CASE Network Studies and Analyses 394 - Differentiation of Innovation Behavior of Manufacturing Firms in the New Member States. Cluster Analysis on Firm-Level Data
Materials published here have a working paper character. They can be subject to further 
publication. The views and opinions expressed here reflect the author(s) point of view and 
not necessarily those of CASE Network. 
This paper was produced in the framework of MICRO-DYN (www.micro-dyn.eu ), an 
international economic research project focusing on the competitiveness of firms, regions 
and industries in the knowledge-based economy. The project is funded by the EU Sixth 
Framework Programme (www.cordis.lu). This publication reflects only the author's views, the 
European Community is not liable for any use that may be made of the information contained 
therein. 
The publication was financed from an institutional grant extended by Rabobank Polska S.A. 
English proofreading by Paulina Szyrmer. 
Key words: Innovation patterns of firms; Strategy of innovation, Innovation behaviour, 
Innovation sources; Taxonomies of innovative firms, EU New Member States 
JEL codes: L25, O31, O32, 033 
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CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
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CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
3 
Contents 
Abstract...................................................................................................................................5 
1. Introduction ......................................................................................................................6 
2. Background ......................................................................................................................7 
3. The Heritage of a Command Economy ..........................................................................9 
4. Data source and enterprise sample..............................................................................12 
5. Methodology employed to explore innovation patterns.............................................14 
6. Aggregate factors description ........................................................................................15 
7. Innovation patterns of firms in the NMS ........................................................................16 
Conclusions..........................................................................................................................21 
Bibliography .........................................................................................................................23 
Appendix...............................................................................................................................26
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
Ewa Balcerowicz is a co-founder and the Chairwoman of the Supervisory Council of CASE 
– Center for Social and Economic Research; from 1 July 2004 to 30 June 2008 she served 
as President of the CASE Management Board. She has a PhD (1988) and Master’s degree 
(1977) from the Warsaw School of Economics. Her research and publications focus on: the 
SME sector, the environment for the development of the private sector, the banking sector 
and insolvency systems, barriers of entry and exit in the transition economies of CEEC, and, 
most recently, innovation economics. 
Marek Pęczkowski is a lecturer at the Faculty of Economic Sciences at the University of 
Warsaw. He specializes in business process modelling, multivariate data analysis, data 
mining and econometrics. He has worked in numerous international research projects 
involving statistical databases and statistical computing. 
Anna Wziątek – Kubiak is a professor of economics and head of the Department of 
Macroeconomics and Economic Policy at the Institute of Economics in the Polish Academy 
of Sciences, a lecturer at the Dąbrowa Górnicza Business School and a scholar at CASE – 
Center of Social and Economic Research. She has participated in and coordinated numerous 
research projects focusing on international economics, including international trade and 
competitiveness and innovations. She has authored and co-authored numerous articles and 
books published by Springer, Palgrave and Edward Edgar. 
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CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
5 
Abstract 
This paper investigates the differences in innovation behaviour, i.e. differences in innovation 
sources and innovation effects, among manufacturing firms in three NMS: the Czech 
Republic, Hungary and Poland. It is based on a survey of firms operating in four 
manufacturing industries: food and beverages, automotive, pharmaceuticals and electronics. 
The paper takes into account: innovation inputs in enterprises, cooperation among firms in 
R&D activities, the benefits of cooperation with business partners and innovation effects 
(innovation outputs and international competitiveness of firms’ products and technology) in 
the three countries. After employing cluster analysis, five types of innovation patterns were 
detected. The paper characterises and compares these innovation patterns, highlighting 
differences and similarities. The paper shows that external knowledge plays an important 
role in innovation activities in NMS firms. The ability to explore cooperation with business 
partners and the benefits of using external knowledge are determined by in-house innovation 
activities, notably R&D intensity.
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
6 
1. Introduction 
One of the main issues of economic growth and competitiveness in the New Member States 
of the EU (NMS) is their innovativeness. As widely proved by economic research, 
innovations stimulate the economic growth of countries and thus enable the NMS to catch up 
with developed market economies. The NMS inherited an anti-innovation bias from the 
command economy system. However, in response to the introduction of market institutions 
and market rules in the 1990s, firms active in these countries faced increased competition 
and had to modify their innovation behaviour. 
In terms of innovations and economic performance, firms in the NMS are heterogeneous. 
This raises the issue of differences in innovation patterns1 among firms, i.e. differences in 
innovation sources and innovation effects. These countries were isolated from the world 
economy for many years. During the transition period, new economic networks among firms 
developed rapidly. Thus, the question emerges of whether or not enterprises also benefited 
from cooperation with business partners in this period. In other words, we would like to know 
if they gained the ability to absorb domestic and international knowledge spillovers. This 
leads to a question about the role of external sources of innovation versus internal ones. Last 
but not least, the relationship between innovation patterns and international competitiveness 
is also of interest. 
This paper aims to answer the questions listed above. Its purpose is twofold. Firstly, to 
examine differences in the innovation activities of firms in the three NMS: the Czech 
Republic, Hungary and Poland, as well as their sources and effects. Secondly, it aims to 
detect and characterize the innovation patterns of manufacturing sector firms in the three 
countries and their relationship with economic performance. 
The paper is divided into two parts. In the first part the background for our study and 
specifics of the NMS are presented. First, the main theoretical approaches in explaining the 
process of differentiation of sources and modes of innovation among firms are presented 
(Section 2). We summarize the results of research on the role of external versus internal 
factors of innovations. Next, in Section 3 specifics of the NMS compared to developing and 
developed market economies is shown. The second part of the paper presents the results of 
our own research on innovation activities run by manufacturing firms in the NMS. To our 
1 Or innovation modes – we use these two terms interchangeably.
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
knowledge, no analyses on differences in the innovation activities of firms have been 
undertaken for the NMS so far. This part begins with a brief presentation of data source and 
an enterprise sample (Section 4). In Section 5 we discuss the methodology employed to 
detect firms’ innovation patterns in the NMS. Section 6 presents aggregate factors that 
turned out to matter in clustering of enterprises by innovation indicators. The last section 
presents and discusses innovation patterns of the NMS firms. It focuses on similarities and 
differences between innovation patterns of firms and their relationship with economic 
performance. Conclusions convene the paper. 
7 
2. Background 
For many years, most empirical studies on the diversity of innovation activities focused on 
inter-industry variations. The studies neglected the heterogeneity of firms within industries 
and intra-industry differences among firms in terms of innovation behaviour and strategy. At 
the same time, the theoretical literature does provide some guidance in identifying sources of 
inter-firm variation in innovation activities. It points out that the unevenness of the availability 
of information, the various means used to innovate, the differences in expectations about the 
return to R&D investment and other factors may lead to differences in innovation behaviour 
and performance. 
In theory, the differentiation of innovations within an industry is analysed from various points 
of view. Two approaches play a crucial role2 in explaining the process of differentiating 
sources and modes of innovation among firms: evolutionary theory and the theory of 
endogenous growth. The former focuses on analyzing ways in which firms develop their 
innovation process. The specific nature of the process of technological change of a firm and 
the fact that innovation activities depend on the firm’s past history are at the heart of this 
approach (Nelson and Winter 1982; Verspagen 2000). Heterogeneity in knowledge stocks 
across firms plays a crucial role in the variation in enterprises’ innovation patterns. As a 
result, firms differ significantly in terms of innovation capabilities: innovation inputs, activities, 
scope, forms and partners of external cooperation, and innovation output. This also implies 
2 There are many other approaches and theories which refer to the heterogeneity of firms’ innovation activities 
within an industry. For example, the life cycle theory shows that at a given point in time, firms within a given 
industry can be at different stages of development and innovativeness. This suggests the heterogeneity of their 
innovation patterns. The strategic management literature shows that firms may intentionally seek to find different 
innovation strategies from their competitors.
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
that for firms which did not accumulate knowledge in the past, the potential for creating 
innovation and using it as a market-expansion factor is rather limited. 
The excessive focus in evolutionary theory on the importance of internal resources as a 
dominant factor of innovation created a tendency to neglect the contribution made by 
external factors (i.e. knowledge linkages) and their role. The development of the theory of 
endogenous growth and the endogenization of technological change into economic growth 
resulted in the introduction of knowledge spillovers to the analysis on innovation (Grossman 
and Helpman 1991, Rivera-Batis and Romer 1991). The non-rival character of knowledge 
implies that firms may learn from other firms’ innovations. These are known as technological 
(knowledge) externalities or spillovers. So a firm’s innovation capabilities depend on the 
pool of knowledge it accumulated through internal efforts, on the pool of general knowledge 
it has access to and its ability to use it. This means that apart from in-house capabilities 
accumulated in the past, firms rely on external (both domestic and foreign) sources of 
innovation when developing and introducing innovations. This approach also results in the 
emergence of the notion of knowledge capital as a function of both the firm’s own R&D 
investment and spillovers (Ornaghi 2006). 
If knowledge is cumulative (in the sense that only leaders, that is creators of innovation, can 
conduct innovative activities), then, as the theory of endogenous growth proves, an outsider 
can also learn from the previously accumulated technology and acquire or imitate it. For 
example, firms can enhance the quality of their product by learning from an innovation 
introduced by competitors and by imitating it. In this way, firms can benefit from a positive 
externality (a spillover). Outsiders can introduce a new product or simply upgrade the quality 
of the existing one. However, they have to invest in this improvement as imitation also 
requires some knowledge. So imitative activity is a type of learning activity, but the learning 
of new knowledge is costly. This suggests that “in order to recognize, evaluate, negotiate and 
finally adapt the technology potentially available from others,” (Dosi 1988, p. 1132) firms 
require some in-house innovation capacity. A precondition for the endogenization of 
knowledge spillovers is some accumulation of knowledge by the firm. The dual role of in-house 
R&D activities as creator as well as adopter of innovations that spill over from external 
actors has been recognised. 
The discussion on sources of innovation inevitably leads to various taxonomies of firms in 
terms of innovation capabilities, strategies, ways of creating innovation and modes of 
innovation (Clausen and Verspagen, 2008; Srholec and Verspagen, 2008). Most of them are 
based on two types of sources of innovation: internal and external, although in reality they 
coexist. In many respects, the division of firms into cumulative and non-cumulative (Llerena, 
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CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
Oltra 2002) overlaps with the division of firms into those generating innovation and those 
adopting innovation (Damanpour and Wischnevsky, 2006). Yet another criterion of 
classification is by pioneering R&D and by imitating R&D that generates incremental 
innovation. Other examples are taxonomies on STI (Science, Technology and Innovation) 
and DUI (Doing, Using and Interacting) firms (Jensen et al. 2007). Although these 
classifications differ in many respects, they have a dichotomous character as they distinguish 
between two types of firms: leaders (creators of innovation) and outsiders. They reflect the 
distinction between innovation and imitation and between innovators and imitators. The last 
category is diversified. It covers incremental innovators, followers3 and traditionals4 
(Avermaete et al., 2004). 
