DOCUMENTS DE TREBALL. Ownership structure and innovation: Is there a real link?

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1 DOCUMENTS DE TREBALL DE LA FACULTAT DE CIÈNCIES ECONÒMIQUES I EMPRESARIALS Col leccó d Economa Ownershp structure and nnovaton: Is there a real lnk? Raquel Ortega-Arglés Rosna Moreno Jord Surñach Caralt Regonal Quanttatve Analyss Research Group (AQR) Department of Econometrcs, Statstcs and the Spansh Economy (Unversty of Barcelona) Correspondng Author Av. Dagonal Barcelona (Span) Phone: Fax Number: E-mal: r.ortega@ub.edu. Fnancal support from the DGICYTSEC s gratefully acknowledged.

2 Abstract: Ths work focuses on the study of the relatonshp between ownershp and control structure of the company and ts nnovatve actvty. Its am conssts of analysng the role that may be played by determnants wthn the company related to ownershp structure when the decson to ncur research and development actvtes s taken as well as on the output of ths nnovatve process. Among these determnants we may thnk of ssues such as who owns the frm and how the control of decson-makng s dstrbuted, the nature of ths control and the level of concentraton of ownershp, among others. The study s carred out for the year 2001 usng a representatve sample of Spansh manufacturng ndustres. Keywords: ownershp and control structure, research and development, agency theory. JEL classfcatons: D210, O310, G320. Resumen: Este trabajo se centra en el estudo de la relacón entre la estructura de propedad y control de la empresa y la actvdad nnovadora de la msma. Se pretende analzar el papel que pueden desempeñar certos determnantes nternos a la empresa relaconados con la estructura de propedad tanto en la decsón de ncurrr en gastos de I+D como en el resultado nnovador obtendo por la empresa. Del análss realzado se podrán extraer conclusones sobre el efecto que certos mecansmos adoptados para palar los problemas de agenca surgdos por la no dentdad entre propedad y control en puestos de toma de decsones tenen en la gestón de actvdades nnovadoras en la empresa. El estudo se realza para el año 2001 tomando una muestra representatva de las ndustras manufactureras españolas.

3 1. INTRODUCTION In recent years, companes have become aware of ther need to encourage ther capacty for nnovaton. Ths has reached the pont where t has come to be understood as a contnuous process that s not formulated n order to attan a specfc objectve, but nstead one that s ncluded n the company's strategy, becomng nsttutonal. Companes feel that they are safer from possble competton by formalsng ther own nnovatons n the patents and trademarks regster. All types of actvtes are nvolved n obtanng ths objectve - scentfc, technologcal, organsatonal, fnancal and commercal. There s a great deal of recent lterature whch studes the determnants n nnovaton. These studes may be categorsed as macroeconomc, whch try to explan the potentaltes n varous geographcal unts n the feld of nnovaton, and mcroeconomc studes, whch analyse the nternal determnants wthn the company to explan nnovatve efforts and results. Some questons such as the effect of the company s sze, ts age, ts degree of co-operaton wth other companes or fnancng, both nternal and external, have been analysed n detal n the mcroeconomc studes. However, there have been few studes whch have tred to explan the effect of varables such as the decson-makng structure or ownershp on the decsons to nvest n the company. A company's ablty to nnovate depends on a seres of factors, n such a way that whether or not they are present has a favourable or unfavourable nfluence on the nnovaton process. These factors may be placed n the followng groups: 1. The exstence of favourable condtons n the demand structure or n the market sze, n the lfe cycle of the products t manufactures, or n the evoluton of scentfc and techncal means that t may use. 2. The resources that the company allocates to engneerng, desgn, research and marketng. Moreover, the favourable condtons mentoned above and the company's techncal capacty must be ntegrated n the framework of an nnovatve strategy, and then the followng factors become nvolved: 3. The company's management and organsaton. 4. Its desre to dfferentate ts products or processes from those of ts compettors. Consderng the possble sgnfcance of the company s management and organsaton 1

4 wth regard to ts nnovatve actvty, the thrd pont above, we feel that there s a need to analyse the characterstcs of the ownershp structure of the company - who owns t and how the control of decson-makng s dstrbuted, the nature of ths control, the percentage of ts captal owned by managers 1 and the level of concentraton of ownershp, among other ssues. The characterstcs that may lead to good management of the company's resources, both fnancal and physcal, are nnumerable. Ths wll be determnant n the achevement of good results n the company's nnovatve process, whch wll determne ts growth and ts future. Whle there are many studes that contan models analysng the determnants of companes n the decson to nvest n R&D (Gerosk and Pomroy, 1990; Busom, 1993; Gumbau, 1994, 1997; Crépon et al., 1996; Love et al., 1996; Dxon and Seddgh, 1996; Galende and Suárez, 1996; Beneto, 2003, among others), there are very few that nclude any type of ownershp structure varable n ther study. Some works analyse what the determnants are n the creaton of the company's value, ntroducng varables whch nclude the structure of captal and control of the company nto ther analyss (Jensen, 1986; Hmmelberg et al., 1999; Hermanln and Wesbach, 1991; and Kole, 1995; among others), but n most cases they do not analyse the process of nnovaton, due to a lack of nformaton. Thus, our work focuses on the study of the relatonshp between company ownershp and control structure and the R&D nput and output. Its am, based on the lterature both n the feld of ownershp structure and n the feld of nnovaton, s to analyse the role that may be played by nternal determnants n the company related to ts ownershp and control structure on the nnovatve actvty of the company. The artcle s structured n fve parts. After the short ntroducton, whch we have used as a gude to dentfy the determnants to be consdered n our study, and the presentaton of our objectve, we brefly summarse the emprcal lterature n the feld of the mpact of ownershp structure n company s results. The thrd secton descrbes the characterstcs of the sample and the methodology followed. In the same secton, all the varables consdered n our analyses are dscussed. The fourth secton shows the results obtaned n the emprcal research. Fnally, the man conclusons drawn from our analyss are presented. 1 In ths study, we wll use the terms manager and drector ndscrmnately to desgnate workers n decson-makng postons. 2

