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SCience, Innovation, FIrms and markets in a GLObalized World

Final Report Summary - SCIFI-GLOW (SCience, Innovation, FIrms and markets in a GLObalized World)

Executive Summary:
The aim of the FP7 SCIFI-GLOW (SCience, Innovation, FIrms and markets in a GLObalized World) Collaborative Project was to simultaneously look at the organisation of the 'knowledge sector' and at the behaviour of firms and markets, bringing together two 'communities' of economic researchers: those interested primarily in the research sector and those who look at the effect of globalization in terms of trade flows, the organisation of firms, and product and labour market outcomes. The two 'communities' of researchers look for common and contrasting trends in the research sector, and the corporate sector in general, as a result of globalization. For example, to what extent does the increased competitive pressure implied by globalization lead to more productivity in both areas? What are the potential drawbacks of this pressure, for example in terms of instability and/or inequality of outcomes? To what extent do we see similar tendencies of globalization in the two sectors in the context of the emergence of Asia, for example? And to what extent does globalization lead to faster transmission of knowledge from the research sector to manufacturing and service firms? These are only a few of the questions that our combining of these two communities of researchers has allowed us to address.

The goal of this project has been to produce frontier research on the topic, and to use it to produce a policy report that has had extensive prior consultation with stakeholders from the research, business, labour and policy communities (in a similar fashion as happened for the scientific publication study, where three consultation meetings were organized with publishers, libraries and research funders).

The project started in June 2008 and finished in May 2012. Aside from WP7 (Final Policy Report and Dissemination) and WP8 (Project Management), the work of the project has been organized around six Work Packages, consisting of two phases.

The first phase aimed to advance the frontier of knowledge relating to the production of knowledge in a global world. The research focused more specifically on the production of knowledge not limited to the context of universities and research institutes, but on the research activities of private or public firms. This first phase was divided as follows:

WP 1: The organisation of science (and creation of knowledge) in the new global era.
WP 2: Industry-science links.
WP 3: Intellectual property rights and the diffusion of knowledge.

The aim of the second phase was to look at the 'bigger picture' – the overall organisation of firms in the global knowledge economy, as well as its implications on markets and inequality. Moreover, the discussion focused on both the impact on trade flows and the impact from trade flows. The three work packages in this phase were:

WP 4: The organisation of firms, contracts and markets in the global knowledge society.
WP 5: Globalization, the labour market and inequality.
WP 6: International trade flows, knowledge creation and diffusion, and innovation.
Over the course of the project, 10 organisations have co-operated in producing research and policy papers under the work packages described above, and exceeded the initial target of writing 48 papers. Thus, it is expected that the project will leave a lasting socio-economic impact, both in academic circles and in the policy arena, by providing a sophisticated understanding of the interaction between knowledge production and the behaviour of firms and markets in the global economy.
Project Context and Objectives:
In 2000, EU leaders committed to the objective of making Europe ‘the most dynamic and competitive knowledge-based economy in the world, capable of sustainable economic growth, with more and better jobs, greater social cohesion and respect for the environment.’ They drew up the ‘Lisbon agenda’ to achieve this goal by 2010. The central strategy was based on policies to encourage investment in knowledge. Knowledge as a public good with potential spillovers is the rationale behind intellectual property protection and subsidies for investments in innovations that will potentially lead to high spillovers. University research that creates basic knowledge is a leading example of this. But research shows that spillovers are also generated from private firms’ R&D and that firms can therefore benefit from the presence of more innovative and more productive firms. But which universities and which firms are more innovative? And how does globalization influence the answer to these questions? Finally, how can policy influence the innovation process? This project has aimed at answering these questions, without forgetting their implications in terms of labour market uncertainty, which impacts on the political sustainability of innovation dynamics.

The originality of this project has been to simultaneously look at the organisation of the ‘knowledge sector’ and at the behaviour of firms and markets. Doing so has been important for the following reasons:

1. There is widespread agreement that one should look in an integrated way at the triangle of higher education, research and innovation.
2. At the level of universities and research institutes, there is growing interest in the relation between their internal organisation (that one can analyse through the lens of incentive and contract theory), their market environment (that is increasingly considered by industrial economists) and their performance (measured with increasing sophistication by researchers in the economics of science). This is even more the case today that a productive knowledge sector is increasingly considered a strategic asset for international competitiveness.
3. The same is true for firms in general, with the additional emphasis on international trade, which is composed in very significant part of intra-firm trade. This explains the new emphasis in international trade research on the internal organisation of firms, and therefore on the connection between contract theory and international trade.
4. Finally, while the focus of international trade researchers on inequality of outcomes, especially in the labour market, is not new, it has increasing importance given the impact of globalization in raising income inequality and uncertainty. Actively thinking about these issues in terms of social cohesion has therefore been key.

In order to look simultaneously at the effects of globalization on the knowledge sector and on firms and markets in general, this project has brought together two ‘communities’ of economic researchers: those interested primarily in the research sector and those who look at the effect of globalization in terms of trade flows, the organisation of firms, and product and labour market outcomes. This has meant connecting teams of researchers with expertise in the following areas: economics of science and innovation; economics of incentives and contracts; industrial organisation; international trade, and labour economics. The project has done this whilst constantly combining theoretical and empirical research, building upon the ever-greater availability of databases, both at the cross-country level and at the national level, to highlight interesting case studies. More information is given below.

The project has allowed the two communities of researchers to look for common as well as contrasting trends in the research sector, and the corporate sector in general, as a result of globalization: for example, to what extent does the increased competitive pressure implied by globalization lead to more productivity in both areas? What are the potential drawbacks of this pressure, for example in terms of instability and/or inequality of outcomes? To what extent do we see similar tendencies of globalization in the two sectors in terms of the emergence of Asia, for example? And to what extent does globalization lead to faster transmission of knowledge, from the research sector to manufacturing and service firms? These are only a couple of questions that our combining of these two communities of researchers has allowed us to address.

More specifically, the project was disaggregated into two main parts. The first part, which started at the outset of the project, aimed at advancing the frontier of knowledge concerning the production of knowledge in a global world. It provided evidence to be used in the second part, which started shortly after the first (and ran in parallel for a major part of this three-year project), which looked at the effect of globalization on the organisation of firms, and in particular on their use of knowledge and the implications it has on productivity, employment and competitiveness. The goal was to assess the interactions between science, innovation and production in a unified way.

These two parts shared the following research elements:

Part 1: The knowledge sector and the global economy.
This first part of the project focused more specifically on the production of knowledge. It was not limited to universities and research institutes, but when private or public firms are concerned, the focus was on their research activities.

Work package 1: The organisation of science (and creation of knowledge) in the new global era. This work package analysed in particular on the productivity of the science sector, its funding and organisation (internally as well as across institutions, through alliances and networks), and the ‘market for scientists’. Particular attention was given to the emergence of new science-based industries, such as biotechnology, tissue engineering and nanotechnology.

Work package 2: Industry-science links. This work package analysed in particular this question in the context of innovation by multinationals. It also considered the role of university-firm collaborations in international R&D alliances. It also analysed industry-science links in terms of local development. And it analysed the question of the overall complementarity between basic and applied research, with the incentives for sharing knowledge in these two environments.

Work package 3: Intellectual property rights and the diffusion of knowledge. This work package analysed the role of patents, licensing, R&D alliances, Standard Setting Organisations, and scientific communication in the global knowledge society. A specific focus was put on the interaction between competition law and intellectual property rights. Researchers studied how strategic behaviour in obtaining and defending IPRs are affected by global competition, and how strategic behaviour of this type affects innovation and the diffusion of knowledge in the international arena, in particular through off-shoring.

Part 2: Globalization, Innovation and Firms: How knowledge interacts with globalization and the organisation of the economy.

This second part of the project looked at the ‘bigger picture’, looking at the overall organisation of firms in the global knowledge economy, as well as its implications on markets and inequality. Moreover, the discussion focused on both the impact on trade flows and the impact from trade flows.

Work package 4: The organisation of firms, contracts and markets in the global knowledge society. This work package analysed how the organisation of firms is currently changing under globalization, with as an implication the trend towards off-shoring of knowledge-intensive activities. The role of capital markets, entry of new firms and joint ventures received particular attention. The question of interactions between different ‘corporate cultures’ was also analysed.

Work package 5: Globalization, the labour market and inequality. This work package analysed in particular: the interaction between innovation, job creation and job destruction; the potential risks on job stability linked to multinational employment compared to ‘domestic jobs’; and the ‘new international division of labour’ in Europe, and the extent to which job migration towards the East concerns knowledge-intensive activities. Furthermore, the drivers behind the rising skill premium and the explosion in CEO pay and how it is related to global trade were explored as well.

Work package 6: International trade flows, knowledge creation and diffusion, and innovation. This work package analysed in particular the impact of trade liberalisation on the innovation process. While WP4 started from the internal organisation of firms, this work package stressed the ‘discipline’ that trade imposes on firms, both in the manufacturing and the service sectors.

While the project brings together researchers at the frontier of academic knowledge on these topics and was expected to deliver research results that aim at being published in top international journals, they have also been highly policy-relevant. We therefore planned to end the project with a summary and set of policy conclusions on research and innovation in the global knowledge economy. This is in a sense Part 3 of the project, which consisted of:

Work package 7: Report on summary and policy conclusions.
The goal of this project was to produce frontier research on the topic and to use it to produce, in Work Package 7, a policy report that was to be the subject of extensive prior consultation with stakeholders from the research, business, labour and policy communities.

Achieving this goal was significantly helped by the fact that many of the project collaborators had extensive previous experience of connecting frontier research with policy questions. This included the ‘Sapir Report’, coordinated by André Sapir, ULB scientist-in-charge for this project, commissioned by EU Commission President Romano Prodi in 2003; the CEPR report on ‘Making Sense of Globalization: A Guide to the Economic Issues’ by Dalia Marin and Thierry Verdier (among other authors), scientists in charge for this project of the University of Munich and of Paris School of Economics; and the ‘Study on the economic and technical evolution of the scientific publication markets in Europe’, coordinated by project co-ordinator Mathias Dewatripont and commissioned by the DG-Research of the European Commission.

The project held a final policy workshop in Brussels in April 2012 which brought together academics, practitioners and policymakers to discuss a range of issues covering the breadth of the research undertaken during the project. Following this workshop CEPR prepared a Policy Report that gathered the key policy results and messages that emerged from each of the project’s work streams. This final SCIFI-GLOW Policy Report, delivered to the Commission as D 27, is a collection of ‘policy briefs’ that distil and highlight some of the key research and policy messages that have emerged during the course of the programme. The intention was that this collection of ‘policy briefs’ will help towards providing a bridge for policy makers to the academic work that is being undertaken in these areas.

Clearly, and urgently, more research needs to be undertaken on these very important topics in order to inform policy and stimulate growth. Science and innovation remain central to the European policy agenda, and the EU’s ‘Horizon 2020’ initiative for research and innovation has been designed to help create new growth and jobs in Europe with the aim of securing Europe’s global competitiveness.


NOTE

It is important to note that the SCIFI-GLOW project ended on 31st May 2012, but before this Final Report could be submitted the project was subject to an extremely lengthy European Commission Audit and thus it has only been possible to complete the final reporting on the project in February 2018.

This report has been written as if it had been submitted at the originally intended time, i.e. mid-2012, and the information below is correct as of that date, in order to preserve the accuracy of reported results. However, due to the time elapsed while the project was frozen (i.e. approximately 6 years), some evidence on work completed, such as the project website, are no longer easily accessible. Wherever this is the case, it is referred to below in specific instances.

Project Results:

1. Centre for Economic Policy Research (CEPR)

CEPR, the project coordinator, was fully responsible for Work Package 7 (Dissemination) and Work Package 8 (Management). Details on dissemination activities organised by CEPR can be found in Section 2.

