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Differences in the characteristics of innovative and non-innovative manufacturing plants

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This article explores differences in characteristics of innovative and non-innovative manufacturing plants in Canada using results from the Survey of Innovation (SOI) 2005. It finds that innovative plants are more likely than non-innovators to be large, to have employees with higher education credentials, to engage in research and development (R&D) and marketing activities and to have full-time R&D employees. Innovative plants are also more likely to receive external funding, to export and import, to use both formal and informal methods of intellectual property protection, and to have differences in how they rate the importance of success factors.

About this article
Findings
References
About the author

About this article

An innovation is defined as the introduction of new or significantly improved goods or services to the market, or the introduction of new or significantly improved processes, including new or significantly improved ways of delivering goods or services (OECD/Eurostat 1997). Only innovations occurring between 2002 and 2004—the survey reference period—were included in this analysis.

Although the Oslo Manual has since undergone revision (OECD/Eurostat 2005) to include both organizational and marketing innovations, the third edition had not yet been published when the 2005 SOI was undertaken. Thus, the 2005 SOI did not measure the prevalence of marketing and organizational innovations.

Innovative plants are those that indicated in the 2005 SOI that they introduced a new or significantly improved product or process during the reference period.

Non-innovative plants are those that did not introduce a new or significantly improved product or process during the reference period.

The sample unit for the SOI 2005 was the statistical establishment, for which the questionnaire substituted the more familiar word “plant”. The latter term is also used in this article.

More information about the SOI 2005 is available.

July 13, 2009 Note to readers: Revisions have been made to tables 2, 3, 4 and 6.

Findings

Plant size and the innovation/non-innovation divide

Innovation is a key factor in firm growth because it can contribute to aggregate productivity growth which can translate into long run improvements in living standards (Baldwin 1995, 1999). Results from the 2005 SOI show that almost two-thirds (65.0%) of Canadian manufacturing plants were innovators.

Evidence from the 2005 SOI indicates that innovators are more likely to be large plants, as defined by number of employees and by revenue. Table 1 shows that manufacturing plants with 50 or more employees were more likely to be innovators than non-innovators. More than half of innovative plants (58.2%) had 50 or more employees, compared to 43.6% of non-innovative plants.

Table 1 Size comparison of innovative and non-innovative manufacturing plants, 2002 to 2004

Table 1
Size comparison of innovative and non-innovative manufacturing plants, 2002 to 2004

The size of a plant can also be gauged by its revenue. Empirical evidence shows that when compared to non-innovators, innovators were more likely to be higher revenue earners. Almost two-thirds (65.3%) of innovators had revenues greater than $5 million, compared to one-half (50.7%) of non-innovators.

These findings may buttress the thesis that larger plants have certain advantages which make them more innovative than smaller ones. Some of these advantages include stronger cash flows to fund innovation activities, higher value assets that they can use as collateral for loans geared toward innovation, and lastly, wider access to human capital for innovation (Rogers 2000).

Further, innovators have a greater likelihood of being part of a larger firm. Almost four-in-ten innovators (37.6%) were part of a larger firm compared to three-in-ten (29.1%) non-innovators.

Is there a skills gap between innovative and non-innovative plants?

It is now well-established that the probability of a firm being an innovator is highly correlated with the skill structure of its employees (Gellatly 1999). Innovative capabilities depend on the knowledge capital of employees, which is partly embodied in the formal level of qualification. Hall (1998) concluded that innovative firms are more likely than non-innovators to implement policies that favour hiring qualified workers in order to foster the most adequate environment for the materialization of new ideas.

The results of the SOI 2005 suggest that the employment of university and college or technical institute graduates differs significantly between innovative and non-innovative plants, with the former being more likely than the latter to have full-time employees with higher education. Innovative plants are more likely to employ university graduates than non-innovative plants (Table 2). They are also more likely to have a higher proportion of employees with college or technical institute diplomas.

Table 2 Employee education credentials of innovative and non-innovative manufacturing plants, 2002 to 2004

Table 2
Employee education credentials of innovative and non-innovative manufacturing plants, 2002 to 2004

Propensity of innovative and non-innovative plants to engage in research and development and marketing activities

Research and development (R&D) is one of the key drivers of productivity growth (Baldwin 1999). International evidence suggests that high levels of R&D support strong and stable firm growth (Basile 2001). Although R&D performance by itself does not guarantee success in innovation, it has been found to be a key component in the innovative process (Baldwin 1997, Napolinato 1991). Results of the SOI 2005 show that innovators were more likely than non-innovators to have full-time employees engaged in R&D (Table 3).