The discussion on innovation sources, patterns of innovation, and their effects is very 
relevant for the NMS. Both their heritage as centrally planned economies and the progress 
they have made during the transition period, meaning the speed at which firms have adapted 
and integrated into a highly competitive global economy, means that research on the 
variation of innovation behaviour among firms in these countries provides an excellent test-case 
of the sources of innovation and economic growth. This relates to the role of different 
factors in innovation patterns and their results. It also shows the different faces of innovation 
activities. 
9 
3. The Heritage of a Command Economy 
It seems reasonable to refer briefly to the command economy heritage for the innovativeness 
of the countries of the Central Europe in their transition to a market economy (i.e. in the 
entire decade of the 1990s) and the years preceding their EU membership. Firstly, although 
under socialism, science and technology were very high on the list of government and 
communist party priorities (Gomulka 1990, Chapter 7), the focus of research was on the 
areas of science which did not require market validation.5 Secondly, for systemic reasons, 
enterprises did not create demand for research from the universities, while the latter did not 
deliver research results that served the market expansion of firms. There was no demand for 
and no supply of research results that could have enabled producers to innovate. Numerous 
3 They spend up to 1% of their annual sales on R&D 
4 They do not perform R&D activities themselves; however they introduce new or substantially modified product or 
processes. 
5 The term used by Arogyaswamy and Koziol (2005), p. 456.
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
factors that formed the ‘constructional logic’ of the command economic system were in fact 
anti-innovation (Balcerowicz 1995, Chapter 6). Nearly all research was government-sponsored 
and was mostly theoretical in nature with hardly any market implications. The 
prolonged isolation of these countries from the world economy and the structure of incentives 
discouraged not only innovation but also imitation (Winiecki 2002, p. 14). “The enterprise 
managers avoided innovation as much as possible if new technology and associated 
organization arrangements affected the existing productive capacity (...) and they preferred 
investment in new capacities, using the same (often already obsolete) technology, to 
technological modernization” (Winiecki 2002, p. 13). The closed economies blocked 
international linkages that impact on innovation, including knowledge spillovers. The 
incentives characteristic of the command economic system resulted not only in low 
competitiveness and technological obsolescence, but most of all in an anti-innovation bias 
(Winiecki 2002). These countries and their firms did not accumulate innovation resources 
due to their in-house innovation activities or international knowledge spillovers. The anti-innovation 
bias of managers and employees and the resistance to privatisation in some 
industries at the start and early years of transition made the enhancement of innovation quite 
difficult. However, in terms of human capital, enterprises had a much greater potential to 
innovate6 than most firms in developing countries. 
During the transition period, the three countries that are of interest to this paper were 
characterised by: 
• A peripheral position with respect to global technology-intensive manufacturing 
production; the structure of production was not conducive to innovation activities and the 
quality of goods was very low; 
• Low share of R&D and low share of business R&D spending in GNP; 
• Low level of knowledge linkages between R&D organizations and firms as well as 
among firms; inherited poor innovation capabilities of domestic firms accompanied by 
radical changes in cooperation among firms (so called “adverse shock to network 
activity”, see Woodward and Wójcik, 2007) as a result of privatisation and bankruptcy of 
many firms; 
In the early 1990s, defensive restructuring was taking place in the enterprise sector and it 
was based on shedding labour, reducing costs and scaling down or closing unprofitable 
6 Since the Marxian theory of economic development stressed the key role of economic efficiency, the innovation 
rate and ultimately productivity levels in the competition of centrally managed economies with capitalistic ones, 
the countries of the Soviet bloc placed an extraordinary emphasis on technical education (for evidence see 
Gomulka 1990, p. 94). 
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CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
plants. In later years, strategic restructuring based on investment and innovation was 
increasingly common (Konings 2003). 
The opening up of the transition economies resulted in an increase in the competitive 
pressure of foreign products and firms on domestic products and firms and created potential 
for international knowledge spillovers. Their main channels were foreign trade and foreign 
direct investment. 
Here we come across the problem of the ability of the transition (NMS) countries’ domestic 
firms to absorb knowledge spillovers from external sources, both domestic and international. 
Absorption is not less important than generating new knowledge, including creating radical 
innovation. The term ‘ability to absorb’ covers not only the implementation of external 
knowledge. It also contains improvements in the knowledge which is imported (copied), i.e. 
its upgrading. 
First of all, as the NMS are knowledge absorbers, learners rather than creators, the role of 
international knowledge spillovers in their innovation activities should be greater than in the 
case of the old EU member states. However, the effects of international knowledge 
spillovers depend on many factors and these effects may be positive or negative7. 
Research on the NMS underlines crucial role of international spillovers for their accumulation 
of knowledge and growth. Analysing 17 OECD countries including CEECs (Central and 
Eastern European countries) Bitzer et al. (2008) came to a conclusion that productivity effect 
of spillovers through vertical backward linkages between multinationals and domestic firms in 
CEECs is much higher than for other OECD countries. Leon-Ledesma (2005) basing on 
analysis of 21 OECD countries in a long run shows that for the G7 group foreign knowledge 
has a negative impact on competitiveness, while for less advanced ones countries it has a 
strong positive impact. This impact is stronger the higher the degree of openness to FDI. 
However, research results are varied depending on the period of analysis, the country, the 
model introduced, and the types of spillovers. Empirical research on the period up till 1998 
(Konings 2001; Zukowska-Gagelmann 2001) showed negative spillovers effects of FDI for 
domestic firms, although Damijan et al. (2003) did not confirm it. However, research results 
covering period since 1999 and long term analyses do not confirm earlier research results 
They did find more positive effects of vertical knowledge spillovers for domestic firms rather 
than horizontal spillovers was found (Terlak 2004; Gersl et al 2007; Hagemajer and Kolasa 
2008; Kolasa 2007; Bijsterbosch and Kolasa 2009; Gorodnichenko et al 2007). Some 
research referred to the role of foreign trade as a source of international knowledge 
11 
7 In 1992-1997, in opposition to Ireland and Spain, FDI in Greece did not generate positive knowledge linkages 
externalities.
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
spillovers. Hagemejer and Kolasa (2008) show that differences in ability to absorb foreign 
knowledge through spillovers varies among types of firms in terms of internalization. Last but 
not least the issue of indirect knowledge spillovers as a result of R&D conducted abroad was 
raised. It turns out that the impact of foreign R&D on productivity of the Central and East 
European countries was greater than that of domestic R&D (Chinkov 2006; Tomaszewicz & 
Swieczewska, 2008 and 2007). This is in opposition to what has been detected in the EU-15 
(Leon-Ledesma 2005). 
Summing up, the potential for radical innovations in the NMS is limited. Both the 
accumulation of knowledge and R&D intensity are low although differentiated among these 
countries8. The number of enterprises in theses countries engaged in innovation activities (as 
a share of all firms) also remains low9. 
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4. Data source and enterprise sample 
The data used in this paper was collected through a firm survey performed by an 
international research team led by Richard Woodward (of CASE-Center for Social and 
Economic Research) and within the European research project entitled “Changes in 
Industrial Competitiveness as a Factor of Integration: Identifying the Challenges of the 
Enlarged Single European Market”.10 The survey was aimed at investigating the networking 
of firms in the three accession countries (the Czech Republic, Hungary and Poland) and 
Spain, and its effect on competitiveness11. Fortunately we have found a substantial number 
of questions included in the survey questionnaire as relevant to the analysis of innovation 
processes. Altogether 41 innovation indicators were selected. We grouped them into four 
sets by the dimensions of innovation activities: (1) innovation inputs, (2) innovation linkages, 
(3) effects of cooperation with business partners reflecting that diffusion of external 
knowledge is taking place, and (4) innovation outputs. As many academics argue that in the 
catching up economies diffusion can be the most important part of innovation, we decided to 
include not only the linkages but also their effects. We also chose four performance 
8 For example, in Poland, the share of R&D in GNP is almost three times lower than in the Czech Republic and 
two times lower than in Hungary. Although R&D intensity in the Czech Republic is close to the average for the 
EU-27, it is still not high enough to catch up in terms of the accumulation of knowledge of firms. 
9 For Poland and Hungary, it was two times lower than the EU-27 average. Only in the case of the Czech 
Republic was this indicator close to the EU-27 average. 
10 It was funded by the 5th Framework Programme of the European Community (Ref. HPSE-CT-2002-00148). 
The project was led by Anna Wziątek-Kubiak. CASE-Center for Social and Economic Research, Warsaw led the 
research consortium. 
11 For the results of this specific analysis, see Woodward and Wójcik (2007).
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
indicators: these are self-assessments of the competitiveness of a company’s products and 
technology separately on the domestic and on the international markets. 
All respondents surveyed were managers responsible for day to day business processes. 
The interviews were conducted in 2004 in Hungary and Poland and in early 2005 in the 
Czech Republic. The data collected refers to 2003 and in some cases to the five year period 
1998-2003. This was an interesting and important period in the three former “socialist” 
countries: they were undertaking market reforms, shifting from defensive to strategic 
restructuring, covering innovation activities and advancing preparations for formal accession 
to the EU, which happened on May 1st, 2004. Obviously both processes influenced the 
behaviour of the real sector, i.e. firms, entrepreneurs and investors. 
Data was collected for 490 companies. After carefully examining the answers received to 
questions relevant for researching the innovation patterns, we had to delete 132 firms from 
the data base, due to missing individual data. As a result the sample shrunk by ¼ to 358 
firms. The composition of the sample is presented in Table 1. 
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Table 1. Enterprise sample composition 
No of 
firms 
% of the 
sample 
Countries 
1. Czech Republic 70 20 
2. Hungary 111 31 
3. Poland 177 49 
Ownership 
1. Domestic 244 68.2 
2. Foreign 108 30.2 
Industry 
1. Food and beverages 160 45 
2. Automotive 65 18 
3. Electronic 109 30 
4. Pharmaceutical 24 7 
Total 358 100
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
Polish firms dominated the sample: they accounted for close to half of the enterprise 
population surveyed. The majority (ca 70%) of firms was domestically owned; and domestic 
ownership prevailed in each individual country, though to different extents (Poland was on 
one extreme with an 81% share of domestic capital, while Hungary was on the other 
extreme, with only a 54.1% share of domestic companies). All size classes of firms were 
investigated, but medium-sized firms dominated the sample. 
Four industries were studied in the survey: (1) Food and beverages (NACE Rev.1 – da15); 
(2) Pharmaceuticals (NACE Rev.1 – dg244); (3) Electronics (NACE Rev. 1 – dl30); and (4) 
Automotive Industry (NACE Rev.1 – dm34). Food and beverages firms were the most 
numerous (45% of the sample), while pharmaceutical firms appeared the least (only 7%). 