In addition to dissemination and management work, the scientific director of SCIFI-GLOW, Mathias Dewatripont, collaborated with Andre Sapir and Philippe Aghion to investigate how university governance affects research output, measured by patenting and international university research rankings. For both European and U.S. universities, they generated several measures of autonomy, governance, and competition for research funding. They show that university autonomy and competition are positively correlated with university output, both among European countries and among U.S. public universities. They then identified a (political) source of exogenous shocks to funding universities in the U.S. Aghion, Dewatripont and Sapir demonstrated that, when a state's universities receive a positive funding shock, they produce more patents if they are more autonomous and face more competition from private research universities. Finally, they showed that during periods when merit-based competitions for federal research funding have been most prominent, universities produce more patents when they receive an exogenous funding shock, suggesting that routine participation in such competitions hones research skill.


2. Université Libre de Bruxelles (ULB)

ULB contributed to Work Packages 1, 3, and 4.

WP1

Together with André Sapir, François Bries surveyed European academic economists from top economic departments to describe the current state of mobility in the European Union. Based on 747 responses, they employed regression models to test for the impact of mobility, both national and international, on the productivity of researchers measured by various bibliometric indicators. They found that mobility has an impact on performance, but that not only inter- but also intra-national mobility is important. Although reported here in WP1, this work carried out by Bries was done for, and is relevant to, WP2 as well.

Papers produced:
(D10a) The governance and performance of research universities, Philippe Aghion, Mathias Dewatripont & André Sapir


WP3

1st periodic report
For his part, Bruno Van Pottelsberghe (together with Matthis de Saint-Georges) has developed a quality index for patent systems. The index was composed of nine operational design components that help shape the transparency of patent systems and affect the extent to which they comply with patentability conditions. Seven factors are related to rules and regulations, while two factors measure patent offices’ resource allocation (i.e. workload per examiner and incentives). The index was computed for 32 national patent systems, displaying a high heterogeneity across countries. Cross-sectional quantitative analyses suggested that the demand for patent rights – or the propensity to patent – is lower in patent systems with a higher quality index, controlling for research efforts, patent fees, and the ‘strength’ of enforcement mechanisms.

Michele Cincera discussed how knowledge originating in one country or region is increasingly able to cross national boundaries and contribute to the productivity growth of other geographic areas – a process known as ‘R&D spillovers’. The policy paper examined the magnitude of R&D spillover effects on the productivity growth of large international R&D companies. Cincera concluded that firms have an incentive to under-invest in R&D in the hope of free-riding from the investments of other companies. Public intervention through subsidies, tax credits, or public procurement for R&D projects is therefore needed to bring R&D closer to optimal levels. Further findings include the fact that regional policies aimed at attracting R&D companies to a given area or encouraging new high-tech clusters are essential; policy measures encouraging increased concentration in particular industries and technological sectors will help firms get closer to one another in a technological sense.

3rd periodic report
Mathias Dewatripont and Patrick Legros have analysed the organisation of the market for IPRs, and, in particular, the functioning of standard setting organisations (SSOs). They highlighted the gaming possibilities generated by FRAND agreements, which require patent-holders whose innovation is essential to a standard to disclose their patents, and to base their (ex-post) licensing on fair and non-discriminatory terms. They showed that because certification of essentiality is difficult (because of what happens in the patent office due to the large number of submitted patents, and because of the ongoing development of the standard under the SSO), firms may have an incentive to contribute more patents than necessary in order to reap a bigger share of the ex-post value of the standard.

This ‘padding’ effect has dynamic consequences since it also influences the level of investment into R&D by firms in non-trivial ways. As they showed, there is a positive relationship between the actual number of essential patents a firm can contribute and the padding, which is the number of inessential patents that this firm contributes to the SSO. This positive covariation makes the policy effects complex. Above all, a better screening of essential patents may reduce the level of innovation in the industry. They showed that an optimal policy combines an increase in the cost of submitting inessential patents and a reduction in the cost of disputes. In addition, the researchers analysed the willingness of different patent-holders to participate in a SSO when there is a commitment to an aggregate royalty rate. They showed that the participation of all participants is a stable outcome if and only if the ‘market value’ of the standard is large enough, and that when participants are heterogenous, some being vertically-integrated (i.e. have patents and produce on the downstream market) while some are specialized in the production of patents, a larger participation in the standard can be achieved either by discriminating between these participants or by inducing divestitures of some assets.

Papers produced:
(D15), Geographic and technologicaI R&D spillovers and firms’ productivity performance, ULB
(D14h), Essential Patents, FRAND Royalties, and Technological Standards, Dewatripont M, Legros P



WP4

2nd periodic report
Paola Conconi in co-operation with Laura Alfaro, Harald Fadinger and Andrew Newman examined how trade policy affects firms’ ownership structures, examining the evidence and using a unique dataset to construct firm-level indices of vertical integration for a large set of countries. In line with the predictions of their model, the authors obtained three main results. First, higher tariffs lead to higher levels of vertical integration. Second, differences in ownership structure across countries, measured by the difference in sectoral vertical integration indexes, are smaller in sectors with similar levels of protection. Finally, ownership structures are more alike among members of regional trade agreements.

3rd periodic report
The research within WP4 at ULB by Philippe Aghion, Mathias Dewatripont, Luosha Du, Ann Harrison, and Patrick Legros explored the nature of the debate on industrial policy. They argued that a change in discourse is needed, and that industrial policy should no longer be ‘existential’, i.e. about whether sectoral policies should be precluded altogether or not, but rather on how such policies should be designed and governed in order to foster growth and welfare. Their focus was on the relationship between productivity (or productivity growth) and the extent to which sectoral policy is competition-friendly. Their empirical results suggest that if subsidies are allocated to competitive sectors (as measured by the Lerner index) and allocated in such a way as to preserve or increase competition, then the net impacts of subsidies, tax holidays, and tariffs on total factor productivity levels or growth become positive and significant. They addressed the potential endogeneity of targeting and competition by using variations in targeting across Chinese cities, as such variations are exogenous to the individual firm.

Papers produced:
(D19z), Industrial Policy and Competition, Philippe Aghion, Mathias Dewatripont, Luosha Du, Ann Harrison, Patrick Legros


3. University of Munich (LMU)

University of Munich contributed to Work Packages 3, 4, 5, and 6.

WP3

1st period
Dietmar Harhoff, Karin Hoisl and Bruno van Pottelsberghe de la Potterie analysed firms’ choices regarding the geographic scope of patent protection within the European patent system. They developed an econometric model at the patent level to quantify the impact of office fees and translation costs on firms’ decision to validate a patent in a given country once it has been granted by the European Patent Office (EPO). These costs have been disregarded in previous studies. The results suggest that both translation costs and fees for validation and renewals have a strong influence on the behaviour of applicants. The estimates were then employed to simulate the impact of the London Protocol, a recent policy reform that reduces translation requirements in the European patent system. National validations of patents granted by the EPO are estimated to increase by 29% as a result.

Papers produced:
(D10b) Languages, Fees and the International Scope of Patenting, Dietmar Harhoff, Karin Hoisl and Bruno van Pottelsberghe de la Potterie


WP4

1st period
Dalia Marin and Thierry Verdier in 1st and 2nd period produced the paper Corporate hierarchies and the size of nations: Theory and Evidence, SFB/TR 15 Discussion Paper No. 227, 2008. They introduce firms with internal hierarchies in a Krugman (1980) cum-Melitz and Ottaviano (2007) model of trade, to show that international trade and the toughness of competition in international markets induce a power struggle in firms, which eventually leads to decentralized corporate hierarchies. The authors offered empirical evidence that is consistent with the model’s predictions.

Elhanan Helpman, Dalia Marin and Thierry Verdier edited a book on the organisation of firms in a global economy, Harvard University Press 2008. This book presented a new research programme that is transforming the study of international trade. It addressed such questions as: why only a small proportion of firms in a given industry export and why an even smaller proportion invest abroad; why exporters tend to be more productive than non-exporters; why almost one-third of international trade takes place between units of the same firm; why as much as two-thirds involves multinational firms as exporter, importer, or both; and why international trade may have been the most important driver of organisational changes in the corporation that have been taking place in the last decade. Until a few years ago, models of international trade did not recognize the heterogeneity of firms and exporters, and could not provide good explanations of international production networks. Now such models exist and are explored in this volume.

Dalia Marin and Thierry Verdier authored a paper entitled ‘Competing in organizations: in terms of firm heterogeneity and international trade’, which developed a theory that investigates how firms’ choice of corporate organisation is affecting firm performance and the nature of competition in international markets. They developed a model in which firms’ organisational choices determine heterogeneity across firms in size and productivity in the same industry. They showed that the toughness of competition in a market depends on who – headquarters or middle managers – has power in firms. Furthermore, the authors proposed two new margins of trade adjustments: the monitoring margin and the organisational margin. Trade may trigger firms to opt for organisations that encourage the creation of new ideas and which are less well able to adapt to price and cost competition.

Dalia Marin and Thierry Verdier’s other collaborative paper Power in the Multinational Corporation in Industry Equilibrium focused on the internal organisation of the multinational corporation by examining the power allocation between headquarters and subsidiaries. They provided a framework for analysing the interaction between the decision to serve the local market by exporting or FDI, market access, and the optimal mode of organisation of the multinational corporation. They found that subsidiary managers are given most autonomy in their decision on how to run the firm at intermediate levels of local competition.

Florian Englmaier and Stephen Leider’s paper Contractual and Organizational Structure with Reciprocal Agents considered reciprocal motivation as a source of incentives. They solved for the optimal contract in the basic principal-agent problem and show that reciprocal motivations and explicit performance-based pay are substitutes. A firm endogenously determines the mix of the two sources of incentives to best induce effort from the agent. Analysing extended versions of the model allowed them to examine how organisational structure impacts the effectiveness of reciprocity and to derive specific empirical predictions. They used the UKWERS workplace compensation dataset to confirm the predictions of the extended model.

Florian Englmaier and Carmit Segal studied dynamic patterns of implicit contracts. They modified the standard model, in which effort is observable but not contractible, by assuming asymmetric information regarding the state of the world. Specifically, they assumed there are some states of the world in which the firm is hit by an adverse shock, unobservable to the worker, and cannot pay the (full) promised bonus. In this situation, the firm always has an incentive to claim that it was hit by the adverse shock and to renege on the promised bonus. They characterized an equilibrium that has periods of cooperation (high effort and bonus payment) and punishment (low effort and no bonus payments) along the equilibrium path. Though in equilibrium there is truthful revelation of the state of the world, the punishment phases are needed to sustain cooperation. They analysed unions and discuss other human resource management practices as ways to mitigate this problem.

Michael Kosfeld and Ferdinand von Siemens’ paper Competition, Cooperation, and Corporate Culture explored the phenomenon that teamwork and cooperation between workers can be of substantial value to a firm, yet the level of worker cooperation often varies between individual firms. They showed that these differences can be the result of labour market competition if workers have heterogeneous preferences, and preferences are private information. In their model there are two types of workers: selfish workers who only respond to monetary incentives, and conditionally co-operative workers who might voluntarily provide team work if their co-workers do the same. They showed that there is no pooling in equilibrium, and that workers self-select into firms that differ in their incentives as well as their resulting level of team work. Their model can explain why firms develop different corporate cultures in an ex-ante symmetric environment. Moreover, the results show that, contrary to first intuition, labour market competition does not destroy but may indeed foster within-firm co-operation.

2nd period
Dalia Marin produced a policy paper on The New Corporation in Europe (D13),for the work package, which analyses organisational changes in the nature of the corporation over the past 15 years, and examines the challenges these changes in corporate organisation may pose – in particular in the areas of trade policy and human resource policies. Faced with increasing European and global competition and the scarcity of top talent, Europe’s corporations are changing the way they do business. Detailed company-level evidence from Germany and Austria showed how international firms are slicing up the value chain and introducing flatter chains of command in order to cut costs and woo the high-skill workers that are vital to them in a knowledge economy. This transformation to the ‘new corporation’ has important implications for the EU as it seeks to reframe its policy in a globalised economy.

