Innovation Success and Value Increases Greater Amongst Businesses Holding Larger Amounts of Capital

Businesses holding considerable amounts of capital benefit significantly more from investments made in research and development (R&D) than firms with less capital. As a result of R&D activities, businesses with large amounts of capital increase their long-term value by an average of 11.6 per cent, whilst businesses holding less capital increase business value by only 2.3 per cent. This is the finding of a study carried out by the Centre for European Economic Research (ZEW) concerning 1,200 German businesses from five high-tech branches of the manufacturing industry, namely, the chemicals sector, mechanical engineering, electrical engineering, vehicle manufacture and the manufacture of technical and medical instruments. The study period covered the years 1993 to 2008.

Businesses decide whether to invest in R&D on the basis of the expenditures involved and the expected long-term returns. The ZEW study shows that the amount of capital held by a company plays a considerable role in this decision as this has a considerable impact on the long-term expected profits. Within the period studied, 87.7 per cent of the high-tech firms holding a large amount of capital made the decision to invest in R&D, whilst only 70.7 per cent of businesses with less capital decided to do so. The classification of businesses according to whether they hold a large, medium or small amount of capital was based on an assessment of each firm's credit score. "The readiness of firms with a large amount of capital to invest in R&D is explained by the expected high long-term profits," explains Dr. Bettina Peters, deputy head of the ZEW Research Department "Industrial Economics and International Management".

Businesses with large amounts of capital generate higher productivity gains 

The high long-term profits expected by firms with large amounts of capital, measured in terms of the change in value of the business minus expenditure on R&D, can be put down to two major factors. Firstly, businesses holding large amounts of capital have more success when it comes to developing new products or new production technologies on the basis of R&D projects, to the point that they can be introduced to the market. 91.7 per cent of businesses holding large amounts of capital, which already have past experience of R&D, have managed this. The success rate for businesses holding only small amounts of capital is merely 85.6 per cent. The importance of previous R&D experience is illustrated by the fact that the respective success rates fall to 28.7 per cent and to 19.9 per cent where a firm has not yet had any experience in R&D.

Businesses with large amounts of capital not only lead in terms of developing innovations to the point of market entry, but also in terms of the implementation and marketing of these products. In such firms, the (turnover) productivity increases by 8.6 per cent as a result of product innovation, and by around nine per cent as a result of process innovation. If companies introduce both types of innovation simultaneously, productivity even rises by 11.5 per cent. Things are quite different for firms holding only small amounts of capital. These businesses experience an increase in productivity of only 0.8 per cent following product innovation, and of only 0.6 per cent as a result of process innovation. Where these innovations are introduced simultaneously, productivity increases by 3.8 per cent.

"Businesses holding large amounts of capital find it easier to fund investments in R&D from their current cash flow, profits or loans. They are also able to invest in a larger number of R&D projects. Last but not least, they have access to considerably more resources, enabling them to better implement and market their innovations. This is clearly an advantage for firms with considerable capital," explains Peters.

Empirical analysis was based on data taken from the Mannheim Innovation Panel (MIP) as well as from the credit rating agency Creditreform.

For further information please contact

Dr. Bettina Peters, Phone +49(0)621 1235-174, E-Mail b.peters@zew.de