5 2. THE RELATIONSHIP BETWEEN OWNERSHIP STRUCTURE AND INNOVATION. WORKING HYPOTHESIS. In order to draw conclusons regardng the role of organsatonal strategy n busness decsons n general, and n nvestment decsons n partcular, t s necessary to consder the lterature concernng captal structure n depth. The lterature analysng the subject of ownershp and control has provded nterestng artcles wth the objectve of studyng how companes captal and fnancal structure determnes ther opportuntes for growth. These have tred to explan companes results takng the structure of the company's share captal, the concentraton of ownershp and the type of man nvestor as explanatory varables. Among the works analysng the relatonshp between captal structure and opportuntes for growth are those by Smth and Watts (1992) and Lasfer (1995). The frst analyses how fnancng decsons, on the one hand, and management remuneraton polcy, on the other, may nfluence the company's nvestments and opportuntes for growth, wth a negatve relatonshp obtaned between opportuntes for growth and debt, somethng whch provdes the opportunty to regulate the agency conflcts affectng them. Lasfer's work confrms the postve nfluence of "leverage" 2 on those cases n whch the company does not have valuable opportuntes for growth, as proposed by Jensen (1986) and Stulz (1990). Hmmelberg et al. (1999) also analyses the determnants of company value by applyng panel data, argung that the heterogenety that s not observed generates a spurous correlaton between ownershp and opportuntes for growth. By carryng out a short revew of the lterature whch relates Tobn's Q rato 3 wth the "manageral ownershp" 4 varable, t can be seen that the creaton of value has no relatonshp of a lneal nature wth ownershp, as the value of the company ncreases and decreases for varous proportons of ownershp n the hands of ts drectors. Among the studes analysng ths area are several that obtan an nverted U-shaped relatonshp (McConnell and Servaes, 1990; Mørck et al., 1988; Holderness et al., 1999). The study by Kole (1995) examnes the dfferences n the works mentoned above and concludes 2 Leverage s understood to be the effect that occurs on rsk and the level of varablty n a company s results due to the effect of havng ncreased external fnancng. 3 Tobn s Q rato s a proxy valuable n the creaton of value. One of the most often used ratos s the quotent between the value of shares and the sum of the company s debt n the fnancal market and the cost of repostonng ts real assets. 4 We understand manageral ownershp to be an aspect showng the percentage of shares or ownershp n the hands of managers or drectors. 3

6 that dfferences n busness sze may lead to dfferences n the conclusons drawn by ths type of work. Moreover, they do not take nto account the problem of endogenety nvolved n the use of the varable "manageral ownershp" as an explanatory varable, as noted by Jensen and Warner (1988). Leech and Leahy (1991) carry out a study usng data from Brtsh companes, wth the am of descrbng the ownershp structure of a sample of large companes and carryng out an econometrc analyss of ts causes and consequences n terms of control and ncentves. They feel that the ownershp structure and ts level of concentraton have an mportant role n the growth of the company. Usng the regresson model ncludng varables related to the utlty functons of the drectors, shareholders and owners, they conclude that the company's opportunty for growth depends on the concentraton of ownershp and the drectors' control. In Span, Galve and Salas (1993) carred out an emprcal study wth the am of analysng the shareholdng composton of Spansh companes and to check whether there were dfferences n the fnancal results that were attrbutable to the type of the owner group controllng the company. They gave detals of the mechansm by whch the ownershp-control nfluences results, wth a postve relaton shown between concentraton of ownershp and the results obtaned by the company, as well as famly ownershp type. In the work by Andrés et al. (2000), whch amed to study the mpact of the decson to become ndebted and contractual structure on the market value of companes, the concluson s drawn that concentraton of ownershp s a harmful nfluence n the presence of opportuntes for growth. A postve relatonshp between drectors' shareholdngs and the creaton of value n the absence of opportuntes s not proved. Lterature concernng ownershp structure and ts effect on the growth of companes has been analysed up to ths pont. However, as far as we know, there are hardly any works concernng the role that may be played by a company's ownershp structure and the way n whch t s consttuted and admnstered on decsons as mportant as the nnovatve strategy to be adopted. Some aspects related to ownershp structure, among other questons, are only analysed n the works by Love et al. (1996), Dxon and Seddgh (1996), Acs and Isberg (1991) and Francs and Smth (1995). In the frst of these, a sample of Scottsh companes s analysed, wth the concluson that foregn ownershp has a postve effect on the probablty of a company located n Scotland obtanng product nnovatons. In the work by Dxon and Seddgh, carred out wth a 4