Marin has also produced a paper The Opening Up of Eastern Europe at 20 - Jobs, Skills, and ‘Reverse Maquiladoras’ in Austria and Germany (D19i) which examines whether the popular fear in the European Union is justified that Eastern Enlargement and the resulting offshoring will cause major job losses. The paper examined with unique firm level data on offshoring whether these fears are justified for the two neighbouring countries of Eastern Europe, Austria and Germany. She found that Eastern Enlargement has led to surprisingly small job losses of less than 0.5 percent of total employment in Germany and of 1.5 percent in Austria, since jobs in Eastern Europe do not compete with jobs in Austria and Germany.
Note: This paper has appeared as a Munich Discussion paper, which does not include any acknowledgement to SCIFI GLOW, which is an oversight on behalf of the author, for which she apologises.

3rd period
Professor Marin, in co-operation with Linda Rousova and the European Central Bank, co-authored a paper entitled the organization of european multinationals that aims to describe the stylized facts of multinational firm organisation. This paper examined the conditions under which European multinationals give autonomy to their subsidiaries and delegate authority to them. They also analysed the conditions under which European multinationals transplant their business model to Eastern Europe. They showed that the business culture of parent firms accounts for about 50% of the variation of the organisation of subsidiaries, while the market environment of subsidiaries contributes the rest.

Research by Marin, in the paper entitled The Theory of the Firm Goes Global questioned whether international trade and competition have been the driving forces behind the observed changes in the corporation. Marin considered what insights can be gained from bringing the theory of the firm to the global economy and discussed several new features of the world economy that can be explained by incorporating the theory of the firm into the theory of international trade, such as the move to flatter corporate hierarchies and the decentralization of authority in firms, the ‘war for talent’, the rise of CEO pay in rich countries, organisational convergence across countries, and firm heterogeneity.

Recent evidence indicates that a candidate’s aggressiveness seems to be an important characteristic in the hiring choice for CEO positions. The aim of the paper biased managers as strategic commitment by Florian Englmaier and Markus Reisinger is to provide a rationale for this fact in the context of the strategic delegation literature. This paper analyzes a model in which owners of competing firms can hire biased managers for strategic reasons. The authors showed that independent of the mode of competition, i.e. price or quantities, owners hire aggressive managers. This result contrasts with the classic literature on strategic delegation.

Another paper by the LMU team studied incentive schemes in firms in a paper entitled ‘The Role of Salience in Performance Schemes: Evidence from a Field Experiment‘. Florian Englmaier, Andreas Roider, and Uwe Sunde challenged the common empirical finding that ‘Incentives work, stronger incentives work better’, where incentives are understood to enhance performance, and are key elements in firms’ personnel policy. In this paper the authors analysed the effects of the salience of incentives in a team production setting where the principal has an interest in the quantity and quality of output. The researchers used data from a controlled field experiment that changed the communication of the incentive system without changing the incentive system itself. The results indicate that the salience of incentives is itself statistically and economically important for performance. They find that higher salience of incentives for quantity increases quantity, reduces quality, and increases in-pocket income of team managers.

Dalia Marin, Linda Rousova, Thierry Verdier in their paper ‘Do Multinationals Transplant their Business Model’ embedded the theory of knowledge hierarchies into a general equilibrium model of international trade with monopolistic competition, to examine how the economic environment may affect the decision of multinational firms to transplant the organisation to other countries. They found that multinational firms originating from smaller and more competitive home markets are less likely to export their business model to less competitive and larger host countries. These market forces together, with factor prices in home and host countries, may counteract the influence of the multinationals’ corporate culture on the decision to transplant. Their findings suggest that trade and competition policy may be effective in promoting organisational transfer across countries.

Papers produced:
(D19i), The Opening Up of Eastern Europe at 20 - Jobs, Skills, and ‘Reverse Maquiladoras’ in Austria and Germany, Dalia Marin
(D19g), The Theory of the Firm Goes Global , Dalia Marin
(D19l), Biased Managers as Strategic Commitment, Florian Englmaier, Markus Reisinger
(D19n), Conflict and Cooperation in Organizations, Florian Englmaier Carmit Segal
(D19p), The Role of Salience in Performance Schemes: Evidence from a Field Experiment, Florian Englmaier, Andreas Roider, Uwe Sunde
(D19q), The Theory of the Firm goes Global, Dalia Marin
(D19u), The Organization of European Multinationals, Dalia Marin, Linda Rousová
(D19w), Do Multinationals Transplant their Business Model, Dalia Marin, Linda Rousova, Thierry Verdier



WP5

1st period
Dalia Marin looked at recent long-run time series evidence for the US that suggests that popular explanations for the surge in executive pay are not supported by the data. She explored the role of globalization in the rise in executive pay, based on new firm survey data on executives and their pay in Austria and Germany. She found that firms more exposed to international competition engage in talent fairs to search and attract skilled workers. Furthermore, seniority-related pay varies for different levels of foreign competition, suggesting that firms increase CEO pay when faced with the threat of losing their senior executives to foreign competitors, while seniority in office itself does not lead to higher pay. These findings support the idea of a ’war for talent’ that is triggered by international trade, as suggested by recent theories of international trade and organisations.

Francesca Fabbri focused in her research on intermarriage, which is arguably one of the most important channels through which immigrants' integration and intergenerational assimilation occur. She investigated the determinants of marriage choice and its effect on immigrants' labour market outcomes, namely employment and wages. She found that the probability that an immigrant marries a native is higher for individuals who have some university education. Results also suggest that, ceteris paribus, marriage to a native is associated to higher employment probabilities among both immigrant and native men and women.

Ferdinand von Siemens studied equilibrium employment contracts in the case that workers have private information on their skills and their propensity for inequity aversion. Inequity-averse workers suffer if other workers in their reference group get different rents, defined as income net of production costs. Social preferences are shown to cause no sorting effects unless contract choices influence what workers consider to be their reference group. Given the latter, inequity aversion increases the distortions originating from asymmetric information in a monopsony. Competition might promote the emergence of efficient sorting opportunities, thereby rendering inequity aversion irrelevant. But depending on the precise definition of reference groups, competition can also aggravate distortions.

3rd period
Professor Marin together with Francesca Fabbri constructed a database to examine executive pay in Germany. They found that German CEOs tend to be rewarded when the sector is doing well, rather than the firm they work for. They also found that CEO pay and the demand for manager talent increases in difficult times when the typical firm size shrinks, perhaps in an attempt by the firm to limit losses optimally. They found strong and economically important evidence that domestic and global competition for managers has contributed to the rise in executive pay in Germany. Surprisingly, however, the impact of competition for managers on executive compensation has become weaker in the last two decades. Lastly, the effect of local and global competition for managers is particularly pronounced in the banking sector – and especially in the last two decades.

Papers produced:
(D21e), What explains the Rise in CEO Pay in Germany? A Panel Data Analysis for 1977-2009, Francesca Fabbri and Dalia Marin
WP6

3rd period
Alexander Tarasov constructed and estimated a general equilibrium model of trade that captures both the scale of trade and number of trading partners for countries. The key element of the model is an association between trade costs (both variable and fixed) and countries' development levels, which can account for the effect of per capita income on trade volumes and explain many ‘zeros’ in bilateral trade flows. He found that market access costs play an important role in fitting the model to the data. In a counterfactual analysis, he found that removing the asymmetries in trade costs raises welfare in all countries, with an average percentage change equal to 29% and larger gains for smaller and poorer countries. Real income inequality falls by 43%.

Papers produced:


4. Universiteit Maastricht (UM-MERIT, later UNU-MERIT)

The University of Maastricht actively contributed to Work Packages 1, 2, 5, and 6.

WP1

2nd and 3rd period
One paper was produced by Jacques Mairesse and Michele Pezzoni in WP1. This paper has not been submitted for official publication yet and it is still work in progress, not to be cited, giving prima-facie evidence on the importance of collaboration in scientific research: Are Italian Physicists More Productive than French Physicists?’ The researchers investigated why the productivity of physicists, as defined on the basis of publications (in terms of numbers and average journal impact factor), appears on average higher in Italy than in France, especially in recent years. The authors were led to compare separately the productivity of physicists working in universities and in the two main public research organisations in the two countries (CNRS Centre National de la Recherche Scientifique and CNR Consiglio Nazionale delle Ricerche). They also abstracted from the differences in the participation of physicists to "big research projects" resulting in publications with numerous co-authors. Finally, the authors analysed the different styles of cooperation between physicists in the two countries, where collaboration is defined on the basis multiple-authored scientific articles.

Papers produced:
(D10u), Prima-facie Evidence on the Importance of Collaboration in Scientific Research: Are Italian Physicists More Productive than French Physicists?, Jacques Mairesse and Michele Pezzoni

WP2

2nd period
Jordi Jaumandreu and Jacques Mairesse developed a simple framework to estimate the parameters of the production function, together with the elasticity of the demand for the output and the impact of demand and cost shifters. This framework was used to treat the difficult problem of the endogeneity of input quantities and to assess the welfare effects of firms’ innovative actions, by estimating their impact on both cost and demand. Total welfare gains of introducing a process or a product innovation are, on average, about 1.6% and 4% respectively of the value of the firm’s current sales. The increase in consumer surplus amounts to two-thirds of the effect in the first case and half in the second.

Rene Belderbos, Victor Gilsing, and Shinya Suzuki examined whether there are potential complementarities or incongruities related to simultaneous engagement in multiple types of research collaborations, and potential heterogeneity among firms in the benefits of collaboration. Their key aim was to shed some more light on the heterogeneity in industry-science collaboration and on why some types of linkages may be more attractive than others. Drawing on panel data for 40 major pharmaceutical firms, they found that positive effects of direct university collaboration are restricted to firms with sufficient absorptive capacity to assimilate scientific knowledge. Firms lacking such capacity instead benefit from 'indirect' ties with universities (e.g. collaboration with university-centred dedicated biotech firms), while direct university collaboration only undermines the benefits of their inter-firm research alliances.

Papers produced:
(D12i), Direct and Indirect Ties to Universities: Firm Heterogeneity, R&D Collaboration and Innovative Performance in the Biopharmaceutical Industry, Rene Belderbos, Victor Gilsing, Shinya Suzuki


WP5

1st Period

Bronwyn Hall, Francesca Lotti, and Jacques Mairesse produced the paper on innovation and productivity in SMEs, using empirical evidence from Italy. They developed a structural model of innovation that incorporates information on innovation success from firm surveys, along with the usual R&D expenditures and productivity measures. They then applied the model to data on Italian SMEs from the "Survey on Manufacturing Firms", conducted by Mediocredito-Capitalia covering the period 1995-2003. They found that international competition fosters R&D intensity, especially for high-tech firms. Firm size and R&D intensity, along with investment in equipment, enhances the likelihood of fostering both process and product innovation. Both these kinds of innovation have a positive impact on firms’ productivity, especially process innovation. Among SMEs, larger and older firms seem to be less productive.

Rufin Baghana and Pierre Mohnen produced the paper on the Effectiveness of R&D tax incentives in small and large enterprises in Québec. They evaluated the effectiveness of R&D tax incentives in Quebec, using manufacturing firm data from 1997 to 2003 originating from R&D surveys, annual surveys of manufactures, and administrative data. They showed that there is a deadweight loss associated with level-based R&D tax incentives that is particularly acute for large firms. For small firms it is not sizeable enough to suppress the R&D additionality, at least not during a significant number of years after the initial tax change. Incremental R&D tax credits do not suffer from this deadweight loss and are, from that perspective, preferable to level-based tax incentives.

Pierre Mohnen and Boris Lokshin produced the paper What does it take for an R&D tax incentive policy to be effective?. This paper takes a critical look at how the effectiveness of R&D tax incentives has been assessed in recent evaluations. The authors reported on the success of past policy changes in the Netherlands, and simulated the effect of various parameter changes in the existing Dutch R&D tax incentive scheme. They showed that introducing marginal changes in the scheme’s parameters has little impact on increasing R&D spending. The policy is more effective for small firms than for large firms. The authors ended with a discussion of the pros and cons of level-based versus incremental R&D tax incentives.