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5. Methodology employed to explore innovation patterns 
In order to figure out the innovation patterns of firms, a cluster analysis was adopted. Given 
the relatively large number of innovation indicators (41), we decided to use principal 
component analysis (PCA) to measure the sources of innovation in firms. PCA allows us to 
reduce a large number of indicators to a small number of composite variables (called 
‘factors’) that synthesize the information contained in the original variables. Factors are 
standardised variables containing the information common to the original variables. In this 
way, we were able to consider as much available information as possible. PCA is based on 
the idea that indicators which refer to the same issue are likely to be strongly correlated and 
factors that are obtained are uncorrelated. PCA helps prevent including irrelevant variables 
and reduces the risk that any single indicator dominates the outcome of the cluster analysis. 
We assumed that if the correlation between factors and original variables is lower than 0.48, 
the analysis is inappropriate. 
In the next step, non-hierarchical cluster analysis was performed in order to group firms into 
a number of clusters by innovation variables as homogenous as possible (small within cluster 
variance) and at the same time as different as possible from each other (large between 
clusters variance). 
In the Appendix, there is a table which shows the results of factor analysis for the three NMS 
(Table A3). It includes the loadings of the variables on selected factors after the so called 
rotation. The loadings of the various indicators on the retained factors are correlation
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
coefficients between the indicators (the rows) and factors (columns) and provide the basis for 
interpreting the different factors. These loadings are adjusted through rotation to maximize 
the difference between them. We use varimax Kaizer’s normalized rotation that assumes that 
the underlying factors are uncorrelated. 
The first step of factor analysis led to statistically satisfactory results. Eleven factors jointly 
explaining, in the case of the three countries firms, 54.5% of the total variance were selected. 
In the second step we conducted a non-hierarchical cluster analysis based on the eleven 
composite variables extracted in the factor analysis of the first step. Introducing hierarchical 
agglomeration methods for a subset of objects and comparing results for the range of K min 
≤ K ≤ K max (where K is between 2 and 7), we chose the optimal number of clusters. Using 
hierarchical analysis and Ward’s minimal variance method, we chose five clusters that group 
the enterprises into five categories in terms of innovation indicators. Based on the distance 
from the centroids, we compared the variance within clusters and between clusters. 
Centroids of clusters obtained in the hierarchical method were used as the initial centroids for 
the K-means algorithm. 
15 
6. Aggregate factors description 
The factors yielded in the cluster analysis have been further aggregated and as a result we 
have received eight so called aggregate factors. These are: 
• In-house inputs and activities (aggregate factor 1), 
• two types of cooperation in R&D: backward (2) and with research organizations (3), 
as well as subcontracting of R&D activities (4), 
• beneficial cooperation with business partners: in product (5) and process (6) 
innovation, 
• type of innovation (7): either product or process or both ones, 
• innovation outputs (8). 
The aggregate factor 1 which is called ‘in-house inputs and activities’ groups a multitude of 
internal innovation (research) inputs and activities of firms that may contribute to their 
absorptive capacity and the creation of innovation (Cohen and Levinthal, 1989). It includes 
the following variables: R&D intensity (R&D expenditures as a portion of firm’s sales 
revenues), human resources (share of R&D, IT staff, engineers and technicians in total
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
employment), human capital upgrading through training, R&D unit in a firm, and R&D 
activities in respect to product and process development and others. 
Three aggregate factors encompass various collaborative networks in R&D. They cover 
backward linkages (aggregate factor 2) that focus on cooperation in R&D with raw material 
suppliers and machinery and equipment suppliers, as well as cooperation with research 
organization- foreign and domestic and independent scientists (factor 3). The subcontracting 
of R&D activities aimed at product and process development and improvements (aggregate 
factor 4) is also considered. 
Cooperation in R&D activities of firms in NMS in the late 1990s and early 2000s were still a 
new phenomenon (see Section 2). Gaining experience on how to effectively profit from 
others in extracting knowledge had to take time to learn. This was most likely the reason why 
the cooperation was less common and effective than in developed market economies at that 
stage. For this reason, two types of aggregate factors were selected: beneficial cooperation 
with business partners in product innovation and in process innovation. They constituted 
factors 5 and 6. 
Two types of innovation activities: product and process ones constitute factor 7. 
The last aggregate factor considers the output of firm’s innovation activities in terms of new 
products and production technology introduced. However this factor did not retain for the 
Czech Republic, while it was retained for the other two states and the three countries 
altogether. 
16 
7. Innovation patterns of firms in the NMS 
After detecting the clusters, we analyzed their features. The first step was to study the values 
of the innovation indicators that were chosen in the course of the cluster analysis. The data is 
presented in Table A1 in the Appendix. The second step was to compare the value of each 
factor (i.e. composite variables) between the clusters. We used the following scores: from 
‘lowest’, through ‘low’, ‘moderate’, ‘high’ to ‘highest’. The third and last step was to analyze 
all the scores for each cluster and invent a name for each one based on its distinguishing 
features. 
This procedure has brought us to the finding that the following innovation patterns emerged 
in NMS firms during the EU accession preparatory period: (1) low profile, (2) hunting for
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
product innovation in the market, (3) spillover absorbers in process innovation, (4) on the 
science-based innovation path and (5) externally sourced firms (see Table 2). 
The detected innovation patterns represent the different innovation behaviours of firms as 
well as different innovation outputs. The economic performance of sets of firms employing 
individual innovation patterns varies as well. Surprisingly, the ownership structure of firms 
realising these patterns does not differ considerably. Differences in the branch structure of 
these firms are much greater. 
Low profile pattern 
Very low in-house innovation resources and activities as well as little external cooperation in 
R&D distinguish this innovation pattern from the others. These features, together with the 
focus on process (rather than product) innovation, and the fact that a relatively large portion 
of firms benefit from cooperation in the production process suggests that the diffusion of 
external knowledge, notably to the production process of these firms, plays an important role 
in innovations. It serves for the accumulation of knowledge, which is very low. 
The low innovation potential and the limited innovation activities of this group accompany 
the worst - among the five subsets of firms (grouped by types of innovation behaviour) - 
innovation outputs and international competitiveness. The moderate competitiveness of their 
products and production technology on the domestic market allows them to operate in the 
niche of this market, possibly in its lower quality segment. The use of external knowledge in 
the production process indicates that they are conscious of their low competitive position and 
to improve or maintain it, they focus on the absorption of external innovation. 
From a general perspective, it is very telling that the low profile pattern firms in the NMS 
accounted for 29% of the entire population surveyed. Most of the firms (ca 64%) following 
this pattern are in the food industry, 22% in electronics, 11% in the automotive industry and 
only 3% in the pharmaceutical industry. Surprisingly, the ownership structure of this subset of 
firms is similar to that in other clusters (specifically, foreign owned firms accounted for 28% of 
the total number of low profile firms). 
Hunting for product innovation in the market 
This cluster encompasses firms that focus on the adaptation of innovations by acquiring 
them mostly from research organizations. Their R&D intensity is the lowest among innovation 
patterns. This is accompanied by an extremely high (60%) share of R&D and IT staff in total 
employment and the dispersion of R&D activities among many fields. Most of the firms have 
R&D and design units. This suggests that in-house R&D activities focus on searching for new 
product innovations on the market and better R&D subcontractors. Most of the firms gain 
17
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
benefits from linkages in different forms of product development. The widespread diffusion of 
innovation through subcontracting R&D is a crucial source of their innovation. 
The market orientation of these firms is revealed through their high level of innovation output. 
The share of new products in sales and the share of sales attributed to new technology was 
one of the highest. Surprisingly, the internationally competitive position of products and 
production technology was strong in most of these firms. This innovation pattern was the 
least frequently undertaken: only 7 firms were adopting it. Interestingly, all of them were from 
the same branch: electronics. The ownership composition of the cluster is not specific; it is 
similar as in the case of other clusters. 
Firms on the science-based innovation path 
Firms pursuing a science-based innovation path rank high in the R&D factor (R&D intensity 
and share of firms that have an R&D department). They also rank highly in cooperation in 
R&D with different types of partners, notably with research organizations (including foreign 
ones and independent scientists) as well as with suppliers of raw materials and machinery. 
Their ease in cooperating with many types of partners reflects their ability to absorb not only 
tacit but also codified knowledge, as well as their ability to accumulate external knowledge. 
The fact that they score highly on the R&D factor and on external R&D collaboration 
suggests the complementary role of two types of sources of innovation rather than the “make 
or buy decision” (Veugelers, 1997; Veugelers and Cassiman, 1999) model. They score highly 
on organizational changes as an effect of cooperation. However, the share of firms that 
recognize cooperation in innovation activities as beneficial is average. This either reflects 
their consciousness of their knowledge distance from main competitors (they expect that they 
can gain more from the cooperation) or that they are in the process of searching for partners 
that can better serve their innovation activities. A high number of in-house innovation 
activities and cooperation in R&D does not translate into high innovation output and 
international competitiveness. Although they come close to the STI/DUI mode of learning and 
innovation (Jensen et al., 2007), the international competitiveness of their products remains 
moderate. 
This innovation pattern is pursued by foodstuffs and electronic firms (75% of the cluster 
population); the ownership structure of firms in this cluster does not differ significantly from 
other clusters. 
18
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
Externally sourced firms 
This innovation pattern shares some features with the one that relies on hunting for product 
innovation. The common feature of the two is their low R&D intensity and high share of R&D 
and ICT staff, which accompany a relatively high use of outsourcing of innovation results. 
However, in opposition to ‘hunters’, firms pursuing supplier orientation in innovation 
behaviour cooperate in R&D with many partners, including both research organizations and 
suppliers of raw materials and machinery. Their product rather than process innovation 
orientation is confirmed by a high innovation output and widespread number of firms that 
benefited from product-oriented cooperation. However their ability to collaborate with 
different partners does not translate into a very high innovation output or the strong 
international competitiveness of their products. A considerable portion of firm managers 
recognized their products and technology as weakly competitive, while the share of firms that 
recognized their product and technology as strongly competitive was average in comparison 
with the entire population of firms. 
The firms using this innovation pattern differ from others in respect to branch structure. The 
share of foodstuffs and automotive firms accounted for 27%, while electronics accounted for 
33%. 
Spillover absorbers in process innovation 
In this cluster, we have firms that are in the process of developing R&D potential and 
learning and this serves the absorption of external knowledge. The surprisingly high growth 
of R&D spending and R&D intensity did not translate into cooperation with research 
organizations. This explains why a considerable number of firms use the outsourcing of R&D 
results, which is a substitute for cooperation with research organizations. Their 
consciousness of the weaknesses of process innovations (confirmed by their weak 
international competitiveness in terms of technology in a large number of firms) leads them to 
cooperate strongly in R&D with suppliers of machinery and equipment. They benefit from this 
cooperation quite considerably. On the other hand, they are also conscious of the role of 
product differentiation in competition, as 72% of firms introduced new products and, for 50% 
firms, this product was new to the market. International product competitiveness was 
moderate for as much as nearly 2/3 of firms but was weak for only 8%. 