7 sample of Englsh companes, the effect of the type of ownershp (domestc or foregn) s analysed. In ths work, as well as that by Acs and Isberg, t s ndependent of the nnovaton carred out by the company. Fnally, the work by Francs and Smth, examnes the emprcal relaton between corporate ownershp structure and nnovaton. They test the hypothess that dffusely-held frms are less nnovatve than frms wth ether a hgh concentraton of management ownershp or a sgnfcant equty block held by an outsde nvestor. Ther results are consstent wth the conjecture that concentrated ownershp and shareholder montorng are effectve at allevatng the hgh agency and contractng costs assocated wth nnovaton. For the Spansh case Galende and De la Fuente (1999) have developed an econometrc analyss to a sample of Spansh nnovatve companes. Investgatng the determnant factors n the organsaton of a frm s nnovatve actvtes, ther emprcal fndngs confrm the exstence of nterestng relatons between nternal factors and the nnovatve process. The sgnfcant effect of the fnancng mechansm (the use of debt) ndcates that hgh fnancal debt n the company has an mpact n the sense that more ncremental nnovatons are generated than radcal ones. Takng nto account the prevous lterature, we have some a pror deas on whch can be the mpact of some varables reflectng the ownershp and control structure of frms on ther R&D actvty. Wth regards to the level of concentraton of the frm s ownershp, we expect that the dffusely-held companes wll have more probablty to undertake R&D costs because of the major moblty of actons of ther managers. On the other hand, the ncorporaton of owners nto the frm decsons acts as a drect control of the manager decsons so we expect that due to the lack of specalsaton, ther effect on the R&D actvtes wll be negatve. Fnally, despte of the ambguty of the debt mechansm on the frm nvestment explaned n the lterature, we consder that the emprcal evdence that ponts to the negatve nfluence of debt fnancng on nnovaton actvtes should be taken nto account. 3. METHODOLOGY AND DATA 3.1. METHODOLOGY Our objectve s to analyse the mpact of several aspects related to ownershp structure and management/control of the company on the decson to nnovate, the 5

8 nnovatve effort and the nnovatve output, so that the treatment of the data wll be dfferent n each case. We wll need therefore to develop dfferent models to measure each of these aspects The decson to undertake R&D expenses Our frst model wll be focussed on the yes/no decson to carry out R&D expenses, so that we estmate a logstc cross-sectonal model 5 whch relates nternal and external structure of the frm and nnovaton. As a result, gven the bnary nature of the endogenous varable for analyss, the decson whether or not to nvest n nnovaton, specfyng a dscreet choce model s consdered approprate, selectng the logstc model estmated usng the maxmum lkelhood method. Due to the fact that n ths type of model the frst order condtons are not lneal, the estmated parameters are obtaned usng teratve procedures. Whle the parameters are not easy to nterpret, ther sgn shows us the drecton of the effect caused by the explanatory varables on the endogenous varable 6. In ths type of model, the quotents between the estmated values of two parameters measure the relatve mportance of the effects that the explanatory varables assocated wth these parameters have on the probablty of selectng the Y =1 alternatve. Because of ths property, whle the coeffcents of a logt model are not drectly nterpretable, ther relatve values are. The logstc model can be rewrtten n terms of the odds that a partcular event wll occur. The odds are the rato between the probablty that an event wll happen (n ths case, that the frm wll carry out R&D expenses over the year) and the probablty that t wll not happen. Thus, Exp (β ) s the ncremental odds rato correspondng to an ncrease of one unt n an ndependent varable, assumng that the values of all other varables reman unchanged. If the value s greater than one the odds ncrease, and f the value s less than one they decrease. Takng nto account the hypothess that we am to test, the model we wll estmate follows the next expresson: 5 Lke several authors Busom, 1993; Gumbau, 1994; Dxon and Seddgh, 1996; Gumbau, 1997; Galende and Suárez, 1999; Beneto, For a more detaled explanaton of the logt model, see Econometrcs manuals such as the one by Greene (2003). 6

9 INNOV = β 0 + β SIZE 1 β 7 HIGH + β AGE + β OWN + β β8low + β9reg + β (Model 1) 4 STOCK + β SHARE + β 10 MARKET + u 5 6 DEBT + As a dependent varable, the nnovaton nput varable INNOV s a dchotomous varable that takes the value of 1 f the company has ncurred some R&D expense over the year, and a null value f not. Consderng the objectves stated n the prevous secton and the deas expressed n the second secton n order to analyse the mpact that the varous ownershp structure and control of the company varables may have on the company's nnovatve actvty, our study ncludes the followng varables. The varable OWN s the percentage of owners or famly members n management postons n the company's total staff as of 31st December n the year analysed. The varable explans the applcaton of the ncorporaton of owners nto decsons posts n the frm to allevate the ownershp and management separaton of functons. Ths separaton of functons mples a seres of advantages, manly of specalsaton, whch busnesses cannot gnore. In ther study n 1976, Jensen and Mecklng noted that there was a problem of free-rdng, accordng to whch gven the nformaton that nvestors have on the company's actvtes s usually lmted or not precse, they may have the ncentve to nvolve the company n growth rates above optmal levels nstead of tryng to maxmse ts market value. When drectors are the people controllng ths type of resource, there s the rsk of an unproductve or napproprate use of resources. The soluton to ths type of conflct may nvolve provdng managers wth the ncentve to dstrbute these resources as aganst nvestng them n projects wth a negatve net current value. To ensure ths type of conduct, the management team has two basc tools at ts dsposton. Frstly, an ncrease n fnancng n the form of debt, whch oblges the manager to release the free resources that the company has generated. Secondly, greater control by nvestors by means of a concentraton of ownershp (an nstrument used n Spansh ndustry, as we wll see) whch acts as a supervson mechansm for the poor use that management may make of these resources. In ths latter case, managers' shareholdng n the company may also contrbute to puttng a stop to sub-optmal nvestment polces. The varable DEBT, ncludes the percentage of external fnancng compared to the total fnancng. Some authors argue that fnancng wth debt has an ambguous effect as a mechansm for mtgatng agency problems (Hall, 1992; Chao, 2002). From a 7