A paper by Boris Lokshin and Pierre Mohnen entitled How effective are level-based R&D tax credits? Evidence from the Netherlands examined the impact of the R&D fiscal incentive programme on R&D capital formation by Dutch firms. They found some evidence that suggests that the programme of R&D incentives in the Netherlands has been effective in stimulating firms’ investment in R&D. However, the hypothesis of crowding out can be rejected only for small firms. The analysis also indicated that the level-based nature of the fiscal incentive scheme leads to the government supporting R&D, which would be done anyway, resulting in a substantial dead-weight loss from the social planner’s perspective.

3rd period
Luc Soete wrote a policy paper entitled Rethinking the AGS: innovating out of the crisis? In which he discussed a number of policy options. It is time for stronger policy emphasis on knowledge investments in sectors such as the public sector, which, in the current sovereign debt crisis period, might offer new opportunities to address the lack of growth convergence within the euro area. Structural weaknesses in research, development, and innovation must also be addressed – not just the research fragmentation, but also the lack of research excellence and research mobility, the poor performance of European higher education systems, and innovation in Europe. These areas fall outside of the scope of the current financial firefighting, but will need to be addressed if one wants to strengthen Europe’s long-term cohesive growth.

Papers produced:
(D21a) How effective are level-based R&D tax credits? Evidence from the Netherlands, Boris Lokshin and Pierre Mohnen
(D21b) Effectiveness of R&D tax incentives in small and large enterprises: analysis of firm data in Quebec, Rufin Baghana and Pierre Mohnen
(D21c) Innovation and productivity in SMEs: empirical evidence for Italy, Bronwyn Hall, Francesca Lotti and Jacques Mairesse
(D21d) What does it take for an R&D tax incentive policy to be effective?, Pierre Mohnen and Boris Lokshin
(D23c) FDI, R&D and innovation output in the Chinese automobile industry, Chen Fang and Pierre Mohnen
(D24), POLICY PAPER - Rethinking the AGS: innovating out of the crisis?, Luc Soete



WP6

1st period
Fang Chen and Pierre Mohnen collaborated on paper called FDI, R&D and innovation output in the Chinese automobile industry. This paper used firm-level data to analyse the determinants of, and the interrelationships between, innovation input and innovation output, and in particular whether FDI had any influence on these two aspects of innovation. A generalised ‘tobit’ model was estimated for both R&D and the share of innovative sales for 2002/2003 and 2005/2006. The findings showed that FDI firms are less R&D-intensive but, when they innovate in new products, they are more product-innovative than domestic-funded firms.

2nd and 3rd period overlap
The paper Product, process and organizational innovation: drivers, complementarity and productivity effects is a joint project of Pierre Mohnen (UNU-MERIT) and Wladimir Raymond (Maastricht University) worked with Michael Polder and George van Leeuwen from the Netherlands Central Bureau of Statistics (CBS) on a joint project to deliver a paper on product, process, and organisational innovation. In this paper the authors examined the three types of innovation organisation, their determinants (among others their relationship to ICT and R&D), their effect on total factor productivity, and the existence of any complementarities between them. Funding from SCIFI-GLOW has been used in the development of the 2010 version of this paper.
The paper Do R&D tax incentives lead to higher wages for R&D workers? Evidence from the Netherlands is a joint paper of Boris Lokshin (Maastricht University) and Pierre Mohnen (UNU-MERIT). It follows previous work done by the two authors to evaluate the effectiveness of R&D tax incentives, known as WBSO, in the Netherlands. These evaluations, conducted in many countries, generally do not take into account the effect of those tax incentives on the wages of the R&D workers. The purpose of this paper was to assess the magnitude of this price effect of R&D tax incentives. The authors came up with an elasticity of 0.1 in the short run and 0.13 in the long run.

In the paper innovation and productivity Bronwyn Hall reviewed the ways in which economists have analysed the relationship between productivity and innovation, focusing on the use of innovation survey data as well as other data on innovative output such as patents. The differing measures of innovation (dummy variables, innovative sales, and innovation expenditure) that the various surveys yield are reviewed and their drawbacks and advantages discussed. After discussing measures of innovation, the paper reviewed two approaches to measuring the relationship between productivity and innovation: the econometric or regression approach and the growth accounting approach.

3rd period
In the paper Evidence on the impact of R&D and ICT investment on innovation and productivity in Italian firms Bronwyn Hall, Francesca Lotti and Jacques Mairesse investigated R&D and ICT investment at the firm level in an effort to assess their relative importance and the extent to which they are complements or substitutes. They found that R&D and ICT are both strongly associated with innovation and productivity, with R&D being more important for innovation, and ICT investment being more important for productivity. For the median firm, rates of return to both investments are so high that they suggest considerable underinvestment in both these activities. The authors explored the possible complementarity between R&D and ICT in innovation and production, but find none – although they do find complementarity between R&D and worker skill in innovation.

The paper entitled ‘Complementarity between in-house R&D and technology purchasing: Evidence from Chinese manufacturing firms’ by Hou Jun and Pierre Mohnen examined if Chinese firms still need external technology sourcing and if there is any synergy in engaging in both internal and external innovation activities. They showed that the two sources of technological upgrading are complementary in stimulating product innovation across small and medium size manufacturing firms in China, but not in generating process innovation, nor in achieving higher levels of labour productivity.

Jacques Mairesse, Yilin Wu, Yanyun Zhao and Feng Zhen presented empirical evidence on the impact of product innovations on employment growth at the firm level in China for manufacturing industries in their paper ‘Employment Growth and Innovation in China: A Firm Level Comparison across Regions, Industries, Ownership Types and Size Classes’.. The results are not so different from those that were found in the manufacturing industry as a whole in France, Germany, Spain and the United Kingdom as well as those found in manufacturing industries in Italy. They showed that displacement effects stemming from productivity growth of old products are large, but the effects related to product innovations are strong enough in general to compensate these displacement effects. Nonetheless, there are interesting differences in the results for the industries and across the five regions, four technology industry groups, three kinds of ownerships, and different size groups of firms in China.

The aim of ‘The R&D Tax Credit in France: A First Assessment of the 2008 Reform’ (D23p) by Benoît Mulkay and Jacques Mairesse was to evaluate the reform of the R&D tax credit (RTC) in France on R&D expenditures and on innovation. They modelled the firm demand for R&D investment as a function of anticipated demand and firm-level user cost of R&D capital taking into account imperfect capital markets, corporate and shareholders taxation. Special attention was devoted to the introduction of the incremental or level RTC. The first results showed that the reform is effective but slow – the immediate effect on R&D capital is of only 1% in 2008, and 4% in 2009 for the sample. Then the effect increases to a maximum at 19% in 2012, but it goes down at long run to a 12% increase of R&D relative to the benchmark. The implicit multiplier of the RTC is the ratio of the change in R&D due to the reform on the change in the total cost of the RTC for the public finance. The implicit multiplier increases over 5 years, then it goes down to its long run equilibrium of 0.7.

Papers produced:
(D23l), Do R&D tax incentives lead to higher wages for R&D workers? Evidence from the Netherlands, Boris Lokshin and Pierre Mohnen
(D23q), Product, process and organizational innovation: drivers, complementarity and productivity effects, Pierre Mohnen, Wladimir Raymond, George van Leeuwen, Michael Polder
(D23i), Innovation and productivity, Bronwyn Hall
(D23n), Evidence on the impact of R&D and ICT investment on innovation and productivity in Italian firms, Bronwyn Hall, Francesca Lotti and Jacques Mairesse
(D23j), Complementarity between in-house R&D and technology purchasing: Evidence from Chinese manufacturing firms, Hou Jun and Pierre Mohnen,
(D23m), Employment Growth and Innovation in China: A Firm Level Comparison across Regions, Industries, Ownership Types and Size Classes, Jacques Mairesse, Yilin Wu, Yanyun Zhao and Feng Zhen
(D23p), The R&D Tax Credit in France: A First Assessment of the 2008 Reform, Benoît Mulkay and Jacques Mairesse



5. Katholieke Universiteit Leuven (KUL)

KUL contributed towards Work Packages 1 and 2.

WP1

1st period:
Reinhilde Veugelers’ policy paper for this work package ‘Towards A Multipolar Science World: Trends And Impact’ brought together the recent statistical evidence on the shifts in geographic sources of scientific production and the globalisation of the process of science creation. It was emphasised that the process of growing international integration cannot yet be associated with the shaping of a truly globally integrated research community, but rather a multi-polar one. The data suggested a high correlation between the patterns of international mobility of scientists, the patterns of international collaborations, and cross-references. This correlation may explain why particularly the U.S. being a central node in the labour mobility patterns, also continues to be a central node for international scientific collaboration.

In their paper ‘Does university quality drive international student flows?’ Linda Van Bouwel and Reinhilde Veugelers examined whether the (research) quality of a country’s higher education system drives macro-flows of foreign tertiary students in Europe. They used various measures of the quality of a country’s higher education system in an extended gravity model. They found that quality has a positive and significant effect on the size and direction of flows of students exchanged between 18 European countries.

3rd period
Linda van Bouwel and Reinhilde Veugelers finished their paper entitled ‘An "elite brain drain": Are foreign top PhDs more likely to stay in the U.S.?’. With a sample of European students who obtain a PhD in economics in the U.S. they studied whether the most promising among them are indeed less likely to return. They find that PhD recipients from top institutes, or with a highly-cited advisor, or a pre-PhD publication or a higher impact factor on their first publication are more likely to stay in the U.S. or Canada at a top institute. This indicates that the quality of the working environment is of crucial importance to top researchers, and that the attraction of the U.S. consists in large part of its many top economics departments. The location choice made for the first job strongly predicts the location of the current job. Once a top researcher has made the decision to stay, particularly at a top institute, the probability of his or her return becomes very small. This suggests that from the European perspective, there is indeed an ‘elite brain drain’, as its most talented researchers, once embedded in the North American research system, are not very likely to return.

Linda Van Bouwel, Reinhilde Veugelers, and Elissavet Lykogianni produced a working paper ‘destinations of mobile european researchers: Europe versus the United States’, studying the deciding factors between researchers that choose to study in Europe versus the US. In this paper, they found that career motivations are more strongly related to mobility to the U.S. as compared to intra-EU. Researchers who were mobile within Europe during their PhD, are more likely to remain internationally mobile within Europe as researchers, rather than to the U.S. However, researchers who leave their birth country to obtain their PhD in another European country with a stronger scientific performance are more likely to become mobile to the U.S. later in their career. To further the understanding of the factors that drive researchers to become mobile, they also propose to a further extensive data collection with improved survey design.

Papers produced:
(D10g) Does university quality drive international student flows?, Linda Van Bouwel and Reinhilde Veugelers
(D11), Towards a multi polar science world, Reinhilde Veugelers
(D10q), An "Elite Brain Drain": Are foreign top PhDs more likely to stay in the U.S.? Linda Van Bouwel and Reinhilde Veugelers
(D10s), Destinations of Mobile European Researchers: Europe versus the United States, Linda Van Bouwel, Reinhilde Veugelers, Elissavet Lykogianni

WP2

1st period
In the first working paper by Rene Belderbos, Bart Leten and Shinya Suzuki Does excellence in academic research attract foreign R&D?, they examined the role of nations’ academic research strengths in attracting foreign R&D by multinational firms. They hypothesized that a firm’s propensity to perform R&D in a host country is positively affected by the country’s academic research strengths. However, firms are expected to be heterogeneous in their response to the strength of the science base, due to differences in their absorptive capacity to utilize scientific knowledge. The authors found support for these hypotheses in an analysis of foreign R&D activities in 40 host countries and 30 technology fields, by 178 leading European, U.S. and Japanese firms during 1995-1998 and 1999-2002. The empirical results suggested that policies to strengthen university research can be an instrument for attracting R&D investments by multinational firms.

