Europäische Wirtschaftsforschung (ZEW)

Suggested citation: Cequera, Daniel; Klein, Gordon J. (2008) : Endogenous Firm Heterogeneity, ICT and R&D Incentives, ZEW Discussion Papers, No. 08-126, http:// hdl.handle.net/10419/27609

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zbw Leibniz-Informationszentrum Wirtschaft Leibniz Information Centre for Economics Discussion Paper No. 08-126 Endogenous Firm Heterogeneity, ICT and R&D Incentives Daniel Cerquera and Gordon J. Klein Discussion Paper No. 08-126 Endogenous Firm Heterogeneity, ICT and R&D Incentives Daniel Cerquera and Gordon J. Klein

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Non-technical summary The economic literature has provided robust evidence indicating that the adoption of information and communication technologies (ICT) has positively affected productivity at aggregate and firm levels. Given the rapid technological progress observed in the production of ICT and the uncertainty and costs associated with their implementation, it is not surprising that the benefits of ICT are not equally distributed among adopting firms. As some firms reap those benefits sooner and better than others, the adoption of ICT represents a source of firm heterogeneity that might generate competitive advantages and affect firm strategies.

This paper studies how the adoption of ICT affects firm heterogeneity and how such (ICT induced) heterogeneity impacts R&D incentives. The analysis is based on two established results from the empirical literature on the analysis of productivity at the firm level. First, there exist high and persistent productivity differences within industries (i.e. firm heterogeneity) and those differences explain the process of creative destruction: more productive firms grow faster, exhibit a higher probability of survival and displace low productivity firms.

Second, the adoption of ICT has a significant, positive impact on productivity at the firm level. This paper attempts to uncover the role of ICT in generating firm heterogeneity and thereby contributing to the process of creative destruction.

The analysis is carried out in two steps. In the first step, the impact of ICT on firm heterogeneity is estimated. Following existing literature, firm heterogeneity is defined as the deviation of a firm’s productivity level from a given industry benchmark. Given that firm heterogeneity explains the productivity driven selection mechanism in which less productive firms are displaced by their more productive counterparts, the second stage estimates the impact of ICT induced heterogeneity on firms’ R&D incentives, as strategies that determine firm survival.

The results show that ICT has a robust, positive impact on firm heterogeneity only when ICT is used intensively and jointly with specific ICT applications. That is, through their use of ICT, firms are able to differentiate themselves (positively and negatively) with respect to other firms belonging to the same economic sector. The analysis also shows that ICT induced heterogeneity is not innocuous: it has a significant and positive, albeit small, impact on the incentives to innovate. In particular, ICT induced heterogeneity is shown to positively affect the decision to invest in R&D personnel.

Das Wichtigste in K¨ rze u

–  –  –

Firm heterogeneity explains the productivity driven selection mechanism that determines aggregate productivity growth within industries. This paper empirically demonstrates that ICT has a robust impact on firm heterogeneity only when ICT is used intensively and jointly with specific ICT applications. ICT induced heterogeneity is shown to have a positive impact on the decision to invest in R&D personnel.





Keywords: Firm Heterogeneity, Information and Communication Technologies, Creative Destruction, R&D Incentives, Firm Level Data.

JEL Classification: D21, L25, O32.

∗ We would like to thank Irene Bertschek for valuable comments. We also gratefully acknowledge the comments and suggestions from participants at the 30th Hohenheimer Oberseminar at the University of Nuremberg 2008, the EU KLEMS Final Conference at the Universtiy of Groningen 2008 and the 35th Conference of the European Association of Research in Industrial Economics (EARIE), Toulouse 2008. All errors are ours.

† cerquera@zew.de. Centre for European Economic Research (ZEW), Mannheim, Germany. Research Group Information and Communication Technologies. Corresponding author.

‡ klein@zew.de. Centre for European Economic Research (ZEW), Mannheim, Germany. Research Group Information and Communication Technologies.