10 theoretcal pont of vew, transacton cost theory and the agency theory argue that debt fnancng can dscourage nnovatve actvtes. The frst one analyses the hgh specfcty and ntangblty of technologcal nvestments. Ths ncreases transacton costs and seems to dssuade debt fnancng. The second theory shows the hgh rsk of these actvtes and the exstng nformaton asymmetres, whch cause problems wth debt fnancng (n Galende and De la Fuente, 2003). An ncrease n the level of ndebtedness may lead to ncreased conflct between shareholders and bondholders. However, ths ncrease may mtgate the dvergences of nterests between nternal and external shareholders and management, as well as provdng valuable nformaton regardng busness perspectves. Jensen and Mecklng (1976) argue that fnancng n the form of debt leads to the adopton of nvestment projects wth excessve rsk. Accordng to them, the contrbuton made by shareholders to the company has lmted responsblty, so that shareholders prefer management to adopt rsky nvestment projects whch offer the opportunty to obtan hgher profts and n whch the ncreased probablty of loss only affects the holder of the debt. However, the latter prefer less rsky project enablng surer recovery of the value of ther contrbuton. The varable SHARE ncludes nformaton regardng the level of concentraton of ownershp, showng the percentage of the company's share captal that s n the hands of the man shareholder. Ths hgher concentraton may be actng as a mechansm to releve agency problems arsng from the lack of dentty between ownershp and control. The drect control of the shareholders to the management can reduce the rsky nvestments of the frm. Ths mechansm has a range of assocated dsadvantages, related to the ncreased rsk borne by the owners, less lqudty n markets and fewer opportuntes for negotaton of the company s values. Fnally, we nclude also the varable dchotomous varable STOCK, whch takes the value of the unt when the company s quoted on the Stock Exchange, and a null value when t s not. Furthermore, a range of varables regardng the company's nternal structure s consdered to check the effect that ts general characterstcs may have on ts nnovaton. These aspects have been wdely analysed n the lterature. Problems of bas are thereby avoded n the coeffcents of the varables related to the company's ownershp structure, whch are the man focus of ths study. As far as the company's nternal structure varables are concerned, the varable SIZE, a varable showng the sze of the busness, ncludes the total personnel numbers 8

11 as of 31st December. The varable AGE, the varable showng the company s age or maturty, shows how many years have passed snce the company was founded. Wth regard to the sze varable, the study by Schumpeter (1942) suggested the nfluence of sze on ths type of analyss. There are theoretcal works whch argue that larger companes have potentaltes such as obtanng economes of scale, decreased rsk, a larger market and greater opportuntes for appropraton (Fernández, 1996). Despte the unanmty of the theoretcal works, from the emprcal pont of vew there s a great deal of dsparty n results. There are both studes wth a postve result n the relatonshp between sze and nnovaton (Scherer, 1992; Scherer and Ross, 1990; Love et al., 1990; Cohen and Kleeper, 1996; among others), and others that have not been able to confrm ths postve nfluence of sze (Mansfeld, 1964; Acs and Audretsch, 1991; among others). The age varable has also been one of the determnants most checked by the lterature. The age of the frm s a possble measure of ts organsatonal resources. It represents the experence and knowledge accumulated throughout ts hstory and s related to a better management of communcaton and of necessary creatvty to nnovate, and to a more effectve capacty of absorpton (Galende and De la Fuente, 2003). It s a varable commonly used to measure the experence and the learnng of the frms, factors that are organsatonal resources. Concernng the nformaton regardng ts busness sector we have classfed the frms nto dfferent categores dependng on the technologcal opportunty of ther sector. The technologcal opportunty s consdered to be determned by characterstcs of the specfc ndustral sector to whch a partcular frm belongs. Ths knd of varables may be capturng varous technology dmensons such as technologcal opportunty, approprablty regmes, dynamc aspects as cumulatveness or the emergence of domnant desgns along the technology lfe cycle, the necessty for complementary and specalzed assets, when mplementng nnovatons. Followng Lafuente et al. (1985), the ndustral sectors of the ESEE can be classfed as sectors of hgh, medum and low technologcal opportuntes 7. In order to avod perfect multcollnearty we have elmnated the medum category. Therefore, the varable HIGH s a dchotomous varable whch takes the value of the unt when the company belongs to a hgh 7 The followng have been classfed as hgh technologcal opportunty sectors: offce machnery, computer, processng, optcal and smlar equpment; chemcal products; machnery and mechancal equpment; electrcal and electronc machnery and materal; motors and autos; other transport materal, publshng and graphc arts. As medum technologcal opportunty sectors: the meat ndustry; food and tobacco products; beverages; rubber and plastcs; nonmetallc mneral products; Metallurgy; metal products. And as low technologcal opportunty sectors: Textles and clothng, leather and footwear, wood; Paper; Furnture and other manufacturng ndustres. 9

12 technologcal opportunty sector of actvty, and a null value when t s not and the varable LOW s a dchotomous varable whch takes the value of the unt when the company belongs to a low technologcal opportunty sector of actvty, and a null value when t s not. We expect that the companes belongng to hgh opportunty sectors have a more mportant R&D actvty than the companes from low opportunty sectors. In order to nclude the effect of the structure of the market n whch the company works, the varable MARKET has been ncluded, whch provdes nformaton regardng the geographcal extent of the man market. It s a dchotomous varable that classfes companes accordng to whether ther market s hgher or equal to natonal extent and takes the null value when t s lower than natonal geographcal extent. Ths varable shows the effect that the company decdng to expand ts market to a wder geographcal extent may have on R&D actvtes. Ths varable also explans the effect of demand on the R&D company decsons and the dfferent knds of competton whether the geographcal extent s hgher than natonal or not. The emprcal lterature shows a postve relatonshp between exports and R&D and nnovaton nvestments. Fnally, concernng the regon where the company s stuated, we have constructed the varable REG. The ESEE s not representatve at a regonal geographcal extent, so we constructed the varable REG wth the macroeconomc nformaton of The Natonal Statstcal Insttute (INE). The dchotomous varable REG classfes frms nto two categores, frms that are stuated n a regon wth hgher technologcal opportuntes than the medum of Spansh regons take the value one, and a null value when ther regon has a low value of R&D effort wth respect to the medum value of the total amount of regons 8. We expect that the frms stuated n a regon wth hgh technologcal opportuntes have more possbltes to undertake R&D expenses and to obtan R&D output The R&D effort. The second model explans the R&D effort per employee, whch s measured as the R&D expenses per employee. Due to the fact that the dependent varable s a contnuous and truncated varable we choose the Tobt model based on the followng functon: y = β' x + ε, ε N 0, 2 [ σ ] The most famlar case of ths model, whch s typcal for expendtures, s the case n whch the observed data contan a cluster of zeros, and the observed dependent varable s descrbed wth the followng structure: 10