2nd periodic report
In ‘How Global is R&D? Determinants of the Home Country Bias in R&D Activities’ by Rene Belderbos Bart Leten and Shinya Suzuki the authors argued that despite the increasing importance of international R&D activities by multinational firms, a major portion of corporate R&D still tends to be concentrated in firms’ home countries. They found that the technological leadership of firms strengthens home bias in the case that the home country provides a more favourable regime of intellectual property rights protection than foreign countries. The results suggest that an important explanation of concentrated R&D in the home country is borne of economic fundamentals.

In ‘internal Basic Research, external basic research and the technological performance of pharmaceutical firms’ by Rene Belderbos Bart Leten and Shinya Suzuki, the authors evaluated the impact of basic research on pharmaceutical firms’ technological performance, distinguishing between internal basic research and the exploitation of external basic research findings. They found that firms increase their performance by engaging more in internal basic research, particularly if basic research is conducted in collaboration with university scientists. The exploitation of external basic research improves performance, while the magnitude increases with firms’ involvement in internal basic research. Hence, internal basic research and the exploitation of external basic research are complements, suggesting that internal basic research provides firms with the skills to exploit external basic research more effectively.

3rd periodic report
Reinhilde Veugelers wrote a Policy Brief on “improving europe’s industry science links”. In this paper, Reinhilde highlighted some of the insights from the work of SCIFI-GLOW researchers in this area, which are proving to be helpful for improving policies to improve industry-science links. The brief shows that we are still far from helping policy design to improve such linkage. Nevertheless, some helpful insights have already emerged. First, linkage policy should be systemic and part of overall innovation policy, also considering capabilities, incentives, and other systems’ failures. Industry-science linkage policy should work simultaneously to affect the supply from science, the demand from industry, as well as the interlinking actors. More generally, efforts should be made to support industry-science linkage policy with data, building a diverse set of indicators – and more analyses should be performed to assess the private and social effectiveness of industry- science linkage, stimulating effective forms.

Papers produced:
(D12a) Does excellence in academic research attract foreign R&D?, Rene Belderbos, Bart Leten and Shinya Suzuki (WP2)
(D12d), How Global is R&D? Determinants of the Home Country Bias in R&D Investments, Rene Belderbos, Bart Leten and Shinya Suzuki (Katholieke Univsersiteit Leuven
(D12f), Internal Basic Research, External Basic Research and the Technological Performance of Pharmaceutical Firms, Bart Leten, Stijn Kelchtermans and Rene Belderbos (Katholieke Universiteit Leuven)
(D20), POLICY PAPER - Improving Europe's Industry-Science Links, Reinhilde Veugelers



6. The London School of Economics and Political Science (LSE)

The London School of Economics (LSE) contributed to Work Packages 2, 3, 4, 5 and 6.

WP2

1st and 2nd Periodic reports
Belenzon and Schankerman (2010) tackled the topic of the local development aspect of industry-science links. They studied how geography affects university knowledge diffusion. Using new data on university patents, scientific publications and measures of distance, they found that knowledge flows from universities are localised. Such flows are very sensitive to distance, up to about 100 miles, and there is a state border effect. This state border effect is stronger in public than in private universities and in states with greater reliance on in-state educated scientists and engineers. The lesson for the policymaker is that there is a trade-off in localising knowledge spillovers. As this state border effect gets stronger, local universities earn less in terms of licensing income, but on the other hand there will be greater localisation of knowledge spillovers, which is good for local development.

Papers produced:
(D12g), Spreading the Word: Geography, Policy and University Knowledge Diffusion, Sharon Belenzon (Duke University) and Mark Schankerman


WP3
1st and 2nd periodic reports
John Van Reenen, Rachel Griffith, and Sokbae Lee have co-authored the paper ‘Is distance dying atlast? Falling home bias in fixed effects models of patent citations’. The authors examined the home bias of knowledge spillovers (the idea that knowledge spreads more slowly over international boundaries than within them) as measured by the speed of patent citations. They found that the fall in home bias over time is weaker for the pharmaceuticals and information/communication technology sectors, where agglomeration externalities may remain strong.

Galasso and Schankerman’s paper “patent thickets, judicial enforcement and the market for innovation: Theory and Evidence from Patent Litigation”(2008) theoretically and empirically analysd how the speed of technology diffusion is affected by the fragmentation of patent rights through patent thickets and a reduction in uncertainty about court outcomes due to the formation of a new court. Their two main findings are that the introduction of a centralised court to deal with disputes causes a large reduction in the duration of disputes, and that patent disputes are settled more quickly when there is more fragmentation, especially before the formation of the centralised court. These findings are important from a policy perspective as they shed light on how obtaining and defending IPRs are affected by certain changes in the institutional setting, and how this in turn changes the speed with which technology diffuses.

3rd periodic report
In the paper “Does product market competition Lead Firms to decentralize?” Nicholas Bloom, Raffaella Sadun and John Van Reenen investigated whether greater product market competition increases decentralization. To tackle these issues, the researchers collected detailed information on the internal organisation of firms across nations. The few datasets that exist are either from a single industry or (at best) across many firms in a single country. The authors analysed data on almost 4,000 firms across twelve countries in Europe, North America, and Asia, and found that competition does indeed seem to foster greater decentralization.

Papers produced:
(D14c), Patent thickets, judicial enforcement and the market for innovation: Theory and evidence from patent litigation, Alberto Galasso (University of Toronto) and Mark Schankerman (LSE)
(D14g), Does Product Market Competition Lead Firms to Decentralize?, Nicholas Bloom, Raffaella Sadun and John Van Reenen


WP4

1st periodic report
Bloom, Sadun and Van Reenen (2010) studied the effect of increasing product market competition on the internal organisation of firms. They put special emphasis on decentralization as a potential outcome of increasing competition, and empirically analyse this relationship using a new dataset from a new survey of firms. They found that increasing competition does indeed lead to greater decentralization within the organisation.

In “organization of firms across countries”, using the data from the same survey and focusing on multinationals, Bloom, Sadun and Van Reenen found that as the bilateral trust between the multinationals’ country of origin and the location of the subsidiary increases, decision-making becomes more decentralized. Further, high decentralization makes expansion easier and increases productivity when technical change is fast. Hence, having high trust/social capital is one of the comparative advantages of countries enabling them to grow faster, especially when technology changes quickly.

2nd periodic report
Another paper by Bloom, Garicano, Sadun and Van Reenen studied the distinct effects of information and communication technologies on the internal organisation of the firm using data from firms in U.S. and seven European countries. They found that better information technologies empower workers and widen the span of control, which leads to decentralization, whereas better communication technologies make decision-making more centralized.

3rd periodic report
Nicholas Bloom, Raffaella Sadun and John Van Reenen, in their paper ‘the organization of firms across countries’ built on their work in the previous periods to present evidence that high social capital in an area increases decentralized decision-making within firms. They showed that this decentralization favours productivity through supporting larger equilibrium firm size and by increasing the returns to information technology. They found that firms headquartered in high trust regions are more likely to decentralize, with trust accounting for about half of the variation in decentralization in our data. There are many future directions for their work, including potentially running field experiments on organisational changes within large firms to obtain further micro organisational evidence. Another extension of their work would be to further investigate the role of changes in information and technology.

Papers produced:
(D19s), Offshoring and Wage Inequality: Using Occupational Licensing as a Shifter of Offshoring Costs , Criscuolo and Garicano
(D19o), Has ICT Polarized Skill Demand? Evidence from Eleven Countries Over 25 Years. John Van Reenen, Guy Michaels, Ashwini Natraj
(D19o), Has ICT Polarized Skill Demand? Evidence from Eleven Countries Over 25 Years , Van Reenen, Guy Michaels, Ashwini Natraj
(D19s), Offshoring and Wage Inequality: Using Occupational Licensing as a Shifter of Offshoring Costs, C.Criscuolo and L.Garicano
(D19t), The Organization of Firms across Countries, Nicholas Bloom, Raffaella Sadun and John Van Reenen


WP5

1st periodic report
Criscuolo and Garicano with their paper on offshoring and wage inequality, used legal licensing requirements of a task as a measure of its ‘offshorability’, and showed how offshoring affects the demand for and hence the wage associated with a specific task. They found that tasks that require legal licensing and therefore are not offshorable benefit from offshoring in terms of increases in employment and wages.

Michaels, Natraj and Van Reenen analysed the effects of globalization on labour market outcomes, this time concentrating on the fast spread of Information and Communication Technologies (ICT) driven by globalisation and their impact on labour market polarization, using data from the U.S. Japan and nine European countries. They found that industries with a faster growth of ICT have greater increases in the demand for high- skilled labour and greater decreases in the demand for medium-skilled workers. This is in line with the predictions of the theoretical literature as ICT complements high-skilled labour and is a substitute for medium-skilled workers. They also found that trade openness has a similar impact on labour market polarization.

3rd periodic report
Criscuolo and Polat (2010) analysed the labour market implications of globalization. They used data from UK firm-level surveys to see if co-location of headquarter activities in the UK decreases the likelihood of multinational plant shutdown. This is an important policy question, as governments race with each other to attract ongoing investment and are trying to find ways of keeping it for as long as possible in order to achieve stability in domestic labour markets. They found compelling evidence that foreign multinationals with headquarters in the U.K. are less likely to shut down their plants as compared to other foreign multinationals and domestic multinationals. They also found evidence of positive externalities to the rest of the economy of having headquarters located in the U.K.

Papers produced:
(D21f), What are the benefits of housing the headquarters of multinational corporations, Criscuolo and Polat
Regional unemployment and investment subsidies: evidence from an unexpected loss in eligibility, Work in progress

WP6
1st and 2nd periodic reports
Bloom, Draca, and Van Reenen used data from twelve European countries to examine the impact of Chinese import competition on technological change. They found that increasing competition from Chinese imports increase innovation within surviving firms, whereas the probability of survival and employment goes down in low-tech firms. These within- and between-firm effects together imply that industries that are more exposed to competition from Chinese imports experience technological upgrading. This finding emerged from looking at changes in Chinese imports, and also exploiting policy experiments such as China’s accession to the WTO in 2001. This suggests that reducing import barriers in industries that are more exposed to Chinese imports will foster innovation and diffusion.

Aghion, Van Reenen and Zingales’ paper “innovation and institutional ownership” used a panel of 800 major US companies to find a link between institutional ownership in publicly traded companies and increased product market competition (measured by cite-weighted patents). To explore the mechanism through which this link arises, they built a model that nests the lazy-manager hypothesis with career-concerns, where institutional owners increase managerial incentives to innovate by reducing the career risk of risky projects. The data supports the career concerns model. Contrary to general opinion, they found that institutional ownership is linked with higher levels of innovation and then go one step further to uncover the source of this relationship. Finding that this relationship is stronger when product market competition is more intense, they concluded that it is the career concerns of the CEOs that make this type of firm more innovative.

Ornelas and Turner (2010) contributed to WP6 by studying the effects of trade protection on efficiency, organisational choice, and welfare. They concluded that protection via tariffs is not necessarily welfare-reducing. Such policies can actually be welfare-enhancing if they discriminate in favour of the investing parties, and specialized outsourcing is mainly from domestic sources. They also found that protection will lead to inefficiency if it distorts organisational choices and causes firms to inefficiently outsource from domestic sources.

Papers produced:
(D23e), Spillovers in Space: Does Geography Matter?, Sergey Lychagin (Pennsylvania State University), Joris Pinkse (Pennsylvania State University) , Margaret E Slade (University of British Columbia) and John Van Reenen (LSE)
(D23f), Protection and international sourcing, Emanuel Ornelas (LSE) and John L Turner (University of Georgia)
(D23g), Trade induced technical change? The impact of Chinese imports on innovation, IT and productivity, Nicholas Bloom (Stanford University), Mirko Draca (LSE) and John Van Reenen (LSE)



7. Centre National De La Recherche Scientifique (CNRS)

CNRS contributed to Work Packages 4 and 6.

