The effect of developing countries' innovation policies on firms' decisions to invest in R&D

Highlights

• Regular public procurement does not induce firms to invest in R&D.

• Innovation support programs encourage firms to invest in R&D.

• Firms that benefit from both public procurement contracts and support programs are not more likely to invest in R&D.

Abstract

Using data on Ecuadorian firms for the period 2009–2011 and by employing inverse probability weighting, this paper compares the impact of two policy instruments that may induce firms in developing countries to invest in R&D activities. The first is public procurement which has recently been viewed as an important tool when encouraging innovation. The second is innovation support programs which are intended to increase firms' technological capabilities. Results indicate that public procurement does not induce firms to invest in R&D activities, even for the largest contracts. However, participating in innovation support programs does so. Furthermore, the combination of both policy instruments does not produce a significant effect on firms' decisions to invest in R&D activities.

Introduction

Evaluation studies on the impact of innovation policy have analyzed the effects of R&D subsidies, R&D tax incentives and innovative public procurement (Almus and Czarnitzki, 2003; Guerzoni and Raiteri, 2015; Hall and Van Reenen, 2000). Results from these studies have been relevant in assessing the value of innovation policies that encourage firms to invest more in R&D activities. However, they are of little interest for many developing countries where innovation policies differ substantially. Developing countries are very heterogeneous in terms of their innovation policy instruments. For instance, in developing countries with sufficiently advanced innovation systems, R&D funding is the dominant form of intervention (Moñux and Ospina, 2017). However, in those countries where most firms lack sufficient capabilities to perform R&D activities, innovation policy instruments are normally designed to add to the firms' knowledge and capabilities. This is because firms are unlikely to perform R&D activities until they have sufficient competences to absorb technologies (Chaminade et al., 2010; Cirera and Maloney, 2017). As a consequence, several developing countries implement “innovation support programs” aimed at enhancing the technological and managerial capabilities of participating firms. This could have an impact on their decisions to invest in R&D activities as these capabilities are the foundations for successful innovation (Cirera and Maloney, 2017; Zhou and Wu, 2010).

For the case of Ecuador, where innovation support programs are the dominant form of intervention, Fernández and Martín (2016) estimated the effects of the Ecuadorian innovation support programs¹ on firms' innovative behavior. However, this study was not aware of the presence of an additional policy instrument that the firms could use to generate the same behavioral changes. In the case of Ecuador, where according to the 2015 Ecuadorian Survey of Innovation (ENAI) <5% of the firms benefit from R&D subsidies, the other policy tool is represented by public procurement. This is a demand-side innovation policy that is progressively seen as a realistic means of advancing the aims of innovation policy (Uyarra and Flanagan, 2010). Public procurement can facilitate the development of national industry by increasing demand for local output and by improving the performance of innovative companies (Ferraz et al., 2015; Moñux and Ospina, 2017). For the latter to occur, it is appropriate for the public sector to use its purchasing power to act as an early adopter of innovative solutions. This form of public procurement is known as “innovative public procurement” (Georghiou et al., 2014) which differs from regular public procurement as it directly influences private firms' innovation activities by demanding goods and services that are not yet available in the market.

Although there is evidence to indicate that innovative public procurement has the potential to stimulate business innovation (Guerzoni and Raiteri, 2015), it is not the most widespread innovation policy instrument among both developing and developed countries (Moñux and Ospina, 2017). Nevertheless, even some developing countries have implemented it with different levels of success (Moñux and Ospina, 2017; Rullan et al., 2012). In 2016, Ecuador launched for the first time an innovative public procurement program which was named “IngeniaTec”.² IngeniaTec aims to be an instrument for the substitution of technology, where proposals for prototypes are presented for its design and national construction.

Although Ecuador already has an innovative public procurement policy, during the period of analysis of this paper (2009–2011) it had not yet been implemented. Hence, we do not evaluate the effect of Ecuadorian innovative public procurement, but the impact of regular public procurement on firms' decisions to invest in R&D activities. Regular public procurement does not demand new products and services; however, it may still induce firms to invest in R&D activities as the public sector does not necessarily have to explicitly demand new products for innovation effects to occur (Uyarra et al., 2016). However, as the Ecuadorian public procurement system does not have the specific objective of encouraging innovation, but of ensuring transparency and the quality of public spending, emphasis is mainly on cost rather than innovation. Thus it is also possible that public procurement does not lead firms to invest in R&D activities. This is even more likely if we take into account that most Ecuadorian firms do not have sufficient technological capabilities to perform R&D activities and that, during the Ecuadorian public procurement process, there is not sufficient interaction between the public agencies and the state suppliers to determine contractual specifications that facilitate innovation.

Unlike innovation support programs, which expand firms' innovation possibility frontiers by increasing firms technological and managerial capabilities, public procurement allows firms to exploit those frontiers by increasing the demand for innovation (Metcalfe and Georghiou, 1997). Thus, it is relevant to compare the effects of these two different policies in the context of developing countries where R&D activities are not clearly articulated within firms' strategies and technological and managerial capabilities are not well established (Arocena and Sutz, 2000). In this paper, we use data from the Ecuadorian Survey of Innovation (ENAI) merged with data from the Ecuadorian National Service of Public Procurement (SERCOP) for the period 2009–2011. In addition and for the first time, we present firm-level evidence on the effects of public procurement on firms' R&D investment decisions in the context of low-middle income Latin-American countries. Moreover, we employ inverse probability weighting (Hirano et al., 2003) in order to estimate the causal impact of Ecuadorian public procurement and compare its effects with those of the Ecuadorian innovation support programs. We also discuss the impact of the interaction of both policies and whether the size of the public procurement contract influences its effects upon firms' decisions to invest in R&D.

The rest of the paper is organized as follows: Section 2 reviews the literature and proposes the hypotheses for our analysis. Section 3 proceeds by describing the data and the variables. Section 4 explains the methodology. Section 5 discusses the implications of the empirical results. Finally, we conclude in Section 6.