Firm heterogeneity is a crucial element for explaining export activity (Bernard et al., 2003). In particular, some empirical studies have compared the export performance of innovative and non-innovative firms, concluding in favour of a significant positive correlation between innovation and exports (e.g. Caldera, 2010; Becker and Egger, 2013). Building on this evidence, this paper shows that the effect of firm’s innovation on the propensity to export varies across regions. Using a representative sample of Spanish manufacturing firms, the effect of product and process innovation on the probability of exporting in each Spanish NUTS2 region is estimated. In a second stage, the estimated coefficients for each region are combined with the sample values of firm characteristics to compute counterfactual average propensities to export in each region, under a counterfactual scenario for the propensity to innovate in products and in processes. Comparison of actual and counterfactual regional export propensities allows a more intuitive assessment of the impact of regional differences in innovation on those observed in export performance.
Results in the paper show that innovative firms are more prone to export than otherwise similar non-innovative firms. For the entire of Spain, the probability of exporting for firms that declared to innovate in products was 35 percentage points (pp) higher than for similar firms that did not innovate. The size of the effect is similar for process innovation and for the measure that accounts for both types of innovations. Interestingly, results confirm substantial disparities across regions in the impact of innovation. The estimated increase in the probability of exporting associated to product innovation is above 40pp in Aragon and La Rioja, while on the opposite side, apart from the island regions, the lowest impact is shown by firms in Asturias and Catalonia. Regional disparities are also observed in the impact of process innovation, with the highest marginal effect in Murcia, Aragon, and Galicia, and the lowest in the two island regions, and in Asturias, and Andalusia. Overall, it can be concluded that the increase in the propensity of exporting due to innovation is larger in regions where the share of exporting firms is high; this result being robust to the alternative measures of innovation considered in the analysis.
The counterfactual exercise confirms that the increase in the share of exporting firms would be substantial in regions with an actual low extensive margin. Increasing the propensity to innovate in products leads to a rise of about 10pp or more in regions with a share of exporting firms far below the country average, such as Andalusia, Balearic Islands, Cantabria, Castile La Mancha, and Extremadura. In turn, the impact is much lower (3-4pp) in regions with a share above or about the country average (Valencia, Madrid, Navarra, and the Basque Country). A similar pattern is observed when using process innovation, though in this case the change in the above-mentioned share is less pronounced in all regions. The only region that clearly deviates from this pattern is the Canary Islands, as its extensive margin is the lowest in Spain while it is among the regions where the effect of increasing innovation is less intense. In fact, the correlation between the change in the extensive margin and its actual value in the set of Spanish regions excluding the Canary Islands is significantly negative (-0.70, -0.88, and -0.88 for product, process and both innovations respectively). This result leads us to conclude that, other things equal, increasing innovation propensity, particularly in products, would contribute to narrow the regional gap in the proportion of exporting firms.
An immediate implication of the evidence in this study is that policies aiming at stimulating innovation (for instance through technological cooperation), which are likely to be effective in promoting exports by increasing the number of exporting firms, will not exert the same effect on exports in all regions. Therefore, the a priori assessment of innovation policies should include the positive expected effect on export performance, but taking into account that geography and certain locational endowments are likely to affect the particular impact of these policies in each region. In addition, results on the effect of innovation on export status lead us to recommend focusing the effort of direct policies aiming at promoting exports just on the group of innovative firms in each region that are not exporting yet. They are the potential candidates to become exporters if locational disadvantages are compensated in some way by the effect of these policies.
Becker S. and Egger P. (2013) Endogenous product versus process innovation and a firm’s propensity to export, Empirical Economics 44, 329-354.
Bernard A., Eaton J., Jensen B. and Kortum S. (2003) Plants and productivity in International trade, American Economic Review 93, 1268-1290.
Caldera A. (2010) Innovation and exporting: evidence from Spanish manufacturing firms, Review of World Economics 146, 657-689.