WP4

2nd periodic report
Team Leader Thierry Verdier collaborated with Dalia Marin (Team Leader, LUM) to undertake research aimed at better understanding the hierarchical structure of multinational firms. They developed a framework that links levels of decentralization of decision-making across firms and their trading environment. Using original data from multinational firms in Germany and Austria, their first results showed that international trade increases the conflicts of interest between CEO/owners and middle managers within firms and eventually leads to more decentralized corporate hierarchies. They extended this approach to understand another organisational question: what the incentives for multinational firms to transplant their business model to their subsidiaries are, and how this depends on the competitive environment of the subsidiary and the parent firm.

Thibault Fally and Juan Carluccio have collaborated extensively on issues in this work package. In their paper ‘foreign entry and spillovers with technological incompatibilities in the supply chain’, the authors examined whether foreign entry improves host country productivity and welfare. They studied how these externalities are affected by technological incompatibilities between foreign and domestic technologies. They provided evidence that financial development generates a comparative advantage in the supply of complex goods, andhigher shares of intra-firm imports of complex inputs from countries with a lower level of financial development.

Fally and Carluccio have also produced the paper ‘multinationals, technological incompatibilities and spillovers’, which studies the role of heterogeneity among domestic firms. They showed that only the best suppliers adopt foreign technology and cater to multinationals. In the long run, they found, technology adoption by the most productive downstream firms creates complementarities with multinationals that can offset the negative impact of segmentation.

Juan Carluccio has also co-authored a paper with Maria Bas on wage bargaining and the boundaries of the firm. They used firm-level data on multinationals located in France to show that firms are more likely to outsource the production of intermediate inputs to external suppliers when importing from countries with empowered unions. They also found that this effect is stronger for firms operating in capital-intensive industries.

Papers produced:

(D19h), Corporate hierarchies and international trade, Dalia Marin (University of Munich) and Thierry Verdier (PSE)


WP6

Progress was made in the study of foreign technology transfer and its adoption by domestic local suppliers. In particular, a simple theoretical model was constructed to show that generally only the best suppliers adopt the foreign technology and cater to multinationals. In the long run, such technology adoption by the most productive downstream firms is also shown to create complementarities that can offset the negative impact of segmentation that naturally will arise between firms contracting with multinationals and those that do not.


8. Toulouse School of Economics Foundation (JJL TSE)

TSE contributed to Work Packages 2, 3, 4 and 6.

WP2

1st periodic report
The paper “Joint ventures as a commitment device against lobbies” by Nicoletta Berardi and Paul Seabright investigated a hitherto unexplored rationale for firms to enter into joint ventures. They modelled risky projects with autocorrelated productivity shocks as creating an option value of investing over time so that later investments benefit from the information revealed by the realization of earlier investments. Joint ventures provided a commitment mechanism against lobbies, thereby enabling more efficient levels of investment. The authors presented some case study evidence that this rationale for entering into joint ventures is especially relevant in the context of infrastructure projects in developing countries, though other contexts such as pharmaceuticals are also favourable to the phenomenon. They also found that Business Environment and Enterprises Performance survey data corroborate the model's prediction that organisations under conditions favourable to internal or external lobbying pressure are more likely than other firms to choose joint ventures as their corporate governance structure.

Papers produced:
(D12b) Joint Ventures as a Commitment Device Against Lobbies, Nicoletta Berardi and Paul Seabright

WP3

1st periodic report
‘a framework for cross-country comparisons of public infrastructure constraints on firm growth’ by Wendy Carlin, Mark Schaffer, and Paul Seabright investigated how a policymaker should prioritise interventions to improve the public infrastructure with which firms operate, and how large the benefits from doing so are likely to be. To address these questions, they used survey data on the obstacles arising from poor quality public inputs that managers face in running their firms. They showed how a policymaker can use the country-level data and the benchmarks estimated from the cross-country data to prioritize public infrastructure investment in their country. Their results indicated that priorities vary widely among countries, and suggested a degree of caution about donor policies tying development assistance to generic improvements in the business environment. The results also suggest that the benefits arising directly from such improvements are likely to be modest relative to the scale of impact implied by aggregate-level studies of the role of institutions in economic development.


2nd Periodic report
Paul Seabright worked collaboratively with Pierre Dubois, Oliver de Mouzon, and Fiona Scott Morton on a project aiming to quantify the relationship between market size and innovation in the pharmaceutical industry. They produced the paper Market size and pharmaceutical innovation. The authors estimated the elasticity of innovation, as measured by the number of new chemical entities appearing on the market for a given disease class, to the potential market size represented by the willingness of sufferers of diseases in that class (and others acting on their behalf such as insurers and governments) to spend on their treatment during the patent lifetime. Their findings indicated that innovation in pharmaceuticals is becoming more difficult and expensive over time, as costs of regulatory approval rise and as the industry runs out of ‘low hanging fruit’.

2nd and 3rd periodic report
Paul Seabright also worked with his co-authors to produce a policy paper on the relationship between market size and pharmaceutical innovation, which will be entitled, How does innovation in the pharmaceutical industry respond to policies that influence expected market size?.

Papers produced:
(D14a) A Framework for Cross-Country Comparisons of Public Infrastructure Constraints on Firm Growth, Wendy Carlin, Mark Schaffer and Paul Seabright (WP3)
(D14e), Market size and pharmaceutical innovation, Pierre Dubois (Toulouse School of Economics) , Oliver de Mouzon (Toulouse School of Economics), Fiona Scott Morton (Yale University) and Paul Seabright (Toulouse School of Economics)
(D20), POLICY PAPER - How Does Innovation in the Pharmaceutical Industry Respond to Policies that Influence Expected Market Size?, Pierre Dubois, Wing Man Wynne Lam, Olivier de Mouzon, Fiona Scott-Morton, Paul Seabright


WP4

1st periodic report
TSE has completed its research on the economics of the audit industry. After having collected an original database, Marc Ivaldi cooperated with Olivier Billard and Sebastien Mitraille and worked on legal and economic study of collective dominance in the statutory audit market in France, using the criteria set by the Airtours case and, in particular, by analysing how regulatory obligations incumbent on statutory auditors may favour the appearance of tacit collusion. Their analysis suggested that nothing prevents the collective dominance of the auditors of the Big Four group in France, which is potentially detrimental to the economy as a whole as the audit industry may fail to provide the optimal level of financial information.

TSE has also researched the impacts of cartels in developing countries. The detection and sanction of cartels are of a high importance for anti-trust authorities in developed countries. Cartels might be harmful to consumers and input purchasers’ welfare. They could overcharge for their products or services since competition is by definition reduced. They may also block the entry of new rivals. The TSE team developed an original methodology to tackle this issue and they collected a worldwide database of cartels in all developing countries.

2nd periodic report
The paper "the impact of mergers on the degree of competition in the banking industry", Vittoria Cerasi, Barbara Chizzolini and Marc Ivaldi analysed the relation between competition and concentration in the banking sector. The empirical answer is given by testing a monopolistic competition model of bank-branching behaviour on individual bank data at the county level (départements and provinces) in France and Italy. The paper has implications for competition policy as it suggests an applied tool to evaluate the potential anti-competitive impact of mergers.

3rd Periodic report
Guido Friebel, Marc Ivaldi, and Jerome Pouyet looked at the various options for the organisation of the railway industry when network operators require the access to multiple national networks to provide international (freight or passenger) transport services. The authors considered various organisational structures including returns-to-scale and the intensity of competition as key to understanding the impact of vertical integration or separation between infrastructure and operation services within each country in the presence of international transport services. They also considered an option in which a transnational infrastructure manager is in charge of offering coordinated access to the national networks. In their model, it turns out to be an optimal industry structure.

Papers produced:
(D19a) The impact of mergers on the degree of competition in the banking industry, Vittoria Cerasi, Barbara Chizzolini and Marc Ivaldi (WP4)
(D19k), Evaluation of the risks of collective dominance in the audit industry in France, Olivier Billard (Bredin Prat), Marc Ivaldi (Toulouse School of Economics) and Sebastien Mitraille (Toulouse Business School)
(D19v), Competition and Industry Structure for International Rail Transportation , Guido Friebely, Marc Ivaldi, Jerome Pouyet


WP6

1st periodic report
Oliver Bertrand, jointly with other researchers, has focused on analysing how the entry mode of Foreign Direct Investments (FDI) affects affiliate R&D activities. Using unique affiliate-level data for Swedish multinational firms, they first presented empirical evidence that acquired affiliates have a higher level of R&D intensity than greenfield (start-up) affiliates. This gap persists over time and with the age of the affiliates, as well as for different firm types and industries. To explain this finding, they developed an acquisition investment-oligopoly model where we show that for a foreign acquisition to take place in equilibrium, the acquiring MNE must invest sufficiently in sequential R&D in the affiliate. Otherwise, rivals will expand their business, thus making the acquisition unprofitable. Two additional predictions of the model — that foreign firms acquire high-quality domestic firms and that the gap in R&D between acquired and greenfield affiliates decreases in acquisition transaction costs — are consistent with the data.

In addition, Bertrand investigated the causal effect of foreign acquisitions on the R&D activities of target firms over the period 1994-2004. The main finding is that acquisitions boost R&D spending. There is a simultaneous rise in external and in-house R&D expenditures. R&D is more contracted out to local research providers, in particular to local public laboratories and universities. The increase in internal R&D spending benefits not only development, but also basic and applied research. Finally, the growth of the R&D budget is not only financed by internal resources but also receives financing from external partners, especially parent companies. Thus, the results call into question the idea that foreign takeovers hamper the R&D development of target firms and are detrimental to the national innovation system of the host country.

Papers produced:
(D23b) Should R&D Champions be Protected from Foreign Takeovers?, Olivier Bertrand, Katariina Nilsson Hakkala, Pehr-Johan Norbäck and Lars Persson (WP6)
(D23b), Should R&D Champions be Protected from Foreign Takeovers ? , Oliver Bertrand
(D23a), Effects of foreign acquisitions on R&D activity: someevidence from firm-level data , Oliver Bertrand


9. Universidad Carlos III de Madrid (UC3M)

The team has produced several papers within Work Packages 1, 2, and 3.

WP1

1st periodic report
The team at UC3M worked extensively on the topic of the evaluation of science, with Javier Ruiz-Castillo leading the team. Scientific performance is often identified with the impact achieved by the papers the unit publishes in the serial literature, measured by the citations the papers receive. It is generally believed that citation distributions in the periodical literature are highly skewed. Moreover, it is often thought that citation distributions can be represented by power laws. However, there is little systematic evidence about whether this is the case in practice. Their research in the two papers references made and citations received by scientific articles and the skewness of science in 219 Sub-fields and a Number of Aggregates has decisively contributed to set the record straight at different aggregation levels for a large sample of scientific articles published in 1998-2002, and acquired from Thomson Scientific.

In highly skewed distributions, the upper and the lower part are typically very different. An important consequence is that a single statistic of centrality, such as the mean citation rate or the median, may not adequately capture this feature. The UC3M researchers have made two contributions to this. In “A Comparison of the scientific performance of the U.S. and the European Union at the turn of the 21st century” they compared the publication shares of the U.S. and the EU at every percentile of the world citation distribution in each of 22 broad fields. The evidence indicates that among the most influential articles, in 21 out of 22 fields the dominance of the U.S. over the EU is overwhelming.

In “The Measurement of low- and high-impact in citation distributions: Technical Results” they introduced a novel methodology that recognizes that, due to their skewness, the upper and lower parts of citation distributions are very different. Assuming that a critical citation level is given, any citation distribution can be described using a high-impact and a low-impact measure, defined over the corresponding subsets of high- and low-impact articles.

