Endogenous Firm Heterogeneity, ICT and R&D Incentives

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

Cerquera, Daniel and Gordon Jochem Klein (2008), Endogenous Firm Heterogeneity, ICT and R&D Incentives, ZEW Discussion Paper No. 08-126, Mannheim.