13 0 when y * 0 y * y * when y * > 0 Takng nto account the hypothess that we want to analyse, we develop the followng tobt model, whch has as a dependent contnuous varable the nnovaton nput varable EFFORT, a varable showng the R&D expense per employee over the year: EFFORT = β 0 + β SIZE + β β 7 1 HIGH 2 AGE + β 3 OWN + β8low + β9reg + β (Model 2) + β STOCK + β SHARE + β 10 4 MARKET + β 5 11 λ + u 6 DEBT + Followng the work of other authors that use the Tobt model to analyse the R&D expenses of the frm (Cohen, Levn and Mowery, 1987; Cohen and Klepper, 1996; González and Jaumandreu, 1998; Beneto, 2003), we wll nclude the nverse Mlls rato (λ ) computed from the prevous estmaton of the dscrete choce model wth the am to control the selecton bas. The sgnfcaton of ths parameter explans the mportance of the selecton bas and the necessty to control the dfferent characterstcs of the two groups of frms, the frms that undertake R&D expenses over the year and the frms that do not by means of the dscrete choce methods The probablty to obtan an R&D output We develop dfferent models to explan the effect of several aspects nternal to the frm on the R&D output. In a frst step we estmate a model that explans the determnants of the probablty to award R&D output (model 3). There are authors that develop a dscrete choce model to measure the effect of dfferent varable on the probablty of awardng patents or other R&D result (Love et al., 1996; Coronado and Acosta, 1999). As a result, gven the bnary nature of the endogenous varable and the hypothess that we want to estmate, we develop the followng logstc model: RESULT 6 = β 0 1 β DEBT + β + β EFFORT + β 7 HIGH + β 8 2 AGE + β LOW + β 3 9 (Model 3) OWN + β REG + β 4 10 STOCK + β MARKET + u 5 SHARE + 8 The hgh technologcal regons, whch take the unt value, are Catalona, Madrd, Navarre and the Basque Country. 11

14 The model has as a dependent varable, the dchotomous varable RESULT, that takes the unt value when the frm award natonal or foregner patents and/or models of use, and the null value otherwse. The set of explanatory varables are the same as the ones used n the prevous models The nnovatve result Fnally, the fourth model s focussed on the analyss of the R&D output based on the Grlches work. The Knowledge Producton Functon framework was orgnally developed by Grlches (Grlches 1979, 1986) and s conceptualsed as a Cobb- Douglas-type functon that ncludes several factors of knowledge producton such as the R&D expendtures carred out by the frm (Pakes and Grlches, 1984; Hausman, Hall and Grlches, 1984; Acs and Audretsch, 1988; Crépon and Duguet, 1997; Blundell, Grffth and Van Reenen, 1995). Specfcally, the basc model we consder relates the nnovatve output n a frm, measured through the number of patents and models of use, to research and development nputs n the same frm through a knowledge producton functon. We slghtly modfy ths producton functon so that the ncrement of the nnovatve output depends upon a number of further factors related to the nternal characterstcs of the frms among whch some ssues related to ownershp structure are ncluded. In order to assess the mpact of these determnants on the number of patents and models of use awarded by the frm, the dscreteness of the latter varable has to be taken nto account. For nstance, because of dffcultes and uncertanty nherent to R&D actvtes, frms do not always apply for patents and hence a zero value s a natural outcome of ths varable. Because of ths property, the use of conventonal lnear regresson models may be napproprate. The reasons are that some basc assumptons such as the normalty of resduals or the lnear adjustment of data are no longer fulflled. The usual way to deal wth the dscrete non-negatve nature of the patent dependent varable s to consder a count data model. (n Cncera, 1997) One of the most common count data model s the Posson regresson model, the number of events, gven a set of regressors X, has a Posson dstrbuton wth densty functon: 12

15 e ( y x ) =, y = 0,1,2,... f The condtonal mean depends on the ndvdual characterstcs reflected n the regressors, n others words: µ µ y! y ( y x ) = exp( x β) µ = Ε The lkelhood functon, gven the ndependence of the observatons, s: L N N ( β y, X) = Pr( y µ ) = = 1 And the logarthmc lkelhood functon s: ln L = 1 exp( µ ) µ y! y N ( β y, X) = [ y x β exp( x β) ln y! ] y= 1 The estmators of the Posson model would be gven by the soluton of the frst order condtons: N [ y exp( x β) ] = 1 x = 0 The standard procedure for computng the estmators s the Newton-Raphson teratve method. Convergence s ensured because the logarthmc lkelhood functon s globally concave. The applcaton of the Posson model requres equalty of means and varance, a requrement that cannot always be met n practce. If the data show overdsperson, the standard errors of the Posson model wll be based to the low end, gvng spurous hgh values for the t statstcs (Cameron and Trved, 1986, 1990). The most common formulaton for takng nto account the overdsperson of data s the negatve bnomal model. Ths assumes that the varance s a quadratc functon of the mean. We also ncorporated lke other authors (Coronado and Acosta, 2003) the estmaton of the negatve bnomal model for a more comprehensve evaluaton of the hypothess. PAT = β β EFFORT + β 1 β DEBT + β 7 2 HIGH + β AGE + β 8 3 LOW + β OWN + β 9 (Model 4) 4 REG + β STOCK + β 10 MARKET + u 5 SHARE + 13