The paper “High- and low-impact citation measures: Empirical Applications” contains the first application of the methodology in the previously mentioned paper. It was found that when the critical citation level is fixed at the 80th and the 95th percentiles of the world citation distribution, the U.S. performs dramatically better than the EU and the rest of the world according to high- and low-impact indicators in all 22 fields.

2nd reporting period
The paper “Average-based versus high- and low-impact indicators for the Evaluation of Scientific Distributions” compared these results with the state-of-the-art average-based indicators, while “The end of the 'European Paradox'” extends the comparison between the U.S. the EU and the rest of the world to 219 scientific sub-fields. They confirmed that there is no connection between publication shares and high- or low-impact levels at any aggregation level. Instead, the European Paradox hides a truly European Drama: judging from citation impact, the dominance of the U.S. over the EU in the basic and applied research published in the periodical literature is almost universal at all aggregation levels.

3rd reporting period
In a paper entitled ‘multiplicative and fractional strategies when journals are Assigned to several sub-fields’ Neus Herranza and Javier Ruiz-Castillo discussed the two strategies to deal with the problem that many journals are assigned to a single sub-field, but many others are assigned to several sub-fields. They found that, in spite of large differences in the number of articles according to both strategies, the similarity of the citation characteristics of articles published in journals assigned to one or several sub-fields guarantees that choosing one of the two strategies may not lead to a radically different picture in practical applications.

Within the same paper series, Herranza and Ruiz-Castillo in paper entitled ‘Sub-field Normalization in the Multiplcative Case: Average-based Citation Indicators’ investigate the citation impact of three large geographical areas – the U.S. the EU, and the rest of the world – at different aggregation levels. They made three findings. First, no geographical area is systematically favoured (or penalized) by any of the two normalize indicators. Second, according to the MNCS, only in six out of 80 disciplines – but in none of 20 fields – is the EU ahead of the U.S. In contrast, the normalized U.S./EU gap is greater than 20% in 44 disciplines, 13 fields, and for all sciences as a whole. The dominance of the EU over the rest of the world is even greater. Finally, the U.S. appears to devote relatively more – and the rest of the world less – publication effort to subfields with a high mean citation rate, which explains why the U.S./EU and EU/RW gaps for all sciences as a whole increase by 4.5% and 5.6% in the un-normalized case.

A related paper ‘Sub-field Normalization in the Multiplicative Case: High- and Low-Impact Citation Indicators’ used high- and low-impact citation indicators for the evaluation of the citation performance of research units at different aggregate levels. The main findings are the following: (i) although normalization does not systematically bias the results against any area at lower aggregate levels, it reduces the U.S./EU high-impact gap in the all-sciences case by a non-negligible 14.4%; (ii) The dominance of the U.S. over the EU in the basic and applied research published in the periodical literature is almost universal at all aggregation levels.

The UC3M team directed by Ruiz-Castillo also studied two other issues in citation analysis: how to account for the size of the research unit in evaluation exercises in “The Citation Merit of Scientific Publications” with Juan A. Crespo and Ignacio Ortuño, and how to evaluate a partition of the world into 38 countries and eight residual geographical areas in “The Measurement of Scientific Excellence Around the World” with Pedro Albarrán.

In ‘The citation merit of scientific publications’ the researchers proposed a new method to assess the merit of any set of scientific papers in a given field, based on the citations they receive. The method allows for comparisons between research units of different sizes and fields. Using a dataset acquired from Thomson Scientific that contains the articles published in the periodical literature in the period 1998-2007, they showed that the novel approach yields rankings of research units different from those obtained by a direct application of the mean citation or the h-index.

A paper entitled ‘The Measurement of scientific excellence around the world’ reviews scientific excellence in 38 countries and eight geographical areas using two sets of novel indicators of citation impact: a family of high-impact indicators imported from the poverty literature in Economics, and a set of indicators within the percentile rank approach. The researchers emphasized the following three findings. First, the proportion of articles of a research unit in the set formed by the 10% of the most cited papers in the world, and two important percentile rank indicators bring no novelty relative to a traditional average-based indicator. Second, a high-impact indicator very sensitive to citation inequality is seen to be useful to detect success at a local level, but not for a global ranking that includes small research units. Finally, a monotonic high-impact indicator sensitive to any increase in citations is used to rank the partition of the world into 46 units in the 22 broad fields distinguished by Thomson Scientific, as well as the all-sciences case.

In addition, Herranza and Ruiz-Castillo studied the European Paradox at the sub-filed level in a paper entitled "The End of the 'European Paradox'’, in which they evaluate the European Paradox according to which Europe plays a leading world role in terms of scientific excellence, measured in terms of the number of publications, but lacks the entrepreneurial capacity of the U.S. to transform this excellent performance into innovation, growth, and jobs. They find that, although the EU has more publications than the U.S. in 113 out of 219 sub-fields, the U.S. is ahead of the EU in 189 and 163 sub-fields in terms of the high- and low-impact indicators.

Raquél Carrasco and Ruiz-Castillo studied the evolution of research productivity of a sample of economists working in the best 81 departments in the world in 2007. In their paper entitled ‘The Evolution of the Scientific Productivity of a Sample of Highly Productive Economists’ the main novelty is that, in so far as a productivity distribution can be identified with an income distribution, they measure productivity mobility in a dynamic context using an indicator inspired by an income mobility index for a two-period world. They offered new evidence confirming previous results about the heterogeneity of the evolution of productivity for top and other researchers. However, the major result is that – contrary to expectations – for the sample of very highly productive people the effect of rank reversals between the two periods on overall productivity mobility offsets the effect of an increase in productivity inequality from the first to the second period.

Furthermore, Carrasco and Ruiz-Castillo studied for the first time the dataset of economists in the best 81 university research departments in the world that had been constructed for this project. In particular, their work concerned the evolution of productivity mobility over time and appeared in a paper entitled “The Evolution of the Scientific Productivity of Highly Productive Economists”.

Finally, in a policy paper for the work package, entitled ‘From the "European Paradox" to a European Drama in Citation Impact’ Javier Ruiz-Castillo criticized the diagnosis about the research performance of the EU contained in the so-called ‘European Paradox’. He concluded that the European Paradox hides the European Drama: judging from citation impact in the periodical literature, the dominance of the U.S. over the EU is almost universal at all aggregation levels. As a key finding he stated that since the UK and six small European countries (Austria, Belgium, Denmark, Finland, Netherlands, and Sweden) perform relatively well, the explanation of this European Drama must be found in the relative poor performance of Germany and France and, above all, Italy and Spain among the four larger continental countries.

Papers produced:
(D10c) A Comparison of the Scientific Performance of the U.S. and the European Union at the Turn of the XXI Century, Pedro Albarrán, Joan Crespo, Ignacio Ortuño, Javier Ruiz-Castillo
(D10d) Low- And High-Impact Citation Measures: Empirical Applications, Pedro Albarrán, Ignacio Ortuño, Javier Ruiz-Castillo
(D10e) References Made And Citations Received By Scientific Articles, Pedro Albarrán and Javier Ruiz-Castillo,
(D10f) The Measurement Of Low- And High-Impact In Citation Distributions: Technical Result, Pedro Albarrán, Ignacio Ortuño, Javier Ruiz-Castillo
(D10h), Average-based versus high- and low –impact indicators for the evaluation of scientific distributions, Pedro Albarran (Universidad de Alicante), Ignacio Ortuno (University of California), Javier Ruiz-Castillo
(D10i), The skewness of science in 219 sub-fields and a number of aggregates, Pedro Albarran (Universidad de Alicante), Ignacio Ortuno (University of California), Javier Ruiz-Castillo
(D10j), Average-based indicators at different aggregation levels, Neus Herranz (University of Illinois) and Javier Ruiz-Castillo (Carlos III de Madrid)
(D10k), Multiplicative and Fractional Strategies when Journals are Assigned to Several Sub-fields, Neus Herranza and Javier Ruiz-Castillo
(D10l), Sub-field Normalization in the Multiplcative Case: Average-based Citation Indicators, Neus Herranza and Javier Ruiz-Castillo
(D10m), Sub-field Normalization in the Multiplcative Case: High- and Low-Impact Citation Indicators, Neus Herranza and Javier Ruiz-Castillo
(D10n), The Citation Merit of Scientific Publications, Juan A. Crespoa, Ignacio Ortuño-Ortínb, and Javier Ruiz-Castillo
(D10o), The End of the "European Paradox", Neus Herranza and Javier Ruiz-Castillo
(D10p), The Measurement of Scientific Excellence Around the World, Pedro Albarrán, and Javier Ruiz-Castillo
(D10r), The Evolution of the Scientific Productivity of a Sample of Highly Productive Economists, Raquél Carrasco and Javier Ruiz-Castillo
(D10t), The Evolution of the Scientific Productivity of Highly Productive Economists, Raquél Carrasco and Javier Ruiz-Castillo
(D22), POLICY PAPER - From the "European Paradox" to a European Drama in Citation Impact, Javier Ruiz-Castillo


WP2
At UC3M, it was noted that different types of technological change have different implications for employment. In particular, labour-augmenting technological change displaces labour relative to the other factors of production. But both labour-augmenting and Hicks-neutral technological change also have an output effect, in that the usage of all factors of production increases as the marginal cost of production decreases.

Demand adds to the production function the piece that is needed to assess the welfare effects of the innovative actions of the firms. The production function and its dual, the cost function, estimate at most the cost effects of innovation. The demand relationship adds the possibility of assessing the impact of product innovation and, more generally, the profitability of any type of innovation and its associated consumer surplus effects. The preliminary results stressed three important aspects with policy consequences: a) both types of innovations have positive welfare consequences; b) product innovation has a stronger welfare impact; and c) process innovation has a broader relative impact in consumer surplus. This justifies a policy directed towards stimulating and supporting both process and product innovation. A further development of the framework should be to compare the welfare effects with the cost of innovation, giving useful indications for optimal policies.

2nd and 3rd periodic reports

‘The Evaluation of the citation distributions’ by Javier Ruiz-Castillo reviewed several recent contributions that demonstrate that a blend of welfare economics and statistical analysis is useful in the evaluation of the citations received by scientific papers in the periodical literature. The paper began by clarifying the role of citation analysis in the evaluation of research. A summary of results about the citation distributions’ basic features at different aggregation levels was offered, which indicated that citation distributions share the same broad shape, are highly skewed, and are often crowned by a power law. In light of this evidence, a novel methodology for the evaluation of research units was illustrated by comparing the high- and low-citation impact achieved by the U.S. the E.U. and the rest of the world in 22 scientific fields. However, contrary to recent claims, it was shown that mean normalization at the sub-field level does not lead to a universal distribution.

Papers produced:
(D12c), The evaluation of citation distributions from an economic perspective, Javier Ruiz-Castillo (Carlos III de Madrid)
(D12h), The evaluation of citation distributions from an economic perspective - revised, Javier Ruiz-Castillo (Carlos III de Madrid)
(D12j), The Evaluation of the Citation Distributions, Javier Ruiz-Castillo

WP3

1st periodic report
Augiar and Gagnepain’s research, presented in their paper “European cooperative R&D and firm performance”, provided empirical evidence on the effect of these FPs on various firm-level performance measures, such as productivity and profitability. Specifically, their paper analysed the Fifth European Framework Programme for Research and Technological Development, by looking into its effects on the performance of participating firms. A special emphasis was made on the User-friendly Information Society (IST) programme and on the reforms undertaken by the programme with respect to its predecessors. In particular, the paper took into account the different instruments from the programme (Key Actions and Contract types) to isolate any potential impact on the participants. Instrumental variables estimation was used to account for the endogeneity of participation in the programme. Data from Amadeus was used to consider labour productivity as a performance measure.

Papers produced:
(D14b), European Cooperative R&D And Firm Performance, Luis Aguiar (Universidad Carlos III de Madrid) and Philippe Gagnepain (Paris School of Economics/Universit´e Paris)


10. Institute of Economics of Hungarian Academy of Sciences (IEHAS)

IEHAS contributed to Work Packages 5 and 6.