The branch structure of this subset of firms is differentiated. Out of the total number of firms, 
43% were foodstuffs producers, 32% were electronic manufacturers, and 19% were 
automotive producers. 
19
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
20 
Table 2. The three NMS: Firms’ innovation pattern characteristics 
Innovation 
patterns 
Innovation 
factors 
Low profile Hunting for 
product 
innovation 
in the 
market 
Spillovers 
absorbers 
in process 
innovation 
Science-based 
innovation 
path 
Externally 
sourced firms 
In house inputs 
and activities 
Lowest High R&D 
staff and 
innovation 
activities but 
low R&D 
intensity 
High High Moderate 
Backward 
linkages 
Low High (but 
supplier of 
materials) 
Moderate Highest High 
Cooperation with 
research 
organizations 
Lowest High Low Highest High 
Subcontracting Lowest Highest Moderate Low High 
Beneficial 
cooperation: 
product 
innovation 
Lowest High Low Moderate Highest 
Beneficial 
cooperation: 
process 
innovation 
Moderate Lowest Highest High Low 
Types of 
innovation 
Process Product Product/ 
process 
Product Product 
Innovation output Lowest Highest High Moderate High 
International 
P-lowest 
P- highest 
P-moderate 
P - high 
competitiveness 
T-lowest 
T- highest 
T-moderate 
T - high 
P – moderate 
T – moderate 
Domestic 
competitiveness 
P-lowest 
T-lowest 
P – high 
T - moderate 
P – highest 
T- highest 
P – low 
T-moderate 
P – moderate 
T – high 
Cluster 
composition 
29% of the 
firm sample; 
Food-64% 
2%; 
Electronic- 
100% 
35%; 
Food-43% 
18%; 
Food-38% 
16%; 
Automotive- 
34% 
P-product, T- technology
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
21 
Conclusions 
Although most firms in the NMS are imitators, non-cumulative (using the Llerena and Oltra 
definition (2002, p. 185) and follow Jensen et al. (2007)’s DUI rather than STI mode of 
learning and innovating, they differ in terms of partners and forms of cooperation in 
innovation activities and in their internal capacities to innovate. The differences in innovation 
behaviour as well as differences in innovation output and economic performance gave us a 
base from which we could detect five types of innovation patterns. 
On the one hand, a considerable number of sample firms (29%) are low profile that is they 
are typical imitators. Their low innovation inputs, outputs and cooperation in innovation 
means their products suffer from the lowest competitiveness on the international market and 
only modest competitiveness on the domestic market. Their domestic orientation, their ability 
to operate in market niches and in lower quality segments of the market allow them to 
survive. 
On the other hand, there are three groups of firms which make extensive use of external 
sources of innovation, cooperate in innovation with many partners and are therefore 
beneficiaries of this cooperation. Despite these similarities, they represent three different 
innovation patterns. They differ in innovation strategy in terms of their in-house innovation 
capacities, its forms (human capital versus R&D intensity), their strategies for using external 
sources of innovation (the partners and forms of cooperation they focus on), areas of 
spillover absorption and economic performance. 
The first group of firms, labelled ‘hunting for product innovation in the market,’ represent a 
type of outsourcing-oriented group of firms which were not detected in incumbent EU 
countries. Their high share of R&D and ICT staff results in high ability to explore the 
outsourcing of R&D and surprisingly they have the highest international product 
competitiveness out of the entire population of analysed firms. However, their low R&D 
intensity suggests a limited understanding of the role of accumulation of knowledge in future 
expansion. 
The next two groups of firms share quite an extensive and beneficial use of external 
knowledge and have moderate international competitiveness. They differ in terms of the 
types of weaknesses of their production processes and innovation potential. They have 
varied R&D intensities, different shares of R&D and ICT staff in employment and they focus 
on a different type of innovation (product versus process).
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
The high share of R&D and ICT staff in ‘the externally sourced’ firms allows them for 
cooperation in R&D activities with different partners. Their low R&D intensity is to some 
degree substituted by beneficiary cooperation with research organizations. On the other 
hand, although the high R&D intensity of the firms within the next innovation pattern, 
‘spillover absorbers in process innovation,’ supports collaboration in R&D with different 
partners, in opposition to the previous firms, their absorption of knowledge spillovers is high 
mainly in process innovation. 
A specific group of firms termed as being on the science-based path has been also detected. 
They represent Jensen et al.’s DUI/STI mode of learning and innovation. However their 
relatively high R&D intensity (but low share of R&D and IT staff) and broad cooperation in 
R&D with all types of partners, including foreign research organizations, does not transfer 
into high international competitiveness. Rather, it remains moderate for most of these firms. 
Analyses show that it was ‘the hunting for product innovation in the market’ innovation 
pattern that was branch and ownership specific. The other four innovation patterns were 
employed by firms in different manufacturing branches and of different ownership. 
To improve international competitiveness, various firms in the NMS introduce different 
innovation strategies. In innovation activities of most (but Low profile) detected groups of 
firms, cooperation plays an important role. Differences in the partners and in the form of 
cooperation differentiate the patterns of innovation of these firms. On the other hand, the 
competitiveness of firms whose R&D intensity is very low is much lower than those whose 
R&D intensity is higher (or at least moderate). However, a comparison of innovation patterns 
of NMS firms raises the question of the reasons for the moderate international 
competitiveness of firms that have high R&D intensity and extensive use of cooperation with 
different partners in innovation activities. Is it because R&D activities require a critical mass 
before being capable of generating new technology and yielding economic results and 
firms’ budgets in the NMS are too tight to meet it? Or should high R&D intensity also be 
accompanied by a high share of R&D staff? Is it also possible that they operate in the 
countries that have specific characteristics that may influence their capacity to transform 
R&D investment into economic performance? The scope of analysis in this paper does not 
allow us to answer these questions. 
22
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
23 
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CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
26 
Appendix 
Table A1. Firms in the Three NMS: Description of innovation patterns by types of 
innovation indicators 
(% of cluster’s firms answering ‘yes’ except for factors where other measures apply) 
Innovation 
patterns 
Innovation factors and 
indicators 
(1) 
Low 
profile 
(2) 
Hunting 
for product 
innovation 
in the 
market 
(3) 
Spillovers 
absorbers 
in process 
innovation 
(4) 
Science-based 
innovation 
path 
(5) 
Externally 
sourced 
firms 
All firms 
I. In-house innovation inputs and activities 
Innovation activities in-house 
R&D or design unit in-house 
8.6 57.1 51.6 58.7 62.7 42.2 
Process development 
35.7 71.4 91.9 74.6 71.2 65.6 
and improvement 
activities in house 
Product development 
and improvement 
activities in-house 
30.5 71.4 95.2 82.5 72.9 69.8 
Gathering commercial 
and technical information 
in-house 
11.4 57.1 69.4 54 54.2 45.9 
HR upgrading 
Management training 
very important 
36.2 28.6 37.9 61.9 59.3 45.0 
Employees training very 
important 
22.9 28.6 29.8 39.7 54.2 33.5 
Human resources 
Employment share of 
technicians and 
engineers (%) 
8.8 54.3 9.0 7.0 15.2 10.4 
Employment share of 
R&D and IT staff (%) 
3.0 40.0 3.0 1.0 4.3 3.2 
R&D Intensity 
(R&D to sales revenues, 
%) 
0.13 0.01 0.78 0.82 0.24 0.49 
II. Innovation linkages 
Backward linkages and cooperation R&D units and scientists. R&D department cooperates with: 
Suppliers of raw 
10.5 42.9 46.8 93.7 49.2 44.7 
materials 
Suppliers of machinery 2.9 85.7 41.1 85.7 42.4 38.8 
Independentt scientists 1.9 57.1 8.1 66.7 40.7 22.9 
Domestic research 
institutes 
19.0 85.7 44.4 95.2 49.2 47.5 
Foreign research 
institutes 
3.8 28.6 5.6 57.1 27.1 18.2 
Subcontracting of R&D activities 
Process development / 
improvements 
14.3 100 22.6 12.7 61.0 24.3 
Product development 
/improvements 
11.4 100 14.5 23.8 79.7 25.7
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
27 
Innovation 
patterns 
Innovation factors and 
indicators 
(1) 
Low 
profile 
(2) 
Hunting 
for product 
innovation 
in the 
market 
(3) 
Spillovers 
absorbers 
in process 
innovation 
(4) 
Science-based 
innovation 
path 
(5) 
Externally 
sourced 
firms 
All firms 
Design 4.8 14.3 34.7 20.6 50.8 25.7 
III. Benefits of cooperation with business partners influencing both product and process innovation 
In improved access to 
39 14.3 54 46 28.8 43.3 
modern technology 
In improvement in the 
production process 
38.1 14.3 62.9 47.6 42.4 48.6 
In modernization of 
equipment 
44.8 42.9 68.5 46 27.1 50.3 
In inventories and 
management 
33.3 26.6 34.7 55.6 55.9 31.3 
In product quality 61.9 71.4 71 73 93.2 72.3 
In design 33.3 71.4 61.3 39.7 78 52.2 
In R&D activities 24.8 85.7 53.2 38.1 69.5 45.5 
IV. Innovation outputs 
Share of new products and new technology in a firm’s sales revenues 
Sales revenue share of 
products less than two 
years old 
22.4 55 32.9 32.2 47.6 32.6 
Sales revenue share of 
production from 
manufacturing 
technology less than two 
years old 
40.2 55.3 47.8 45.8 59.7 47.3 
New products introduced in the last two years and 
New in a firm 55.2 71.4 72.6 68.8 64.4 65.6 
Being new for domestic 
33.3 85.7 52.4 47.6 42.4 45.0 
market
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
28 
Table A2. The Three NMS: Product and technology competitiveness of firms by 
innovation patterns 
(% of cluster’s companies answering ‘yes’) 
Innovation patterns 1 2 3 4 5 All 
firms 
Company’s products 
are: 
strongly competitive 
29.5 
57.1 
70.2 
46 
50.8 
50 
moderately 
competitive 
61 42.9 29.8 49.2 47.5 45.5 
Competitiveness of 
company’s 
products on the 
domestic market 
weakly competitive 9.5 0.0 0.0 4.8 1.7 3.9 
0ur products are: 
strongly competitive 27.6 57.1 29.8 31.7 30.5 30.2 
moderately 
50.5 28.6 62.1 55.6 54.2 55.6 
competitive 
Competitiveness of 
company’s 
products on the 
world market 
weakly competitive 21.9 14.3 8.1 12.7 15.3 14.2 
Company’s technology 
is: 
strongly competitive 27.6 28.6 57.3 44.4 55.9 45.5 
moderately 
competitive 
60.0 71.4 38.7 49.2 40.7 47.8 
Competitiveness of 
company’s 
production 
technology on the 
domestic market 
weakly competitive 12.4 0.0 4.0 6.3 3.4 6.7 
Company’s technology 
is: 
strongly competitive 24.8 42.9 26,6 36.5 23.7 27.7 
moderately 
competitive 
47.6 42.9 52.4 47.6 54.2 50.3 
Competitiveness of 
company’s 
production 
technology on the 
world market 
weakly competitive 27.6 14.3 21 15.9 22 22.1
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
29 
Table A3. The Three NMS: Results of Factor Analysis 
Factors 
Variables 
1 2 3 4 5 6 7 8 9 10 11 
Beneficial 
Cooperation (BC) 
with business 
partners in i improved 
access to modern 
technologies 
0.72 
BC in improving the 
production process 
0.71 
BC in modernization 
of production 
equipment 
0.91 
R&D or design unit in-house 
0.53 
Process development 
in-house 
0.79 
Product development 
in-house 
0.75 
Applied research in-house 
0.49 
Design in-house 0.67 
Gathering 
0.64 
commercial and 
technical info in-house 
R&D department 
cooperates with raw 
material suppliers 
0.81 
R&D department 
cooperates with 
machinery and 
equipment suppliers 
0.79 
R&D department 
cooperates with 
independent 
researchers 
0.49 
R&D department 
cooperates with 
domestic institutes 
0.50 
R&D department 
cooperates with 
foreign institutes 
0.63 
BC in inventory 
management and 
improvement 
. 0.70 
BC in product quality 
improvements 
0.66 
BC in product 
specification and 
design 
0.49 
BC in R&D activities 0.48 
Process development 
subcontracted 
0.76 
Product development 0.72
CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 
30 
Factors 
Variables 
1 2 3 4 5 6 7 8 9 10 11 
subcontracted 
Design subcontracted 0.62 
Managerial training 
very important 
0.81 
Employees training 
very important 
0.82 
Employment share of 
technicians and 
engineers in 2003 
0.82 
Employment share of 
R&D and IT staff in 
