Fabiano Schivardi. UniversityofCagliari, EIEF, CEPR. LdA, CEPR. The triggers of competitiveness. Financing innovation: the role of innovation and

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1 Fabiano Schivardi UniversityofCagliari, EIEF, CEPR. LdA, CEPR The triggers of competitiveness Financing innovation: the role of innovation and financial systems in shaping competitive advantages 6 December 2011, National Bank of Belgium, Brussels

2 Howshouldwethinkabout innovation? Just technology? Innovationallowsa firmtostay aheadofcompetitorsand increase margins Escape(unbearable) price competition with developing countries Important even in sectors with little technological innovation Succesfulfirmsinvestsnotonlyin technologicalinnovation, but also in trade mark, product development, marketing. Role of Intangible capital, of which innovation a component I will focus on innovation, but ideas more general

3 EvidencefromItalianfirms Intangibles in SME (up to 250 m turnover) Intangible over total assets 30% no crescita crescita (2010 vs 2007) 20% 10% 0% aziende agricole chimica meccanica hi tech metalli e lavorazione mezzi trasporto prodotti intermedi sistema casa sistema moda

4 Large differences in R&D epxenditure across countries in Europe R&D expenditure (share of GDP) Source: OECD, 2008

5 More similarityin innovativeness 70 Share of innovative firms Source: CIS, Germania Danimarca Austria Olanda Belgio Italia Francia Svezia Spagna Finlandia

6 Patentsand R&Dpositivelyrelated Source:Lotti-Schivardi (2005). Patents data are from the EPO; employment and R&D personnel data from the OECD Main Science and Technology Indicators database.

7 Large differences in efficiency of R&D Source:Lotti-Schivardi (2005). Patents data are from the EPO; employment and R&D personnel data from the OECD Main Science and Technology Indicators database.

8 Usefultothinkat twodriversof innovation: Countrycharacteristics: financialsystem, education system, sectoral specialization. Firmcharacteristics: firmsizedistribution, ownership structure, financial structure

9 DifferencesfromGermanyin patent propensity, firmdata Panel A: Probability of having at least one patent. Panel B: number of patents. Source: Lotti-Schivardi(2005), EPO and Amadeus

10 Roleoffirmsize Old debate(schumpeter): both needed Share of innovative firms, by size Totale addetti addetti oltre 250 addetti Germania Italia Francia Spagna Source: CIS, 2008

11 Obstaclestoinnovationactivity Too risky Fiancial constrains ,8 24,8 France ,5 23,6 > 250 6,2 18,7 totale 11,5 24, ,6 43,9 Germany ,4 46,2 > ,8 34,3 totale 27,8 43,7 The importance of financial constraints decreases with firm size ,1 56,5 Italy ,0 57,6 > ,0 46,4 totale 46,2 56, ,0 54,9 Spain ,2 49,6 > ,8 39,9 totale 49,8 53, ,7 51,4 UK ,9 40,3 > 250 3,1 31,5 totale 6,1 48,0 Source: Bugamelli ae al, 2011, Efige database

12 Barrierstogrowthin Europe Low propensityofyoungeu firmstogrow: why? Finance and ownership structure? Source: Bartelsmann, Scarpetta and Schivardi, 2005

13 Financingthe innovationactivity Innovation(intangibles in general) risky Debtcontractnotbest instrument: importance of equity In continentaleurope, largepresenceoffamily firms that finance their operations mostly through bank borrowing The absolute predominance of this mode of corporate ownership/control/finance might be a problem for innovation

14 Bank finance OK for tangibles

15 Less for intangibles

16 Ownership, control and finance of European firms Share of firms: FRA GER ITA SPA UK Family owned Of which: Family managed Foreign ownership Venture capital Share of bank debt over total debt Source: Bugamellietal., 2011, Bankoftaly. Data fromthe EFIGE survey

17 VC investmetnsin IT, EU and US Early stage Italia Europa USA Source: Bugamelli et al, Expansion Italia Europa USA

18 Roleofownership Bugamelli et al. (2011), Efige data: Family ownership not a problem in itself Butproblematicwhencontrolconfinedtothe family: less innovation(bloom and Van Reenen, 2007) Michelacci-Schivardi(2011) Oweners of family firms undiversified, very concerned with mantaining control More riskaverse-- countrywithmore family firms beforme worse in more risky(innovative) activities

19 Obstaclestoinnovationactivity Too risky Fiancial constrains ,8 24,8 France ,5 23,6 > 250 6,2 18,7 totale 11,5 24, ,6 43,9 Germany ,4 46,2 > ,8 34,3 totale 27,8 43, ,1 56,5 Italy ,0 57,6 > ,0 46,4 totale 46,2 56, ,0 54,9 Spain ,2 49,6 > ,8 39,9 totale 49,8 53, ,7 51,4 UK ,9 40,3 > 250 3,1 31,5 totale 6,1 48,0 The importance of financial constraints decreases with firm size Riskiness much more relevant in Italy and Spain, more based on bank finance and less in the UK, with a more market based financial system Source: Efige

20 Needed: a more diversified ownership/finance/control structure Change in productivity growth pre/post 1975 and share of family firms Source: Michelacci and Schivardi, 2011

21 What challenges for the European financial system for innovation? In Continental Europe, needfora more diversified supply of funds Roleofequity Institutional investors VE, PE. Pension funds Increase the contestability of control no barriers to foreign acquisitions Increasethe firmparticipationtothe stock market..

OECD/ADBI 7th Round Table on Capital Market Reform in Asia October 2005 ADB Institute, Tokyo, Japan

OECD/ADBI 7th Round Table on Capital Market Reform in Asia 27-28 October 2005 ADB Institute, Tokyo, Japan SESSION 4: DEVELOPMENTS IN VENTURE CAPITAL AND PRIVATE EQUITY SINCE THE END OF TECH BUBBLE Mr.