WP5

1st reporting period
The research pursued by IEHAS has investigated the effect of capital imports on the wages of a large, representative sample of Hungarian machine operators. Using linked employer-employee data and detailed product- and firm-level import data, IEHAS researchers matched the precise occupation description of each worker to the equipment imported by their employers. It was found that machine operators working on imported machines earn 16% more than those working on domestic machines. Researchers concluded that about one third of this wage gap is due to the higher returns to skill on imported machines, and two thirds are due to the higher skill of imported machine operators. The structural estimates also suggest that imported machines contributed substantially to the increase in wage inequality in Hungary.

2nd and 3rd periods
Gábor Kőrösi studied the substantial change in the job structure of the Hungarian corporate sector in the 1998-2006 period. Foreign-owned, and/or innovative firms created a large amount of jobs for highly skilled workers. Those workers partly came from the non-innovative high-tech firms; those firms which entered the supply chain of international corporations frequently stopped investing into R&D, and opted for the lower level assembly jobs. This is clearly reflected in the reallocation of skills within the corporate sector. Innovative firms were substantially more likely to create jobs, but mostly for highly trained employees. However, as there are far too few firms engaged in R&D, their overall influence on the job market reallocation was limited. While foreign-owned firms were likely to continue creating additional jobs, domestic firms destroyed roughly the same amount. That explains the apparent contradiction between intensive job market reallocation and the overall sluggish employment situation even before the recession in Hungary.

Kőrösi and László Halpern analysed the cost of labour adjustment. Results suggest that costs delay adjustment in the demand for labour. Moreover, strong heterogeneity was found among firms with respect to their adjustment abilities, implying that labour demand estimates based on aggregate data yield misleading results. As the adjustment cost of high-skilled workers did not change much, this change mostly reflected the increasing adjustment cost, especially the increasing hiring cost of low-skilled workers. But the relatively flexible market for high-skilled workers, where adjustment cost has not increased significantly, and its variation mostly depends on experience, may be an important factor in keeping the labour market for innovative firms investing into research and development activities, and could also keep their specific labour markets more flexible than the majority of firms. This gradual, but substantial increase in adjustment costs is especially interesting because it coincides with increasing availability of various government programmes for job creation. While there were practically no such programmes in the transition period, later such programmes were increasingly institutionalised.

Papers produced:
(D21g), Labour adjustment cost in Hungary, Gábor Kőrösi
(D21g), Job Market Restructuring, skills and innovation in Hungary, Gábor Korösi
(D21h), Labour adjustment cost in Hungary, Gábor Korösi, László Halpern


WP 6

1st periodic report
Researchers at IEHAS investigated what the effect of imported technology on firm productivity is. To study this question, a dynamic model of firm investment and importing decisions was developed and estimated in Hungarian firm-level panel data. The preliminary results indicate that: (i) the share of imported capital is strongly positively related to productivity; and (ii) imports from R&D abundant countries matter more for productivity than imports from low-R&D countries.

2nd periodic report
Miklós Koren and Márton Csillag estimated the effect of imported machines on the wages of machine operators utilizing Hungarian linked employer-employee data. They found that workers exposed to imported machines earn about 8% higher wages than other machine operators at the same firm. When they proxied for unobserved worker characteristics, they found a significant 3% wage premium, suggesting that the relationship is causal. The return to schooling is also higher on imported machines. They built a simple matching model consistent with these findings, which suggests that machine imports can be an important channel through which skill-biased technical change reaches less developed and emerging economies.

2nd and 3rd periodic reports
Halpern, Cecília Hornok, Koren, and Adam Szeidl estimated production functions in Hungarian firm-level data that directly control for the technology content of imported capital. Their results indicated that: (i) the share of imported capital is strongly positively related to productivity both within and across firms; and (ii) firms that import capital from a country are more likely to subsequently start importing intermediate inputs from the same country. These findings suggest that foreign technology diffuses to the firm importing capital, and that it is complementary with intermediate inputs.

Halpern, in his paper “Technology transfer through capital imports” investigated detailed data from Hungarian firms, finding that: (i) imported technology raises productivity and has contributed to a substantial rise in productivity over the last two decades, both within and across firms; and (ii) imported technology raises demand for skilled workers – a form of ‘skill-biased technical change’. Doing so has contributed substantially to the increase in wage inequality in Hungary.

Papers produced:

(D23d) Machines and machinists: The effect of imported capital on wage inequality, Márton Csillag and Miklós Koren (WP6)
(D23h), Machines and machinists: The effect of imported capital on wage inequality, Miklos Koren and Marton Csillag (KU Leuven)
(D23o), Technology transfer through capital imports: Firm-level evidence, Laszlo Halpern, Cecilia Hornok, Miklos Koren, Adam Szeid

Potential Impact:
1.4 The potential impact (including the socio-economic impact and the wider societal implications of the project so far) and the main dissemination activities and exploitation of results (not exceeding 10 pages).

By bringing together researchers with proven track records of publications in top international journals in economics and have them focus on an original topic, namely the interaction between knowledge production and the behaviour of firms and markets in the global economy, the project has generated a flow of research that extends the frontier of scientific knowledge. Building a team of experts from across Europe has been key in this respect, given that such diversified knowledge cannot be found in any single country.

However, the output of the project goes beyond pure academic research: it also focuses on impacting the policy arena, given that it addresses very topical issues. Interest has been expressed and can indeed be further expected from within the knowledge-producing sector (universities and research institutes, private research institutions), policy circles (Science and Innovation Ministries, EU institutions, research funders), business circles, and labour groups.

Our research has been able to go beyond academic circles, thanks to the dissemination channels set up by CEPR, some of which are ‘generic’ and some also specifically targeted to the topic of the project, namely SING (Science, Innovation and Growth). But wanting to go beyond that, as part of WP7 the project consortium produced a policy-oriented report, Science, Innovation, Firms and Markets in Europe, that brought together the research results and derived policy implications, in terms of science and innovation policy, international trade policy, and labour market policy in particular. This report was subject to extensive consultation with research, business, labour and policy community stakeholders.

Some highlights of the socio-economic impact of this project are summarised below.

In WP1, KUL furthered the research and policy goals that can have implications for the socio-economic development of Europe in the following ways. In the case of Europe’s place in the world they measure the impact by addressing the questions: 1) what does the rise of non-Triad countries, and particularly China’s rise in the global science community, mean for the scientific and economic position of advanced countries? And 2) will the erosion of the Triad dominance in science diminish its advantage in knowledge-based value creation? The researchers suggest that the issue will not be how to hide away from the process of global integration of science, but rather how to benefit from it as much as possible. Countries will need not only to improve the competitiveness of their national science and innovation systems in a global environment, but to learn better how to connect into global science networks to achieve national benefits.

As the recent data seem to suggest, with the rapid catch-up of non-Triad countries, that may be a serious challenge for the future. Although recent policy communications suggest that policymakers are at least aware of the challenges presented by globalization, having more and better-quality evidence on the process and effects of global science integration would allow them to design better policy initiatives.

A potent policy avenue for stimulating mobility intra-Europe and allow for mitigation of the elite brain drain to the US would be to improve the excellence of the research environment in Europe and improve the internal labour market for researchers in Europe. This is a complex longer-term policy agenda, complementing a short-term funding-for-mobility-stimulus plan.

If forces are to be mobilized in Europe to successfully exit the crisis and create a smart, sustainable and inclusive growth path towards a knowledge-based society by 2020, European higher education must play a more central role, achieving wide access and excellence at the same time. But the European higher education system does not seem currently to be in a position to achieve these aspirations in a number of important ways.

KUL’s research under WP2 on industry-science links also has a number of implications. First, industry-science linkage policy should be systemic and part of overall innovation policy, also considering capabilities, incentives, and other systems failures. Policies should aim to simultaneously affect the supply from science, the demand from industry, as well as the interlinking actors.

Second, efforts should be made to support industry-science linkage policy with data, building a diverse set of indicators, and more analyses should be performed to assess the private and social effectiveness of industry-science linkage. This in turn will stimulate more effective policy.

More specifically, our research on R&D locations suggests that policies to strengthen the quality and quantity of university research can be an instrument for attracting R&D investments by multinational firms to host countries and increasing the critical mass in R&D clusters around universities. Other implications are that reducing wage cost of scientists and engineers through tax rebates and an adequate enforcement of intellectual property protection rules are also beneficial to attracting R&D.

UNU-MERIT and ULB linked the potential impact of their policy findings to innovation policy and have pleaded, for more effective supply-demand matching in EU research, and hopes that the current sovereign debt crisis period might offer new opportunities to address the lack of growth convergence within the eurozone area and the many structural weaknesses in RDI – not just the research fragmentation, but also the lack of research excellence and research mobility, the poor performance of European higher education systems, and innovation in Europe.

In addition, UNU-MERIT and LMU researchers have estimated that the impact of their research will be evident in the field of intellectual property rights. In their survey and research papers, Bronwyn Hall, Christian Helmers, Mark Rogers, Dietmar Harhoff, and Vania Sena find that patents are associated with higher turnover and employment, despite the fact that formal systems of registered IP protection are often considered as less important than informal IP protection.

Furthermore, UNU-MERIT and TSE teams have together advanced our understanding of the developments relating to innovation, ICT, and economic performance. There is general agreement that innovation and ICT lead to higher economic performance. Bronwyn Hall, Francesca Lotti and Jacques Mairesse find on the basis of Italian data that R&D and ICT are both strongly associated with innovation and productivity, rates of return to both investments are so high that they suggest considerably underinvestment in both these activities. Polder, van Leeuwen, Mohnen, and Raymond find that ICT investment and usage are important drivers of innovation in both manufacturing and services. Doing more R&D has a positive effect on product innovation in manufacturing. The strongest productivity effects are derived from organisational innovation. Jacques Mairesse, Yilin Wu, Yanyun Zhao, and Feng Zhen’s results regarding the link between innovation and employment are not so different from those found in the manufacturing industry as a whole in France, Germany, Spain, and Italy.

Evidence of complementarity between different types of innovation output or innovation input are mixed, but Polder, van Leeuwen, Mohnen and Raymond find positive effects of product and process innovation when combined with an organisational innovation, indicating organisation complementarity. Jun Hou and Pierre Mohnen show that R&D and technology purchase are complementary in stimulating product innovation across small and medium size manufacturing firms in China, but not in generating process innovation, and nor in achieving higher levels of labour productivity. These findings have important implications for innovation policy design in terms of effecting change, particularly in manufacturing firms.

Finally, the research conducted as part of the SCIFI-GLOW project by UNU-MERIT provides an evaluation of the effectiveness of R&D tax incentives, which across the project is a comprehensive analysis of different incentives globally. In their evaluation of the R&D tax incentive system in the Netherlands and the province of Quebec, Lokshin and Mohnen and Baghana and Mohnen show that there is a deadweight loss associated with level-based R&D tax incentives that is particularly acute for large firms. For small firms it is not sizeable enough to suppress the R&D additionality, at least not during quite a number of years after the initial tax change. In the light of this deadweight loss and the apparent effects of tax incentives not just on real R&D but also on the wages of R&D workers in the Netherlands (Lokshin and Mohnen) these results suggest that the R&D tax incentives need to be reconsidered as an effective means of stimulating private R&D. Mulkay and Mairesse show that the French reform of the R&D tax incentive system is effective but slow.

List of Websites:
http://scifiglow.cepr.org

The project website was hosted at http://scifiglow.cepr.org/. The website experienced technical difficulties in the 1st period, but was then migrated to a new server and was extensively utilised throughout the life of the project. Publications delivered within the framework of the project were made available on the project website and have since been disseminated more widely.
PLEASE NOTE: The project website was maintained and online until after the end of the project. In the six years that have elapsed, and reflecting the evolving nature of research in this field, the website has since been archived. Please see below attached file for evidence of its presence online in the relevant time period.