2003 
0.82 
Share of sales 
revenues from sales 
of new products in 
2003 
0.65 
Sales revenue share 
of production from 
manufacturing 
technology less than 
2 years old in 2003 
0.61 
ISO certificate 
received 
0.51 
New products 
introduced in a firm 
0.67 
New products sold 
and being new for 
domestic market 
0.70 
R&D intensity in 2003 0.70

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CASE Network Studies and Analyses 394 - Differentiation of Innovation Behavior of Manufacturing Firms in the New Member States. Cluster Analysis on Firm-Level Data

  • 2. Materials published here have a working paper character. They can be subject to further publication. The views and opinions expressed here reflect the author(s) point of view and not necessarily those of CASE Network. This paper was produced in the framework of MICRO-DYN (www.micro-dyn.eu ), an international economic research project focusing on the competitiveness of firms, regions and industries in the knowledge-based economy. The project is funded by the EU Sixth Framework Programme (www.cordis.lu). This publication reflects only the author's views, the European Community is not liable for any use that may be made of the information contained therein. The publication was financed from an institutional grant extended by Rabobank Polska S.A. English proofreading by Paulina Szyrmer. Key words: Innovation patterns of firms; Strategy of innovation, Innovation behaviour, Innovation sources; Taxonomies of innovative firms, EU New Member States JEL codes: L25, O31, O32, 033 © CASE – Center for Social and Economic Research, Warsaw, 2009 Graphic Design: Agnieszka Natalia Bury EAN 9788371784996 Publisher: CASE-Center for Social and Economic Research on behalf of CASE Network 12 Sienkiewicza, 00-010 Warsaw, Poland tel.: (48 22) 622 66 27, 828 61 33, fax: (48 22) 828 60 69 e-mail: case@case-research.eu http://www.case-research.eu
  • 3. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… The CASE Network is a group of economic and social research centers in Poland, Kyrgyzstan, Ukraine, Georgia, Moldova, and Belarus. Organizations in the network regularly conduct joint research and advisory projects. The research covers a wide spectrum of economic and social issues, including economic effects of the European integration process, economic relations between the EU and CIS, monetary policy and euro-accession, innovation and competitiveness, and labour markets and social policy. The network aims to increase the range and quality of economic research and information available to policy-makers and civil society, and takes an active role in on-going debates on how to meet the 2 economic challenges facing the EU, post-transition countries and the global economy. The CASE Network consists of: • CASE – Center for Social and Economic Research, Warsaw, est. 1991, www.case-research.eu • CASE – Center for Social and Economic Research – Kyrgyzstan, est. 1998, www.case.elcat.kg • Center for Social and Economic Research - CASE Ukraine, est. 1999, www.case-ukraine.kiev.ua • CASE –Transcaucasus Center for Social and Economic Research, est. 2000, www.case-transcaucasus.org.ge • Foundation for Social and Economic Research CASE Moldova, est. 2003, www.case.com.md • CASE Belarus - Center for Social and Economic Research Belarus, est. 2007.
  • 4. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 3 Contents Abstract...................................................................................................................................5 1. Introduction ......................................................................................................................6 2. Background ......................................................................................................................7 3. The Heritage of a Command Economy ..........................................................................9 4. Data source and enterprise sample..............................................................................12 5. Methodology employed to explore innovation patterns.............................................14 6. Aggregate factors description ........................................................................................15 7. Innovation patterns of firms in the NMS ........................................................................16 Conclusions..........................................................................................................................21 Bibliography .........................................................................................................................23 Appendix...............................................................................................................................26
  • 5. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… Ewa Balcerowicz is a co-founder and the Chairwoman of the Supervisory Council of CASE – Center for Social and Economic Research; from 1 July 2004 to 30 June 2008 she served as President of the CASE Management Board. She has a PhD (1988) and Master’s degree (1977) from the Warsaw School of Economics. Her research and publications focus on: the SME sector, the environment for the development of the private sector, the banking sector and insolvency systems, barriers of entry and exit in the transition economies of CEEC, and, most recently, innovation economics. Marek Pęczkowski is a lecturer at the Faculty of Economic Sciences at the University of Warsaw. He specializes in business process modelling, multivariate data analysis, data mining and econometrics. He has worked in numerous international research projects involving statistical databases and statistical computing. Anna Wziątek – Kubiak is a professor of economics and head of the Department of Macroeconomics and Economic Policy at the Institute of Economics in the Polish Academy of Sciences, a lecturer at the Dąbrowa Górnicza Business School and a scholar at CASE – Center of Social and Economic Research. She has participated in and coordinated numerous research projects focusing on international economics, including international trade and competitiveness and innovations. She has authored and co-authored numerous articles and books published by Springer, Palgrave and Edward Edgar. 4
  • 6. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 5 Abstract This paper investigates the differences in innovation behaviour, i.e. differences in innovation sources and innovation effects, among manufacturing firms in three NMS: the Czech Republic, Hungary and Poland. It is based on a survey of firms operating in four manufacturing industries: food and beverages, automotive, pharmaceuticals and electronics. The paper takes into account: innovation inputs in enterprises, cooperation among firms in R&D activities, the benefits of cooperation with business partners and innovation effects (innovation outputs and international competitiveness of firms’ products and technology) in the three countries. After employing cluster analysis, five types of innovation patterns were detected. The paper characterises and compares these innovation patterns, highlighting differences and similarities. The paper shows that external knowledge plays an important role in innovation activities in NMS firms. The ability to explore cooperation with business partners and the benefits of using external knowledge are determined by in-house innovation activities, notably R&D intensity.
  • 7. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 6 1. Introduction One of the main issues of economic growth and competitiveness in the New Member States of the EU (NMS) is their innovativeness. As widely proved by economic research, innovations stimulate the economic growth of countries and thus enable the NMS to catch up with developed market economies. The NMS inherited an anti-innovation bias from the command economy system. However, in response to the introduction of market institutions and market rules in the 1990s, firms active in these countries faced increased competition and had to modify their innovation behaviour. In terms of innovations and economic performance, firms in the NMS are heterogeneous. This raises the issue of differences in innovation patterns1 among firms, i.e. differences in innovation sources and innovation effects. These countries were isolated from the world economy for many years. During the transition period, new economic networks among firms developed rapidly. Thus, the question emerges of whether or not enterprises also benefited from cooperation with business partners in this period. In other words, we would like to know if they gained the ability to absorb domestic and international knowledge spillovers. This leads to a question about the role of external sources of innovation versus internal ones. Last but not least, the relationship between innovation patterns and international competitiveness is also of interest. This paper aims to answer the questions listed above. Its purpose is twofold. Firstly, to examine differences in the innovation activities of firms in the three NMS: the Czech Republic, Hungary and Poland, as well as their sources and effects. Secondly, it aims to detect and characterize the innovation patterns of manufacturing sector firms in the three countries and their relationship with economic performance. The paper is divided into two parts. In the first part the background for our study and specifics of the NMS are presented. First, the main theoretical approaches in explaining the process of differentiation of sources and modes of innovation among firms are presented (Section 2). We summarize the results of research on the role of external versus internal factors of innovations. Next, in Section 3 specifics of the NMS compared to developing and developed market economies is shown. The second part of the paper presents the results of our own research on innovation activities run by manufacturing firms in the NMS. To our 1 Or innovation modes – we use these two terms interchangeably.
  • 8. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… knowledge, no analyses on differences in the innovation activities of firms have been undertaken for the NMS so far. This part begins with a brief presentation of data source and an enterprise sample (Section 4). In Section 5 we discuss the methodology employed to detect firms’ innovation patterns in the NMS. Section 6 presents aggregate factors that turned out to matter in clustering of enterprises by innovation indicators. The last section presents and discusses innovation patterns of the NMS firms. It focuses on similarities and differences between innovation patterns of firms and their relationship with economic performance. Conclusions convene the paper. 7 2. Background For many years, most empirical studies on the diversity of innovation activities focused on inter-industry variations. The studies neglected the heterogeneity of firms within industries and intra-industry differences among firms in terms of innovation behaviour and strategy. At the same time, the theoretical literature does provide some guidance in identifying sources of inter-firm variation in innovation activities. It points out that the unevenness of the availability of information, the various means used to innovate, the differences in expectations about the return to R&D investment and other factors may lead to differences in innovation behaviour and performance. In theory, the differentiation of innovations within an industry is analysed from various points of view. Two approaches play a crucial role2 in explaining the process of differentiating sources and modes of innovation among firms: evolutionary theory and the theory of endogenous growth. The former focuses on analyzing ways in which firms develop their innovation process. The specific nature of the process of technological change of a firm and the fact that innovation activities depend on the firm’s past history are at the heart of this approach (Nelson and Winter 1982; Verspagen 2000). Heterogeneity in knowledge stocks across firms plays a crucial role in the variation in enterprises’ innovation patterns. As a result, firms differ significantly in terms of innovation capabilities: innovation inputs, activities, scope, forms and partners of external cooperation, and innovation output. This also implies 2 There are many other approaches and theories which refer to the heterogeneity of firms’ innovation activities within an industry. For example, the life cycle theory shows that at a given point in time, firms within a given industry can be at different stages of development and innovativeness. This suggests the heterogeneity of their innovation patterns. The strategic management literature shows that firms may intentionally seek to find different innovation strategies from their competitors.