16 3.2. DATABASE 9 The database used s the Survey of Entrepreneural Strateges (Encuesta sobre Estrategas Empresarales, henceforth ESEE) produced by the Publc Enterprse Foundaton of Span for what s today the Mnstry of Scence and Technology (prevously the Mnstry of Industry and Energy). The Publc Enterprse Foundaton's Economc Research Programme desgned the survey, supervses ts annual producton and mantans the database. The ESEE s a statstcal research project that surveys a panel of companes representng manufacturng ndustres n Span on an annual bass. Its desgn s relatvely flexble and t s sutable for two types of potental use. On the one hand, t provdes n-depth knowledge and analyss of the ndustral sector's evoluton over tme by means of multple data concernng the busness and decsons of companes n the sector. The ESEE s also desgned to generate mcro-economc nformaton that enables econometrc models to be specfed and tested. As far as ts coverage s concerned, the reference populaton of the ESEE s companes wth 10 or more workers n what s usually known as manufacturng ndustry. The geographcal area of reference s Span, and the varables have a tmescale of one year. One of the most outstandng characterstcs of the ESEE s ts representatveness. The ntal selecton of companes took place by combnng thoroughness crtera and a random sample. Companes wth more than 200 workers were ncluded n the frst group, whch were requested to partcpate thoroughly. Companes wth less than 200 employees formed the second group, whch was selected by stratfcaton samplng, proportonal wth restrctons and systematc wth a random start-up. Ths s a random sample of the crosses of the 21 CNAE manufacturng actvtes to two dgts and for employment ntervals: 2-10, 21-50, and workers. As Beneto (2003) ponts out, the possblty offered by the ESEE of consderng not only patents, but also models of use, s partcularly mportant n a sample where the number of SMEs, as we wll see later, s consderable. A great porton of nnovatons n SMEs are ncremental nnovatons and thus are not susceptble to be reflected n patents. The consderaton of models of use, as long as they are means of protectng ncremental nnovatons, may come to compensate for ths flaw of the patents measure. 9 For more nformaton concernng the database, see Farñas and Huergo (1999), Farñas and Jaumandreu (1994, 1999). 14

17 Snce the varables have already been presented, n order to place the nformaton wthn the framework that we are gong to use n our study we consdered t useful to gve a descrptve analyss regardng the varables that wll be used n the year under consderaton (Tables 1, 2 and 3). Table 1 shows some statstcs descrbng the quanttatve varables n the study for the year It can be seen that the average concentraton of captal n the hands of the man shareholder (SHARE) has a hgh mean close to 100 per cent. It s worth to emphasze that the medan s 100 per cent. It can be concluded that there are a hgh number of companes that decde to use the concentraton of the captal as a possble control mechansm n the face of agency problems between ownershp and control. As regards the varable OWN, the varable whch consders the rate of owners n management postons n the company s total staff has a low mean and a null value. Fnally, the varable DEBT, whch ncludes the percentage of external fnancng compared to the total fnancng, seems to present a hgh mean and a hgher medum to respect the others. The hgher debt rato n Europe have been noted by varous authors (Prowse, 1990; Bhagat and Welch, 1995). Some of the causes can perhaps be attrbuted to the less severe conflcts of nterest between the stockholders and bondholders n ths European countres (France, Germany and Holland), compared to the US. The ownershp and governance structures perhaps help mtgate stockholder-bondholder conflcts of nterest. As far as the average SIZE and AGE of the companes consdered s concerned, these are medum-szed companes (wth an average of 240 workers), whch have been stable wth the passng of tme, and whch have an average age of 24 years. Wth respect the R&D nput and output (EFFORT and PAT), the percentages of the medan are null n the two cases. As far as varables of a qualtatve nature are concerned, as a pror analyss to the estmaton of the model, tables 2 and 3 are added, whch show the percentages of companes that state they have nvested n R&D n each category and have awarded patents and/or models of use n the current year. The results clearly show on a general scale that companes that do nvest n R&D and have an nnovatve output are a small percentage of the total number of companes. Wth regard to the varable whch tells us whether or not the company s quoted on the Stock Exchange (STOCK), t s sgnfcant that practcally all the companes quoted on the Stock Exchange nvest n nnovaton. Moreover, companes quoted on the Stock 15

18 Exchange have a hgher percentage of awardng some R&D output than the companes that do not quoted on the Stock Exchange. As antcpated, for the technologcal opportunty varables, the category showng the hghest percentage of nvestment n R&D and nnovatve output (natonal, foregner patents and models of use) s the category "hgh technologcal opportunty" (HIGH), wth half the companes n ths category havng R&D costs. The analyss for the geographcal extent of the man market (MARKET), t can be seen that f the extent of the geographcal market s hgher or equal to the natonal level, the percentage of companes makng an nvestment n nnovaton s more mportant. The same concluson s obtaned n relaton to the nnovatve output, snce the companes wth ther geographcal extent of the man market hgher or equal to natonal level have more patents and models of use than the companes wth lower markets. Fnally, the table shows the nfluence of the stuaton of the frm n a regon wth hgh technologcal opportuntes (REG), showng approxmately half the companes n ths category havng R&D expenses and also awardng R&D output. Fnally, Table 4 shows the correlaton matrx between the varables consdered n our model for the year analysed, wth the lack of problems of hgh collnearty between them clearly vsble. 4. RESULTS 4.1. The decson to undertake R&D expenses Table 5 shows the results from the estmaton of the logstcal model, whch explans the determnants n the decson to ncur R&D costs for the year The man factor s the mportant explanatory role of the varables of ownershp structure and control type n companes' nnovatve actvty. All the varables that we have defned as varables n the company's nternal structure are sgnfcant 10 for the current year. As was to be expected, both sze (SIZE) and age (AGE) presented a postve parameter, leadng to the concluson that the bgger and older the company s, the more lkely t s to ncur R&D costs. Many authors obtan these results. Wth regard to the sze varable, our results show the nfluence ponted by 10 The sgnfcance s tested wth the use of the Wald statstc, whch allow us to check the null hypothess that each coeffcent s 0. 16