Table 3 Research and development (R&D) and marketing in innovative and non-innovative manufacturing plants, 2002 to 2004

Table 3
Research and development (R&D) and marketing in innovative and non-innovative manufacturing plants, 2002 to 2004

Good marketing strategies complement innovation. Innovators place greater emphasis on marketing activities, they have a broader range of products and spend more on marketing than non-innovators (Baldwin and Johnson 1995). The results of the SOI 2005 show that innovators are more likely to have full-time employees engaged in marketing than non-innovators.

Many governments have introduced R&D tax credits as a further incentive for firms to increase their R&D investment. Evidence (Mohnen and Bérubé 2007, Dalby 2005, Dagenais, Mohnen and Therrien 1997) suggests that tax incentives stimulate R&D activity between $0.98 and $1.38 per dollar of foregone tax expenditure (excluding possible provincial tax incentives) and that R&D tax credits impact positively on the firm’s decision to conduct R&D and to increase innovation output (Czarnitzki, Hanel and Rosa 2005).

According to the results of the SOI 2005, innovative plants were more likely to use R&D tax credits than non-innovative plants (see again Table 3). Also, innovators were more likely to use both federal and provincial R&D tax credits than non-innovators.

Use of intellectual property protection methods among innovators and non-innovators

According to the results of the SOI 2005, about 7 out of every 10 innovative plants (69.6%) used formal intellectual property protection methods, while only about 4 out of every 10 non-innovative plants (42.1%) used similar methods (Table 4). In addition, three-quarters of innovative plants (74.7%) also used informal methods of intellectual property protection, compared to less than one-half of non-innovators (41.0%).

Table 4 Use of intellectual property protection in innovative and non-innovative manufacturing plants, 2002 to 2004

Table 4
Use of intellectual property protection in innovative and non-innovative manufacturing plants, 2002 to 2004

Another indicator of the level of use of intellectual protection methods is the percentage of plants with revenues protected by patents. Innovators were more likely to have their revenues protected by patents (25.5% versus 9.6%).

Are innovators more likely than non-innovators to receive external funding?

Overall, innovative plants are more likely than non-innovative plants to receive funding from external sources. However, this was dependent on the type of funding in question. For example, innovators were more likely to receive Canadian-based venture capital, American-based venture capital and other external sources (Table 5). On the other hand, innovators were just as likely as non-innovators to receive venture capital from other countries, angel investors/ family capital, private placement, initial and secondary public offerings, and collaborative arrangements and alliances.

Table 5 External funding characteristics of innovative and non-innovative manufacturing plants, 2002 to 2004

Table 5
External funding characteristics of innovative and non-innovative manufacturing plants, 2002 to 2004

Innovators more likely than non-innovators to export and import

Studies have shown that R&D and innovation are very important drivers of firms’ decisions to export (Basile 2001, Bernard and Jensen 1999, Cassiman and Martinez-Ros 2007). Results of the SOI 2005 support these findings. As discussed earlier, innovative plants were more likely than non-innovators to have full-time employees engaged in R&D. In addition, compared to their non-innovative counterparts, innovative plants were found to be more likely to have markets outside Canada. Table 6 shows that in addition to being more likely to have revenues from the rest of Canada (outside their province of operation) innovative plants are more likely than non-innovative firms to have revenues from the United States, Europe, Mexico, the Asia-Pacific region and other countries. This suggests that encouraging and raising innovation levels could also lead to increased export levels.

Compared to non-innovators, innovators are also more likely to import raw materials from outside Canada. Table 6 shows that for all the geographical areas listed, innovative plants were more likely than their non-innovative counterparts to import raw materials. For example, almost 8 out of every 10 innovators (78.5%) imported raw materials from the United States, compared to about 6 out of every 10 non-innovators.

Table 6 Location of revenue sources, raw material expenditures, and machinery and equipment purchases, innovative and non-innovative manufacturing plants, 2002 to 2004

Table 6
Location of revenue sources, raw material expenditures, and machinery and equipment purchases, innovative and non-innovative manufacturing plants, 2002 to 2004

Also, in 2004, innovators were more likely than non-innovators to buy new machinery or equipment. This was true of machinery and equipment purchased from both Canada and the United States.