1 Introduction

The economic literature has provided robust evidence indicating that the adoption of information and communication technologies (ICT) has positively affected productivity at aggregate and firm levels.1 Given the rapid technological progress observed in the production of ICT and the uncertainty and costs associated with their implementation, it is not surprising that the benefits of ICT are not equally distributed among adopting firms. As some firms reap those benefits sooner and better than others, the adoption of ICT represents a source of firm heterogeneity that might generate competitive advantages, affect firm strategies and/or influence aggregate productivity growth.2 This paper empirically studies how the adoption of ICT affects firm heterogeneity and how such (ICT induced) heterogeneity impacts R&D incentives. The analysis is based on two established results from the empirical literature on the analysis of productivity at the firm level. The first result shows that there exist high and persistent firm level productivity differences within industries (i.e. firm heterogeneity).3 Moreover, those differences explain the process of creative destruction where more productive firms grow faster, exhibit a higher probability of survival and displace low productivity firms.4 The second result in the literature has documented how the adoption of ICT has a significant, positive impact on productivity at the firm level.5 Although the latter suggests that ICT impacts firm heterogeneity, the main contribution of this paper is to account for the role of ICT on specific measures of firm heterogeneity.

If the adoption of ICT is expected to affect firm heterogeneity, and firm heterogeneity in turn explains the process of creative destruction within industries, then the estimated ICT induced heterogeneity should be also related to additional firm strategies relevant for firm survival. The present analysis empirically assess the impact of the recovered ICT induced heterogeneity on one of such strategies: firm specific R&D incentives. Even though firm level competitiveness and survival depends on a wide range of factors, it has been widely recognized that innovative efforts are at the core of successful firm level strategies to tackle competition.6 In the literature, R&D incentives are viewed as strategies that allow firms to differentiate themselves with respect to their competitors through their impact on firm See Draca et al. (2007), van Ark et al. (2008) and Jorgenson et al. (2008).

See Chun et al. (2008).

See Bartelsman and Doms (2000) for a survey.

See Foster et al. (2008) for a discussion on the role of productivity on the process of creative destruction.

See Draca et al. (2007) for a survey.

See Aghion et al. (2005) and Aghion and Griffith (2005).

level productivity.7 This paper investigates whether R&D incentives react to ICT induced heterogeneity.

The present analysis exploits a detailed database on the economic performance of a representative sample of the German manufacturing and service sector (ZEW ICT Survey). This data set contains information on the economic characteristics, performance, ICT use and innovative activity of the sampled firms for the years 2003 and 2006. ICT intensity is captured by the percentage of employees that work mainly with a PC (PCW). A set of dichotomous variables showing the adoption of different ICT applications such as enterprise resource planning systems (ERP), supply chain management (SCM) and customer relationship management software (CRM) is also available in the data. Additionally, the data include information on the innovative inputs (i.e. R&D) and outputs (i.e. innovations introduced to the market) of the sampled firms.

Defining firm heterogeneity as the deviation of a firm’s productivity level from a given industry benchmark, this paper shows that ICT has a robust, positive impact on firm heterogeneity only when ICT is used intensively and jointly with specific ICT applications. That is, through their use of ICT, firms are able to differentiate themselves (positively and negatively) with respect to other firms belonging to the same economic sector. This result is shown to be robust to different empirical strategies. In addition, the analysis also shows that ICT induced heterogeneity is not innocuous: it has a significant and positive, albeit small, impact on the incentives to innovate. In particular, ICT induced heterogeneity is shown to positively affect the decision to invest in R&D personnel.

The intuition behind this result states that firms are able to deviate from their competitors in terms of productivity and through ICT only when the adopted infrastructure is large enough (i.e. intensive use of PC accompanied by specific ICT applications). Given the costs and resources required for the adoption of such infrastructure, positive deviations result from the positive organizational impact of successful implementation of ICT (e.g. optimized internal processes), while negative deviations are associated with adoption costs that are not compensated by the benefits attached to the ICT infrastructure implemented (e.g. long term benefits not yet obtained). As firms in practice might employ several market strategies to differentiate themselves with respect to their competitors, it is not surprising that ICT induced heterogeneity is positively correlated with other market strategies such as R&D investments.

See Griliches (1995), Crepon et al. (1998) and Hall et al. (2008).

The paper is organized as follows. The second section discusses related literature. The third section presents the details of the empirical strategy. The fourth section summarizes the main results of the paper. Finally, the fifth section concludes.

–  –  –

This paper is related with two strands of literature. First, there is a voluminous literature that documents the existence and persistence of firm heterogeneity in terms of productivity.



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