Innovative activities and investment decision: evidence from European firms

Abstract

This paper investigates the role of innovative activity and other micro determinants, on firms’ investment behaviour. The empirical analysis is based on a large representative and cross-country comparative sample of manufacturing firms across seven European countries during the global financial crisis 2007–2009. It is argued that innovative activities, measured either by an input variable (R&D) or by an output variable (innovative products sales), may boost additional investment in equipment and machinery. Given the significant share of firms which did not carry out any investment, a tobit procedure is adopted. Successively, in order to account for the potential simultaneity between investment decision and innovation activity variables, a seemingly unrelated regression equation methodology is applied. The results reveal that both R&D and innovative sales positively affect investment decisions, with the former having a stronger impact on investments, compared to the latter. The analysis also suggests that, after checking for a firm’s characteristics, firms in Germany and Spain are more likely to invest than those in France, Italy, and the UK.