  • 9. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… that for firms which did not accumulate knowledge in the past, the potential for creating innovation and using it as a market-expansion factor is rather limited. The excessive focus in evolutionary theory on the importance of internal resources as a dominant factor of innovation created a tendency to neglect the contribution made by external factors (i.e. knowledge linkages) and their role. The development of the theory of endogenous growth and the endogenization of technological change into economic growth resulted in the introduction of knowledge spillovers to the analysis on innovation (Grossman and Helpman 1991, Rivera-Batis and Romer 1991). The non-rival character of knowledge implies that firms may learn from other firms’ innovations. These are known as technological (knowledge) externalities or spillovers. So a firm’s innovation capabilities depend on the pool of knowledge it accumulated through internal efforts, on the pool of general knowledge it has access to and its ability to use it. This means that apart from in-house capabilities accumulated in the past, firms rely on external (both domestic and foreign) sources of innovation when developing and introducing innovations. This approach also results in the emergence of the notion of knowledge capital as a function of both the firm’s own R&D investment and spillovers (Ornaghi 2006). If knowledge is cumulative (in the sense that only leaders, that is creators of innovation, can conduct innovative activities), then, as the theory of endogenous growth proves, an outsider can also learn from the previously accumulated technology and acquire or imitate it. For example, firms can enhance the quality of their product by learning from an innovation introduced by competitors and by imitating it. In this way, firms can benefit from a positive externality (a spillover). Outsiders can introduce a new product or simply upgrade the quality of the existing one. However, they have to invest in this improvement as imitation also requires some knowledge. So imitative activity is a type of learning activity, but the learning of new knowledge is costly. This suggests that “in order to recognize, evaluate, negotiate and finally adapt the technology potentially available from others,” (Dosi 1988, p. 1132) firms require some in-house innovation capacity. A precondition for the endogenization of knowledge spillovers is some accumulation of knowledge by the firm. The dual role of in-house R&D activities as creator as well as adopter of innovations that spill over from external actors has been recognised. The discussion on sources of innovation inevitably leads to various taxonomies of firms in terms of innovation capabilities, strategies, ways of creating innovation and modes of innovation (Clausen and Verspagen, 2008; Srholec and Verspagen, 2008). Most of them are based on two types of sources of innovation: internal and external, although in reality they coexist. In many respects, the division of firms into cumulative and non-cumulative (Llerena, 8
  • 10. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… Oltra 2002) overlaps with the division of firms into those generating innovation and those adopting innovation (Damanpour and Wischnevsky, 2006). Yet another criterion of classification is by pioneering R&D and by imitating R&D that generates incremental innovation. Other examples are taxonomies on STI (Science, Technology and Innovation) and DUI (Doing, Using and Interacting) firms (Jensen et al. 2007). Although these classifications differ in many respects, they have a dichotomous character as they distinguish between two types of firms: leaders (creators of innovation) and outsiders. They reflect the distinction between innovation and imitation and between innovators and imitators. The last category is diversified. It covers incremental innovators, followers3 and traditionals4 (Avermaete et al., 2004). The discussion on innovation sources, patterns of innovation, and their effects is very relevant for the NMS. Both their heritage as centrally planned economies and the progress they have made during the transition period, meaning the speed at which firms have adapted and integrated into a highly competitive global economy, means that research on the variation of innovation behaviour among firms in these countries provides an excellent test-case of the sources of innovation and economic growth. This relates to the role of different factors in innovation patterns and their results. It also shows the different faces of innovation activities. 9 3. The Heritage of a Command Economy It seems reasonable to refer briefly to the command economy heritage for the innovativeness of the countries of the Central Europe in their transition to a market economy (i.e. in the entire decade of the 1990s) and the years preceding their EU membership. Firstly, although under socialism, science and technology were very high on the list of government and communist party priorities (Gomulka 1990, Chapter 7), the focus of research was on the areas of science which did not require market validation.5 Secondly, for systemic reasons, enterprises did not create demand for research from the universities, while the latter did not deliver research results that served the market expansion of firms. There was no demand for and no supply of research results that could have enabled producers to innovate. Numerous 3 They spend up to 1% of their annual sales on R&D 4 They do not perform R&D activities themselves; however they introduce new or substantially modified product or processes. 5 The term used by Arogyaswamy and Koziol (2005), p. 456.
  • 11. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… factors that formed the ‘constructional logic’ of the command economic system were in fact anti-innovation (Balcerowicz 1995, Chapter 6). Nearly all research was government-sponsored and was mostly theoretical in nature with hardly any market implications. The prolonged isolation of these countries from the world economy and the structure of incentives discouraged not only innovation but also imitation (Winiecki 2002, p. 14). “The enterprise managers avoided innovation as much as possible if new technology and associated organization arrangements affected the existing productive capacity (...) and they preferred investment in new capacities, using the same (often already obsolete) technology, to technological modernization” (Winiecki 2002, p. 13). The closed economies blocked international linkages that impact on innovation, including knowledge spillovers. The incentives characteristic of the command economic system resulted not only in low competitiveness and technological obsolescence, but most of all in an anti-innovation bias (Winiecki 2002). These countries and their firms did not accumulate innovation resources due to their in-house innovation activities or international knowledge spillovers. The anti-innovation bias of managers and employees and the resistance to privatisation in some industries at the start and early years of transition made the enhancement of innovation quite difficult. However, in terms of human capital, enterprises had a much greater potential to innovate6 than most firms in developing countries. During the transition period, the three countries that are of interest to this paper were characterised by: • A peripheral position with respect to global technology-intensive manufacturing production; the structure of production was not conducive to innovation activities and the quality of goods was very low; • Low share of R&D and low share of business R&D spending in GNP; • Low level of knowledge linkages between R&D organizations and firms as well as among firms; inherited poor innovation capabilities of domestic firms accompanied by radical changes in cooperation among firms (so called “adverse shock to network activity”, see Woodward and Wójcik, 2007) as a result of privatisation and bankruptcy of many firms; In the early 1990s, defensive restructuring was taking place in the enterprise sector and it was based on shedding labour, reducing costs and scaling down or closing unprofitable 6 Since the Marxian theory of economic development stressed the key role of economic efficiency, the innovation rate and ultimately productivity levels in the competition of centrally managed economies with capitalistic ones, the countries of the Soviet bloc placed an extraordinary emphasis on technical education (for evidence see Gomulka 1990, p. 94). 10
  • 12. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… plants. In later years, strategic restructuring based on investment and innovation was increasingly common (Konings 2003). The opening up of the transition economies resulted in an increase in the competitive pressure of foreign products and firms on domestic products and firms and created potential for international knowledge spillovers. Their main channels were foreign trade and foreign direct investment. Here we come across the problem of the ability of the transition (NMS) countries’ domestic firms to absorb knowledge spillovers from external sources, both domestic and international. Absorption is not less important than generating new knowledge, including creating radical innovation. The term ‘ability to absorb’ covers not only the implementation of external knowledge. It also contains improvements in the knowledge which is imported (copied), i.e. its upgrading. First of all, as the NMS are knowledge absorbers, learners rather than creators, the role of international knowledge spillovers in their innovation activities should be greater than in the case of the old EU member states. However, the effects of international knowledge spillovers depend on many factors and these effects may be positive or negative7. Research on the NMS underlines crucial role of international spillovers for their accumulation of knowledge and growth. Analysing 17 OECD countries including CEECs (Central and Eastern European countries) Bitzer et al. (2008) came to a conclusion that productivity effect of spillovers through vertical backward linkages between multinationals and domestic firms in CEECs is much higher than for other OECD countries. Leon-Ledesma (2005) basing on analysis of 21 OECD countries in a long run shows that for the G7 group foreign knowledge has a negative impact on competitiveness, while for less advanced ones countries it has a strong positive impact. This impact is stronger the higher the degree of openness to FDI. However, research results are varied depending on the period of analysis, the country, the model introduced, and the types of spillovers. Empirical research on the period up till 1998 (Konings 2001; Zukowska-Gagelmann 2001) showed negative spillovers effects of FDI for domestic firms, although Damijan et al. (2003) did not confirm it. However, research results covering period since 1999 and long term analyses do not confirm earlier research results They did find more positive effects of vertical knowledge spillovers for domestic firms rather than horizontal spillovers was found (Terlak 2004; Gersl et al 2007; Hagemajer and Kolasa 2008; Kolasa 2007; Bijsterbosch and Kolasa 2009; Gorodnichenko et al 2007). Some research referred to the role of foreign trade as a source of international knowledge 11 7 In 1992-1997, in opposition to Ireland and Spain, FDI in Greece did not generate positive knowledge linkages externalities.
  • 13. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… spillovers. Hagemejer and Kolasa (2008) show that differences in ability to absorb foreign knowledge through spillovers varies among types of firms in terms of internalization. Last but not least the issue of indirect knowledge spillovers as a result of R&D conducted abroad was raised. It turns out that the impact of foreign R&D on productivity of the Central and East European countries was greater than that of domestic R&D (Chinkov 2006; Tomaszewicz & Swieczewska, 2008 and 2007). This is in opposition to what has been detected in the EU-15 (Leon-Ledesma 2005). Summing up, the potential for radical innovations in the NMS is limited. Both the accumulation of knowledge and R&D intensity are low although differentiated among these countries8. The number of enterprises in theses countries engaged in innovation activities (as a share of all firms) also remains low9. 12 4. Data source and enterprise sample The data used in this paper was collected through a firm survey performed by an international research team led by Richard Woodward (of CASE-Center for Social and Economic Research) and within the European research project entitled “Changes in Industrial Competitiveness as a Factor of Integration: Identifying the Challenges of the Enlarged Single European Market”.10 The survey was aimed at investigating the networking of firms in the three accession countries (the Czech Republic, Hungary and Poland) and Spain, and its effect on competitiveness11. Fortunately we have found a substantial number of questions included in the survey questionnaire as relevant to the analysis of innovation processes. Altogether 41 innovation indicators were selected. We grouped them into four sets by the dimensions of innovation activities: (1) innovation inputs, (2) innovation linkages, (3) effects of cooperation with business partners reflecting that diffusion of external knowledge is taking place, and (4) innovation outputs. As many academics argue that in the catching up economies diffusion can be the most important part of innovation, we decided to include not only the linkages but also their effects. We also chose four performance 8 For example, in Poland, the share of R&D in GNP is almost three times lower than in the Czech Republic and two times lower than in Hungary. Although R&D intensity in the Czech Republic is close to the average for the EU-27, it is still not high enough to catch up in terms of the accumulation of knowledge of firms. 9 For Poland and Hungary, it was two times lower than the EU-27 average. Only in the case of the Czech Republic was this indicator close to the EU-27 average. 10 It was funded by the 5th Framework Programme of the European Community (Ref. HPSE-CT-2002-00148). The project was led by Anna Wziątek-Kubiak. CASE-Center for Social and Economic Research, Warsaw led the research consortium. 11 For the results of this specific analysis, see Woodward and Wójcik (2007).
