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Innovation in SMEs exhibits some peculiar features that most traditional indicators of innovation activity do not capture. Therefore, in this paper, the authors develop a structural model of innovation which incorporates information on innovation success from firm surveys along with the usual R&D expenditures and productivity measures. They then apply the model to data on Italian SMEs from the "Survey on Manufacturing Firms" conducted by Mediocredito-Capitalia covering the period 1995-2003. The model is estimated in steps, following the logic of firms' decisions and outcomes: in the first, R&D intensity is linked to a set of firm and market characteristics.
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