19 Schumpeter (1942), and some others studes wth a postve result n the relatonshp between sze and nnovaton (Scherer, 1992; Scherer and Ross, 1990; Love et al., 1990; Cohen and Kleeper, 1996; among others). For the case of Span, there are many studes that have amed to confrm the effect of the sze varable on nnovaton (Busom, 1993; Labeaga and Martnez-Ros, 1994; Gumbau, 1994, 1997; Molero and Buesa, 1996; Farñas and Huergo, 1999; Beneto, 2002, 2003; among others) whch have reached the same concluson as Schumpeter, especally n the ndustral sector. The age varable (AGE) has also been one of the most checked determnants by the lterature, wth the concluson drawn by us reached on most occasons. It s a varable commonly used to measure the experence and the learnng of the frms, factors that are organsatonal resources and the experence and knowledge accumulated. There are some authors who verfy a postve mpact of age on nnovatve actvty for the Spansh case (Busom, 1993; Molero and Buesa, 1993; Gumbau, 1997, and others). However, there exsts a work by Molero and Buesa (1996) whch shows that young companes dedcated more resources to nnovaton. As far as the varables of ownershp structure and control are concerned, the varable showng dentty between ownershp and control (OWN) tells us that the greater the percentage of owners or relatves n management postons wth regard to the total number of employees, the lower the probablty of R&D beng ncurred. Ths s showng us that the fact that there s an dentty between ownershp and control makes the probablty of ncurrng R&D costs declne. As ponted out by Rodríguez (1996), the separaton between the functons of ownershp and management, as well as the appearance of wdely dffuse ownershp structures (the ntroducton of other busnesses n the company's shareholdng) are phenomena that are easy to prove n the vast majorty of companes at present (as n the lmted company legal status mentoned prevously). Ths separaton of functons mples a seres of advantages, manly of specalsaton, whch busnesses cannot gnore. The varable showng ownershp concentraton (SHARE) s sgnfcant and has a negatve parameter, meanng that the greater the concentraton of captal n the hands of few people, the lower probablty of ncurrng R&D costs. The relaton between the ownershp concentraton and the nnovaton has been ponted by dfferent authors (Galve and Salas, 1993; Leech and Leahy, 1991). We consder that companes n a poston of effectve control (when the largest homogenous group of shareholders possesses at least 50% of shares) have a lower probablty of carryng out nvestment n 17

20 R&D. Ths s a result that may corroborate some studes for the Spansh case (Andrés et al., 2000), whch attempts to measure the effect of concentraton of ownershp of Spansh companes on ther results. The utlsaton of ths mechansm seems to act as a brake on busness growth and n our study, t seems to be also a break for the nnovatve effort. The varable for measurng the effect of the fnancng mechansm n the form of debt used to control nvestment actvtes carred out by the manager (DEBT) has a sgnfcant negatve parameter, showng that the probablty of ncurrng n R&D costs s lower wth hgh debt ratos. Our results are n agreement wth the theory, whch predcts that frms wth hgh debt ratos tend to decrease ther R&D expendtures, because R&D expendtures can evaporate n fnancal dstress. There are emprcal evdence that fnd ths negatve nfluence (Hall, 1990; Gudc and Palear, 2000). Among the works dealng wth the Spansh stuaton, that by Azofra et al. (1995) obtans a negatve relatonshp between ndebtedness and the valuaton rato. It can be seen n ths study how those companes wth ntangble assets or good opportuntes for growth, and as a consequence, hgher valuaton ratos, tend to resort to debt to a lesser extent. It can also be seen how a postve valuaton by the market s synonymous wth a hgh capacty of nternal resources that therefore enables external fnancng to be dspensed wth. Lookng at the varable whch states whether or not the company s quoted on the Stock Exchange (STOCK), t can be seen that ths s not sgnfcant n Wth regard to the varables concernng technologcal opportunty n the sector, t can be seen how those companes wth a hgh technologcal opportunty (HIGH) have a hgher probablty of carryng out R&D expenses. Many authors have also obtaned the same conclusons, n the sense that belongng to a busness sector wth a hgh level of technologcal complexty s a determnant when nnovatng (for example, Coronado and Acosta, 1999; Gumbau, 1994, 1997; Scherer, 1965; Cohen and Levn, 1989; Parco, 1993; Kraft, 1989). The varable dealng wth the geographcal extent of the man market n whch the company operates (MARKET) shows the effect that the company decdng to expand ts market to a wder regon may have. Ths varable ncludes varous ssues. Frstly, there s the fact that companes that are classfed n the category of the wdest geographcal extent (Span and abroad) are n prncple larger and more mature companes. Ths varable also shows the effect of demand on the decson to nvest n mprovng the 18