  • 14. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… indicators: these are self-assessments of the competitiveness of a company’s products and technology separately on the domestic and on the international markets. All respondents surveyed were managers responsible for day to day business processes. The interviews were conducted in 2004 in Hungary and Poland and in early 2005 in the Czech Republic. The data collected refers to 2003 and in some cases to the five year period 1998-2003. This was an interesting and important period in the three former “socialist” countries: they were undertaking market reforms, shifting from defensive to strategic restructuring, covering innovation activities and advancing preparations for formal accession to the EU, which happened on May 1st, 2004. Obviously both processes influenced the behaviour of the real sector, i.e. firms, entrepreneurs and investors. Data was collected for 490 companies. After carefully examining the answers received to questions relevant for researching the innovation patterns, we had to delete 132 firms from the data base, due to missing individual data. As a result the sample shrunk by ¼ to 358 firms. The composition of the sample is presented in Table 1. 13 Table 1. Enterprise sample composition No of firms % of the sample Countries 1. Czech Republic 70 20 2. Hungary 111 31 3. Poland 177 49 Ownership 1. Domestic 244 68.2 2. Foreign 108 30.2 Industry 1. Food and beverages 160 45 2. Automotive 65 18 3. Electronic 109 30 4. Pharmaceutical 24 7 Total 358 100
  • 15. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… Polish firms dominated the sample: they accounted for close to half of the enterprise population surveyed. The majority (ca 70%) of firms was domestically owned; and domestic ownership prevailed in each individual country, though to different extents (Poland was on one extreme with an 81% share of domestic capital, while Hungary was on the other extreme, with only a 54.1% share of domestic companies). All size classes of firms were investigated, but medium-sized firms dominated the sample. Four industries were studied in the survey: (1) Food and beverages (NACE Rev.1 – da15); (2) Pharmaceuticals (NACE Rev.1 – dg244); (3) Electronics (NACE Rev. 1 – dl30); and (4) Automotive Industry (NACE Rev.1 – dm34). Food and beverages firms were the most numerous (45% of the sample), while pharmaceutical firms appeared the least (only 7%). 14 5. Methodology employed to explore innovation patterns In order to figure out the innovation patterns of firms, a cluster analysis was adopted. Given the relatively large number of innovation indicators (41), we decided to use principal component analysis (PCA) to measure the sources of innovation in firms. PCA allows us to reduce a large number of indicators to a small number of composite variables (called ‘factors’) that synthesize the information contained in the original variables. Factors are standardised variables containing the information common to the original variables. In this way, we were able to consider as much available information as possible. PCA is based on the idea that indicators which refer to the same issue are likely to be strongly correlated and factors that are obtained are uncorrelated. PCA helps prevent including irrelevant variables and reduces the risk that any single indicator dominates the outcome of the cluster analysis. We assumed that if the correlation between factors and original variables is lower than 0.48, the analysis is inappropriate. In the next step, non-hierarchical cluster analysis was performed in order to group firms into a number of clusters by innovation variables as homogenous as possible (small within cluster variance) and at the same time as different as possible from each other (large between clusters variance). In the Appendix, there is a table which shows the results of factor analysis for the three NMS (Table A3). It includes the loadings of the variables on selected factors after the so called rotation. The loadings of the various indicators on the retained factors are correlation
  • 16. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… coefficients between the indicators (the rows) and factors (columns) and provide the basis for interpreting the different factors. These loadings are adjusted through rotation to maximize the difference between them. We use varimax Kaizer’s normalized rotation that assumes that the underlying factors are uncorrelated. The first step of factor analysis led to statistically satisfactory results. Eleven factors jointly explaining, in the case of the three countries firms, 54.5% of the total variance were selected. In the second step we conducted a non-hierarchical cluster analysis based on the eleven composite variables extracted in the factor analysis of the first step. Introducing hierarchical agglomeration methods for a subset of objects and comparing results for the range of K min ≤ K ≤ K max (where K is between 2 and 7), we chose the optimal number of clusters. Using hierarchical analysis and Ward’s minimal variance method, we chose five clusters that group the enterprises into five categories in terms of innovation indicators. Based on the distance from the centroids, we compared the variance within clusters and between clusters. Centroids of clusters obtained in the hierarchical method were used as the initial centroids for the K-means algorithm. 15 6. Aggregate factors description The factors yielded in the cluster analysis have been further aggregated and as a result we have received eight so called aggregate factors. These are: • In-house inputs and activities (aggregate factor 1), • two types of cooperation in R&D: backward (2) and with research organizations (3), as well as subcontracting of R&D activities (4), • beneficial cooperation with business partners: in product (5) and process (6) innovation, • type of innovation (7): either product or process or both ones, • innovation outputs (8). The aggregate factor 1 which is called ‘in-house inputs and activities’ groups a multitude of internal innovation (research) inputs and activities of firms that may contribute to their absorptive capacity and the creation of innovation (Cohen and Levinthal, 1989). It includes the following variables: R&D intensity (R&D expenditures as a portion of firm’s sales revenues), human resources (share of R&D, IT staff, engineers and technicians in total
  • 17. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… employment), human capital upgrading through training, R&D unit in a firm, and R&D activities in respect to product and process development and others. Three aggregate factors encompass various collaborative networks in R&D. They cover backward linkages (aggregate factor 2) that focus on cooperation in R&D with raw material suppliers and machinery and equipment suppliers, as well as cooperation with research organization- foreign and domestic and independent scientists (factor 3). The subcontracting of R&D activities aimed at product and process development and improvements (aggregate factor 4) is also considered. Cooperation in R&D activities of firms in NMS in the late 1990s and early 2000s were still a new phenomenon (see Section 2). Gaining experience on how to effectively profit from others in extracting knowledge had to take time to learn. This was most likely the reason why the cooperation was less common and effective than in developed market economies at that stage. For this reason, two types of aggregate factors were selected: beneficial cooperation with business partners in product innovation and in process innovation. They constituted factors 5 and 6. Two types of innovation activities: product and process ones constitute factor 7. The last aggregate factor considers the output of firm’s innovation activities in terms of new products and production technology introduced. However this factor did not retain for the Czech Republic, while it was retained for the other two states and the three countries altogether. 16 7. Innovation patterns of firms in the NMS After detecting the clusters, we analyzed their features. The first step was to study the values of the innovation indicators that were chosen in the course of the cluster analysis. The data is presented in Table A1 in the Appendix. The second step was to compare the value of each factor (i.e. composite variables) between the clusters. We used the following scores: from ‘lowest’, through ‘low’, ‘moderate’, ‘high’ to ‘highest’. The third and last step was to analyze all the scores for each cluster and invent a name for each one based on its distinguishing features. This procedure has brought us to the finding that the following innovation patterns emerged in NMS firms during the EU accession preparatory period: (1) low profile, (2) hunting for
  • 18. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… product innovation in the market, (3) spillover absorbers in process innovation, (4) on the science-based innovation path and (5) externally sourced firms (see Table 2). The detected innovation patterns represent the different innovation behaviours of firms as well as different innovation outputs. The economic performance of sets of firms employing individual innovation patterns varies as well. Surprisingly, the ownership structure of firms realising these patterns does not differ considerably. Differences in the branch structure of these firms are much greater. Low profile pattern Very low in-house innovation resources and activities as well as little external cooperation in R&D distinguish this innovation pattern from the others. These features, together with the focus on process (rather than product) innovation, and the fact that a relatively large portion of firms benefit from cooperation in the production process suggests that the diffusion of external knowledge, notably to the production process of these firms, plays an important role in innovations. It serves for the accumulation of knowledge, which is very low. The low innovation potential and the limited innovation activities of this group accompany the worst - among the five subsets of firms (grouped by types of innovation behaviour) - innovation outputs and international competitiveness. The moderate competitiveness of their products and production technology on the domestic market allows them to operate in the niche of this market, possibly in its lower quality segment. The use of external knowledge in the production process indicates that they are conscious of their low competitive position and to improve or maintain it, they focus on the absorption of external innovation. From a general perspective, it is very telling that the low profile pattern firms in the NMS accounted for 29% of the entire population surveyed. Most of the firms (ca 64%) following this pattern are in the food industry, 22% in electronics, 11% in the automotive industry and only 3% in the pharmaceutical industry. Surprisingly, the ownership structure of this subset of firms is similar to that in other clusters (specifically, foreign owned firms accounted for 28% of the total number of low profile firms). Hunting for product innovation in the market This cluster encompasses firms that focus on the adaptation of innovations by acquiring them mostly from research organizations. Their R&D intensity is the lowest among innovation patterns. This is accompanied by an extremely high (60%) share of R&D and IT staff in total employment and the dispersion of R&D activities among many fields. Most of the firms have R&D and design units. This suggests that in-house R&D activities focus on searching for new product innovations on the market and better R&D subcontractors. Most of the firms gain 17
  • 19. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… benefits from linkages in different forms of product development. The widespread diffusion of innovation through subcontracting R&D is a crucial source of their innovation. The market orientation of these firms is revealed through their high level of innovation output. The share of new products in sales and the share of sales attributed to new technology was one of the highest. Surprisingly, the internationally competitive position of products and production technology was strong in most of these firms. This innovation pattern was the least frequently undertaken: only 7 firms were adopting it. Interestingly, all of them were from the same branch: electronics. The ownership composition of the cluster is not specific; it is similar as in the case of other clusters. Firms on the science-based innovation path Firms pursuing a science-based innovation path rank high in the R&D factor (R&D intensity and share of firms that have an R&D department). They also rank highly in cooperation in R&D with different types of partners, notably with research organizations (including foreign ones and independent scientists) as well as with suppliers of raw materials and machinery. Their ease in cooperating with many types of partners reflects their ability to absorb not only tacit but also codified knowledge, as well as their ability to accumulate external knowledge. The fact that they score highly on the R&D factor and on external R&D collaboration suggests the complementary role of two types of sources of innovation rather than the “make or buy decision” (Veugelers, 1997; Veugelers and Cassiman, 1999) model. They score highly on organizational changes as an effect of cooperation. However, the share of firms that recognize cooperation in innovation activities as beneficial is average. This either reflects their consciousness of their knowledge distance from main competitors (they expect that they can gain more from the cooperation) or that they are in the process of searching for partners that can better serve their innovation activities. A high number of in-house innovation activities and cooperation in R&D does not translate into high innovation output and international competitiveness. Although they come close to the STI/DUI mode of learning and innovation (Jensen et al., 2007), the international competitiveness of their products remains moderate. This innovation pattern is pursued by foodstuffs and electronic firms (75% of the cluster population); the ownership structure of firms in this cluster does not differ significantly from other clusters. 18
