A Bivariate Probit Model for Analysing how the “Knowledge” causes Innovation and their Effect in Small and Medium Firms

This paper examines the determinants of innovation and its effects on small- and medium-sized firms It use the data from the OPIS databank, which provided a survey on a representative sample of firms from a province of the Southern Italy. The final goal is to understand whether small- and medium-sized firms can develop a competitive advantage by using their innovative capabilities, regardless of the sectoral and size limits. We underline that the main factor influencing the likelihood of innovation is knowledge, which is acquired through different ways (e.g., the level of education, training, and networks). With regard to our econometric methodology, we construct a bivariate model to estimate the probability of increased sales conditionated to the probability of innovation controlling for the correlation between these two outcomes. We found that the knowledge positively influence the probability of innovation instead the competitive advantage is not directly and positively affected by our hypothesis of high level of knowledge. JEL O31 ; L1; C24; C25 Keywords: innovation, small- and medium-sized firms, human capital, networks, bivariate probi