Innovative Activity and Firm Performance: The Case of Eurozone Periphery

In this work, we attempt to analyze the contribution of innovative activities to firm performance and growth. We examine economic data from some of the economies that were heavily affected by current economic crisis: the countries of southern Europe (Portugal, Italy, Greece and Spain) and Ireland. Following literature, an appropriate econometric model is developed and several indicators are tested in order to disclose possible relation with innovative activity. Findings confirm the crucial effect of innovative process in economic activity, in firm and country level. Keywords—Eurozone Periphery, Firm Performance, Innovative activity, R&D. I. THEORETICAL BACKGROUND HE countries of southern Europe (Portugal, Italy, Greece and Spain) and Ireland were heavily affected by the global financial crisis. Their economies, are also called as PIIGS (or GIIPS), acronyms that were firstly introduced in the 90s’ and even though not ‘politically correct’ are broadly used by the majority of analysts describing the inability of those countries to confront successfully sovereign debt. The result of the debt crisis was the implication of very ‘hard’ austerity measures and cut-offs in public spending leading to a large reduction in GDP and in a violent burst in unemployment. The vicious circle of recession is generally admitted to be the most crucial problem, for those economies and specific policy measures and reforms are necessary in order to spur development and growth. In this paper, we focus on one of the factors that are considered to be directly related with growth, the innovative process. Active Research and Development appeared to be a major factor for technological and economic progress. Various surveys from previous decade highlight already the strong positive relation with financial performance, along with fast rates of growth [1]. As a result, focused policies should be established in order to encourage and support innovative firms (especially Start-ups and NTBFS), as they seem to contribute to economic prosperity directly (in terms of turnover, profitability, etc.), and indirectly (employment, establishment of new technologies etc.). In a more recent work, [2], following OECD view, underline that, "the interest in innovation spans from the firm level to the national level... as countries can achieve higher rates of growth and favorable terms of trade by specializing in I. A. Makris is with the Accounting and Finance Department, Technological Educational Institute of Peloponnese, Antikalamos Messinias, 24100, Kalamata, Greece (phone: +30-27210-45256, e-mail: [email protected], [email protected]). knowledge intensive products with higher added value [and because of that,] policy makers across the globe have been struggling to develop policies which would stimulate spending on R&D activities and increase the efficiency of the innovation process" (p.353). In their survey, they found that investment in innovation activities, affect positively the innovation output (sales of new products) resulting also in better productivity. In the line of that, [3] claimed that R&D increases the level of sector’s performance and national economic performance, diffusing innovative products (p.990), while [4] found that R&D process is correlated positively with productivity growth and sales, especially in high-tech sectors (p.492). Analyzing European enterprises, [5], concludes that innovative firms are more likely to grow than non-innovative firms. However, no clear relation with profitability seems to exist. The contribution of innovative firms (mainly SMEs) to economic growth has been also underlined by [6], while [7] conclude that innovative firms, even during economic recessions, seem to increase their employment and sales (p.120). In a survey for Chinese firms [8] finds that R&D performers are more concentrated among capital-intensive firms with large sales’ volumes. Research works for Greece [9], [10] also find that firms performing innovative activities enjoy higher rate of growth in turnover and employment, than sector’s average. Apart from sales and revenue, innovative activity seems also to affect positively exports’ volume, another very crucial factor of growth in firm and country level. [11], [12], conclude in a positive relation between innovative activity and exporting performance, underlining that, firms, wishing to export, should first reach an initial level of R&D. A survey for Japan [13] shows that international R&D activities (enhanced by the existing research capabilities) increase performance and growth of the (pharmaceutical) firms. Using various statistical models and interpreters on measuring exporting activity in food products’ sector, [14] also finds that in all calculations, innovative activity has the larger and stronger contribution in the volume of exports. Even though the contribution of R&D in economic growth seems to be more than obvious, most of the countries of euro periphery that we are focused on, present poor performance. More specific, Portugal Italy Greece and Spain present lower R&D expenditures and high-tech exports, than most of the other Euro zone countries-members, while two of them (Portugal and Greece) are in the last place. Only Ireland’s high-tech exports are more than 20% of its total exports, however a reduction of almost 50% is appeared too in the last Innovative Activity and Firm Performance: The Case