Source: http://www.cepr.org/pubs/bulletin/dps/dp927.htm
Traditional models of innovation based on a `knowledge production function' link knowledge inputs with innovative outputs at the enterprise level and predict that innovative activity will be concentrated among the largest corporations which undertake the bulk of R&D. A recent wave of empirical studies has identified small enterprises as the engines of innovative activity in certain industries, despite their lack of formal R&D activity, which poses a challenge to this Schumpeterian model of innovation and raises the question of where they obtain the necessary inputs.
In Discussion Paper No. 927, Research Fellow David Audretsch and Marco Vivarelli propose modifying the knowledge production function to allow a broader unit of observation than the individual enterprise and span both product and spatial dimensions, which allows for `knowledge spillovers' from R&D investment of private and public firms as well as universities to be exploited by third-party firms. They estimate such a function on annual data measuring total per capita economic activity, numbers of patents registered, R&D expenditure by private and public firms and university research expenditure for 15 Italian regions over 1978-86. Their pooled, cross-section results reveal that all the R&D inputs generate innovative output, but university research has a greater effect on innovation for small firms than for larger ones. This is consistent with similar findings for the US and suggests that an environment with a high endowment of knowledge-based workers and skilled engineers is particularly conducive to the innovative activity of small firms.
Audretsch and Vivarelli conclude that their empirical evidence supports the model of the knowledge production function but not at the level of observation of the individual firm, since small firms tend to exploit knowledge generated from R&D conducted elsewhere. While knowledge production functions have traditionally assumed that large and small firms search for knowledge inputs that generate innovative activity, these results suggest instead that this knowledge is produced exogenously and new small firms then emerge to appropriate its economic value.