Innovators and non-innovators have different perceptions of success factors important to their plant

Important differences were found between innovative and non-innovative plants with respect to the factors they considered highly important for their plants’ success. As Table 7 shows, innovative firms are more likely to report that developing niche markets, new markets and export markets are success factors of high importance to them. On the other hand, both of these groups are equally likely to indicate that satisfying existing clients and complying with environmental regulations are success factors of high importance. These two factors can be considered more general factors important to plants regardless of innovation status.

Table 7 Success factors of high importance for innovative and non-innovative manufacturing plants, 2002 to 2004

Table 7
Success factors of high importance for innovative and non-innovative manufacturing plants, 2002 to 2004

Developing new markets, niche and export markets, and developing custom-designed products are all factors that would be expected to require some level of innovation, thus it is not surprising that these factors are highly emphasized by innovative plants.

References

Baldwin, J. R. 1999. "Innovation, training and success."   Analytical Studies Branch Research Paper Series, Statistics Canada Catalogue no. 11F0019MIE, no. 137.

Baldwin, J. R.  1997. "The importance of research and development for innovation in small and large Canadian manufacturing firms." Analytical Studies Branch Research Paper Series, Statistics Canada Catalogue no. 11F0019MIE, no. 107.

Baldwin, J. R. 1995. “Innovation: The key to success in small firms.” Analytical Studies Branch Research Paper Series, Statistics Canada Catalogue no. 11F0019MIE, no. 76.

Baldwin, J. R. and J.  Johnson. 1995. "Business strategies in innovative and non-innovative firms in Canada.” Analytical Studies Branch Research Paper Series, Statistics Canada Catalogue no. 11F0019MPE, no. 73.

Basile, R. 2001.  "Export behavior of Italian manufacturing firms over the nineties: The role of innovation." Research Policy. Vol. 30, no. 8. p. 1185-1201.

Bernard, A.B. and J.B. Jensen. 1999.  "Exceptional exporter performance: Cause, effect or both?" Journal  of International Economics. Vol. 47, p. 1-25.

Cassiman, B, and E. Martinez-Ros. 2007. Product Innovation and Exports: Evidence from Spanish Manufacturing. IESE Working Paper, Mimeo.

Czarnitzki, D., P. Hanel, and J. M. Rosa.  2005. "The impact of R&D tax credits on innovation: An empirical analysis based on a survey on innovation in Canadian manufacturing." Innovation Analysis Bulletin, Statistics Canada Catalogue no. 88-003-XIE, Vol. 7, no. 2. p. 4-6.

Dagenais, M., P. Mohnen, and P. Therrien. 1997. "Do Canadian firms respond to fiscal incentives to research and development?" Cahier du CIRANO. no. 97s-34. Centre interuniversitaire de recherche en analyse des organisations, Montreal.

Dalby, B. 2005. "A framework for evaluating provincial R&D tax subsidies." Canadian Public Policy. Vol. 31, no. 1. p. 45-58.

Gellatly, G. 1999. "Differences in innovator and non-innovator profiles: Small establishments in business services." Analytical Studies Branch Research Paper Series, Statistics Canada Catalogue no. 11F0019MPE, no. 143.

Hall, B.H. 1998. Innovation and Market Value. NBER Working Paper No. 6984, Cambridge, MA.

Mohnen, P., and  C. Bérubé. 2007. "Are firms that received R&D subsidies more innovative?," UNU-MERIT Working Paper Series, no. 015. United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology (UNU-MERIT).

Napolinato, G. 1991. "Industrial research and sources of innovation: A cross-industry analysis of Italian manufacturing firms." Research Policy, Vol. 20. p. 171-178.

Organisation for Economic Co-operation and Development (OECD) and Eurostat.  2005. Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data. 3rd edition. OECD, Paris.

Organisation for Economic Co-operation and Development (OECD) and Eurostat.  1997. Oslo Manual: Proposed Guidelines for Collecting and Interpreting Technological Innovation Data. 2nd edition. OECD, Paris.

Rogers, M. 2000. "Understanding innovative firms: An empirical analysis of the GAPS." Melbourne Institute Working Paper Series. Melbourne Institute of Applied Economic and Social Research, University of Melbourne.

About the author

Horatio Sam-Aggrey is with the Science, Innovation and Electronic Information Division at Statistics Canada. For more information about this article, please contact sieidinfo@statcan.gc.ca.