Absorptive capacity and regional patterns of innovation

Executive SummaryThis paper considers whether differences in absorptive capacity at the firm-level are determinants of regional variations in innovation performance. Differences in firms’ absorptive capacity are also due to sectoral and technological specificities. Both firms’ absorptive capacity and sectoral structure differ widely across regions: this analysis focuses on the former while controlling for the latter aspect in order to evaluate regional differences in firms’ propensity to innovate.The empirical analysis is based on the use of two different and complementary firm-level databases covering UK enterprises. First, the UK Innovation Survey 2005 (UK CIS4) and second, the newly collected Small and Medium-sized Enterprises Survey carried out by the Centre for Business Research at the University of Cambridge. The use of two data sets allows for comparisons on a wide range of indicators on firms’ absorptive capacity and for different types of innovation. The CIS4 database provides information on a large sample of firms while the CBR allows for more comprehensive details on firms’ characteristics in terms of innovative strategies and absorptive capacity. Furthermore, the analysis incorporates complementary evidence based on in-depth case study analysis of thirteen companies included in the CBR data base.The probability of introducing a product (good or service) or process innovation is estimated using a series of independent variables which capture the different aspects of firms’ absorptive capacity while, at the same time, controlling for regional and sectoral specificities. The results of the analysis are broadly supportive of many of the hypotheses from the literature on absorptive capacity. The key findings are as follows:• The presence of a larger share of R&D employees is positively associated with innovation, particularly for manufactured goods.• The use of new management techniques has a significantly positive association with increased innovation activity.• Collaborative behaviour is also associated with increased innovation activity. National and overseas collaborations are significantly associated with goods product innovation, while national collaborations are most important for service innovation.This research shows that different forms of absorptive capacity are associated with different types of goods, service and process innovation. Furthermore, it suggests that policies that encourage the use of new management techniques, the training of managers and the development of networks across multiple geographies may improve the innovative behaviour of firms in all the regions of the UK