Capabilities and investment in R&D: An analysis on European data

In this paper we test the effect of technological capabilities (accumulated knowledge andorganization/production routines) on the R&D intensity for a panel of European indus-tries. Our proxy for capabilities is the distance from the technological frontier. Estimationis carried out with System Generalized Methods of Moments and is robust to variousspecifications. Our identification strategy is limited to the average (reduced form) effect.We find a strong effect of capabilities on the amount invested in R&D, after controllingfor demand pull, technology push, size, and cash constraints. The latter ones are the mainvariables used in the literature on the determinants of innovative expenditure, of which R&Dis one of the components. The elasticity of the distance from the technological frontier is10%, of similar magnitude (but opposite sign) with regard to the effect of internal resources.When we allow for heterogeneous impact, clustering the industries according to theirtechnological level, we see that the effect of capabilities is robust, but concentrated inMedium and Low Tech sectors. Moreover, the effect is stronger in the upswings of thebusiness cycle and is concentrated in peripheral countries. These latter stylized facts maysuggest that the divergence induced by lack of capabilities is somehow nonlinear andincreases when a critical mass is missing.JRC.J.2-Knowledge for Growt