21 product, so that product nnovatons are determnant n ths stuaton 11. In ths feld, an mportant role s played by dealng wth a wder geographcal area. Internatonal competton s more dverse and more ntense than competton n smaller geographcal areas, meanng that nternal capabltes must be mproved by more rsky advertsng or nnovaton expenses n order to obtan a safe market share. We can see that ths s a sgnfcant varable n the year studed, wth the estmated parameter postve. Ths result corroborates the one obtaned n other studes, such as those by Gumbau (1997), Gerosk (1990), Dxon and Seddgh (1995), Love et al. (1996) and Mansfeld (1981,1986). Fnally, wth respect to the technologcal level of the regon (REG), the probablty of a frm choosng to ncur n R&D expenses also seems to ncrease f the frm s stuated n a hgh technologcal regon than f not, as we expected. An addtonal comment n ths type of models s ther hgh predctve potental. The predcton potental of a model estmated wth logstcal methodology s carred out by means of what s known as "classfcaton table", whch compares the observed responses wth the predcted responses n the mplemented model. There s a hgh percentage of correct classfcaton n the estmated models, beng close to 74% The R&D effort Table 6 reports the estmaton results for the tobt model, whch explans the determnants of the nnovatve effort. The frst nterestng result s that the sgnfcance of the varables s equal than the sgnfcance of the varables n the probablstc model of R&D nput (Model 1). As can be deduced from the obtaned results, the frm s sze (SIZE) seems to have a postve effect on the R&D effort. As sze ncreases, the proporton of R&D expendtures per employee ncreases (Gumbau, 1997; González and Jaumandreu, 1998). The age of the frms (AGE) seems to have a postve nfluence on ther nnovatve effort, a results n agreement wth some other authors (Busom, 1993; Galende and De la Fuente, 2003). The results regardng the frm s ownershp structure deserve some addtonal comments. As we obtaned n the decson model, the varable showng dentty between 11 Ths aspect s ncluded n the study by González and Jaumandreu (1998), who study the decson to carry out product nnovatons for a sample of Spansh companes. 19

22 ownershp and control (OWN) has a negatve and sgnfcant parameter, because of the reducton of unproductve or napproprate use of resources, so that the more owners n decson postons the less R&D effort. Also, the mechansm of ownershp concentraton (SHARE) and the fnancng mechansm (DEBT) seems to have the same negatve effect on the R&D effort. In a work by Myers (1977) the debt rato seems to be sgnfcantly and negatvely correlated wth current R&D expendtures, because of fnancal dstress costs, frm wth consderable growth opportuntes (and, correspondngly, frms that have sgnfcant R&D opportuntes) are unlkely to ssue much debt. However, the varable whch states whether or not the company s quoted on the Stock Exchange (STOCK) seems not to have any effect on the R&D effort per employee. In relaton wth the technologcal opportunty of the sector of actvty, as we expected, the two varables have sgnfcant parameters. Frms that are belongng to a hgh opportunty sector (HIGH) have more R&D expendtures per employee than companes from low or medum opportunty sectors of actvty. The results are smlar to other authors for the Spansh case (Busom, 1993; Gumbau, 1997). The varable REG, ndcatve of the technologcal opportunty of the regon where the company s stuated, has a postve and sgnfcant parameter. Therefore, the locaton of the frm s mportant for explanng the expense n R&D, explans the mportance of the regon resources n the frm R&D effort. The effect of geographcal opportuntes n Span has been analysed by González and Jaumandreu (1998) wth smlar conclusons. Fnally, the nfluence of the geographcal extent of ther man market (MARKET) has a postve nfluence of the nnovatve effort per employee lke n the González and Jaumandreu s work (1998). Companes that have a market hgher or equal to natonal have more R&D expenses per employee than companes that have a geographcal extent lower than natonal. The concluson s that competton has a postve effect on the R&D frm effort. As regards the Mlls rato, t has a postve and sgnfcant effect denotng that the selectvty bas s relevant so t s determnant to control the dfferent answer between the groups of frms (frms that undertakng R&D expenses and frms that do not) as we have made n the prevous secton. 20

23 4.3. The probablty to obtan an R&D output. Table 7 shows the results of the dscrete choce model of R&D output (model 3), wth qute dfferent conclusons f compared wth the results obtaned n the R&D nput models. As we expected, the varable that explans de R&D effort per employee (EFFORT) has a postve and sgnfcant parameter on the probablty to obtan an R&D output, a result whch was obtaned by other authors (Love et al, 1996, Beneto, 2003; among others). As we expected, the two nternal varables that explan the sze (SIZE) and the age effect (AGE) on the probablty of awardng some R&D output are also postve and sgnfcant, denotng the same conclusons that we obtaned n the nput model. The elder the company s the more probablty to obtan R&D output. Concernng the mechansms to allevate the agency problem, only the varable that explans the effect of quotng n the Stock Exchange (STOCK) seems to have a sgnfcant effect on the probablty to award patents or models of use. If a company s quoted on the Stock Exchange, the probablty to obtan an R&D output s hgher than f not. Ths could be related to the dea that the patentng could be used as a sgnal for the shareholders to ncrease ther shares n the company or even for potental shareholders to take part on the company. Furthermore, the fact that the company has a geographcal extent of ther market (MARKET) hgher or equal to the natonal level seems to have a postve and sgnfcant effect on the probablty to obtan an R&D output. The fact that the market sze ncreases the probablty of generatng nnovaton a smlar result than n Beneto (2003). Fnally, the effect of the sector of actvty (HIGH, LOW) and also the regon (REG) seems not to be determnant to have an R&D output. Ths result s contrary to the one by Coronado and Acosta (1999), whch fnds that the probablty to obtan a R&D output s hgher n hgh technologcal opportunty sectors of actvty. Moreover, the Coronado and Acosta work found that f the regon where the frm s located s a hgh technologcal regon the frm has a hgher probablty to nnovate. In order to evaluate the sutablty of the model estmated, we compute a statstc to verfy the null hypothess consstng of the coeffcents of the varables beng equal to zero. It shows the dfference between the logarthm of lkelhood for the full model and for the model that only has the constant term. As t can be observed, the log-lkelhood rato test produced a χ 2 value of wth 11 degrees of freedom. Its sgnfcance (p 21