  • 20. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… Externally sourced firms This innovation pattern shares some features with the one that relies on hunting for product innovation. The common feature of the two is their low R&D intensity and high share of R&D and ICT staff, which accompany a relatively high use of outsourcing of innovation results. However, in opposition to ‘hunters’, firms pursuing supplier orientation in innovation behaviour cooperate in R&D with many partners, including both research organizations and suppliers of raw materials and machinery. Their product rather than process innovation orientation is confirmed by a high innovation output and widespread number of firms that benefited from product-oriented cooperation. However their ability to collaborate with different partners does not translate into a very high innovation output or the strong international competitiveness of their products. A considerable portion of firm managers recognized their products and technology as weakly competitive, while the share of firms that recognized their product and technology as strongly competitive was average in comparison with the entire population of firms. The firms using this innovation pattern differ from others in respect to branch structure. The share of foodstuffs and automotive firms accounted for 27%, while electronics accounted for 33%. Spillover absorbers in process innovation In this cluster, we have firms that are in the process of developing R&D potential and learning and this serves the absorption of external knowledge. The surprisingly high growth of R&D spending and R&D intensity did not translate into cooperation with research organizations. This explains why a considerable number of firms use the outsourcing of R&D results, which is a substitute for cooperation with research organizations. Their consciousness of the weaknesses of process innovations (confirmed by their weak international competitiveness in terms of technology in a large number of firms) leads them to cooperate strongly in R&D with suppliers of machinery and equipment. They benefit from this cooperation quite considerably. On the other hand, they are also conscious of the role of product differentiation in competition, as 72% of firms introduced new products and, for 50% firms, this product was new to the market. International product competitiveness was moderate for as much as nearly 2/3 of firms but was weak for only 8%. The branch structure of this subset of firms is differentiated. Out of the total number of firms, 43% were foodstuffs producers, 32% were electronic manufacturers, and 19% were automotive producers. 19
  • 21. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 20 Table 2. The three NMS: Firms’ innovation pattern characteristics Innovation patterns Innovation factors Low profile Hunting for product innovation in the market Spillovers absorbers in process innovation Science-based innovation path Externally sourced firms In house inputs and activities Lowest High R&D staff and innovation activities but low R&D intensity High High Moderate Backward linkages Low High (but supplier of materials) Moderate Highest High Cooperation with research organizations Lowest High Low Highest High Subcontracting Lowest Highest Moderate Low High Beneficial cooperation: product innovation Lowest High Low Moderate Highest Beneficial cooperation: process innovation Moderate Lowest Highest High Low Types of innovation Process Product Product/ process Product Product Innovation output Lowest Highest High Moderate High International P-lowest P- highest P-moderate P - high competitiveness T-lowest T- highest T-moderate T - high P – moderate T – moderate Domestic competitiveness P-lowest T-lowest P – high T - moderate P – highest T- highest P – low T-moderate P – moderate T – high Cluster composition 29% of the firm sample; Food-64% 2%; Electronic- 100% 35%; Food-43% 18%; Food-38% 16%; Automotive- 34% P-product, T- technology
  • 22. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 21 Conclusions Although most firms in the NMS are imitators, non-cumulative (using the Llerena and Oltra definition (2002, p. 185) and follow Jensen et al. (2007)’s DUI rather than STI mode of learning and innovating, they differ in terms of partners and forms of cooperation in innovation activities and in their internal capacities to innovate. The differences in innovation behaviour as well as differences in innovation output and economic performance gave us a base from which we could detect five types of innovation patterns. On the one hand, a considerable number of sample firms (29%) are low profile that is they are typical imitators. Their low innovation inputs, outputs and cooperation in innovation means their products suffer from the lowest competitiveness on the international market and only modest competitiveness on the domestic market. Their domestic orientation, their ability to operate in market niches and in lower quality segments of the market allow them to survive. On the other hand, there are three groups of firms which make extensive use of external sources of innovation, cooperate in innovation with many partners and are therefore beneficiaries of this cooperation. Despite these similarities, they represent three different innovation patterns. They differ in innovation strategy in terms of their in-house innovation capacities, its forms (human capital versus R&D intensity), their strategies for using external sources of innovation (the partners and forms of cooperation they focus on), areas of spillover absorption and economic performance. The first group of firms, labelled ‘hunting for product innovation in the market,’ represent a type of outsourcing-oriented group of firms which were not detected in incumbent EU countries. Their high share of R&D and ICT staff results in high ability to explore the outsourcing of R&D and surprisingly they have the highest international product competitiveness out of the entire population of analysed firms. However, their low R&D intensity suggests a limited understanding of the role of accumulation of knowledge in future expansion. The next two groups of firms share quite an extensive and beneficial use of external knowledge and have moderate international competitiveness. They differ in terms of the types of weaknesses of their production processes and innovation potential. They have varied R&D intensities, different shares of R&D and ICT staff in employment and they focus on a different type of innovation (product versus process).
  • 23. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… The high share of R&D and ICT staff in ‘the externally sourced’ firms allows them for cooperation in R&D activities with different partners. Their low R&D intensity is to some degree substituted by beneficiary cooperation with research organizations. On the other hand, although the high R&D intensity of the firms within the next innovation pattern, ‘spillover absorbers in process innovation,’ supports collaboration in R&D with different partners, in opposition to the previous firms, their absorption of knowledge spillovers is high mainly in process innovation. A specific group of firms termed as being on the science-based path has been also detected. They represent Jensen et al.’s DUI/STI mode of learning and innovation. However their relatively high R&D intensity (but low share of R&D and IT staff) and broad cooperation in R&D with all types of partners, including foreign research organizations, does not transfer into high international competitiveness. Rather, it remains moderate for most of these firms. Analyses show that it was ‘the hunting for product innovation in the market’ innovation pattern that was branch and ownership specific. The other four innovation patterns were employed by firms in different manufacturing branches and of different ownership. To improve international competitiveness, various firms in the NMS introduce different innovation strategies. In innovation activities of most (but Low profile) detected groups of firms, cooperation plays an important role. Differences in the partners and in the form of cooperation differentiate the patterns of innovation of these firms. On the other hand, the competitiveness of firms whose R&D intensity is very low is much lower than those whose R&D intensity is higher (or at least moderate). However, a comparison of innovation patterns of NMS firms raises the question of the reasons for the moderate international competitiveness of firms that have high R&D intensity and extensive use of cooperation with different partners in innovation activities. Is it because R&D activities require a critical mass before being capable of generating new technology and yielding economic results and firms’ budgets in the NMS are too tight to meet it? Or should high R&D intensity also be accompanied by a high share of R&D staff? Is it also possible that they operate in the countries that have specific characteristics that may influence their capacity to transform R&D investment into economic performance? The scope of analysis in this paper does not allow us to answer these questions. 22
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  • 27. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 26 Appendix Table A1. Firms in the Three NMS: Description of innovation patterns by types of innovation indicators (% of cluster’s firms answering ‘yes’ except for factors where other measures apply) Innovation patterns Innovation factors and indicators (1) Low profile (2) Hunting for product innovation in the market (3) Spillovers absorbers in process innovation (4) Science-based innovation path (5) Externally sourced firms All firms I. In-house innovation inputs and activities Innovation activities in-house R&D or design unit in-house 8.6 57.1 51.6 58.7 62.7 42.2 Process development 35.7 71.4 91.9 74.6 71.2 65.6 and improvement activities in house Product development and improvement activities in-house 30.5 71.4 95.2 82.5 72.9 69.8 Gathering commercial and technical information in-house 11.4 57.1 69.4 54 54.2 45.9 HR upgrading Management training very important 36.2 28.6 37.9 61.9 59.3 45.0 Employees training very important 22.9 28.6 29.8 39.7 54.2 33.5 Human resources Employment share of technicians and engineers (%) 8.8 54.3 9.0 7.0 15.2 10.4 Employment share of R&D and IT staff (%) 3.0 40.0 3.0 1.0 4.3 3.2 R&D Intensity (R&D to sales revenues, %) 0.13 0.01 0.78 0.82 0.24 0.49 II. Innovation linkages Backward linkages and cooperation R&D units and scientists. R&D department cooperates with: Suppliers of raw 10.5 42.9 46.8 93.7 49.2 44.7 materials Suppliers of machinery 2.9 85.7 41.1 85.7 42.4 38.8 Independentt scientists 1.9 57.1 8.1 66.7 40.7 22.9 Domestic research institutes 19.0 85.7 44.4 95.2 49.2 47.5 Foreign research institutes 3.8 28.6 5.6 57.1 27.1 18.2 Subcontracting of R&D activities Process development / improvements 14.3 100 22.6 12.7 61.0 24.3 Product development /improvements 11.4 100 14.5 23.8 79.7 25.7
  • 28. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 27 Innovation patterns Innovation factors and indicators (1) Low profile (2) Hunting for product innovation in the market (3) Spillovers absorbers in process innovation (4) Science-based innovation path (5) Externally sourced firms All firms Design 4.8 14.3 34.7 20.6 50.8 25.7 III. Benefits of cooperation with business partners influencing both product and process innovation In improved access to 39 14.3 54 46 28.8 43.3 modern technology In improvement in the production process 38.1 14.3 62.9 47.6 42.4 48.6 In modernization of equipment 44.8 42.9 68.5 46 27.1 50.3 In inventories and management 33.3 26.6 34.7 55.6 55.9 31.3 In product quality 61.9 71.4 71 73 93.2 72.3 In design 33.3 71.4 61.3 39.7 78 52.2 In R&D activities 24.8 85.7 53.2 38.1 69.5 45.5 IV. Innovation outputs Share of new products and new technology in a firm’s sales revenues Sales revenue share of products less than two years old 22.4 55 32.9 32.2 47.6 32.6 Sales revenue share of production from manufacturing technology less than two years old 40.2 55.3 47.8 45.8 59.7 47.3 New products introduced in the last two years and New in a firm 55.2 71.4 72.6 68.8 64.4 65.6 Being new for domestic 33.3 85.7 52.4 47.6 42.4 45.0 market
  • 29. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 28 Table A2. The Three NMS: Product and technology competitiveness of firms by innovation patterns (% of cluster’s companies answering ‘yes’) Innovation patterns 1 2 3 4 5 All firms Company’s products are: strongly competitive 29.5 57.1 70.2 46 50.8 50 moderately competitive 61 42.9 29.8 49.2 47.5 45.5 Competitiveness of company’s products on the domestic market weakly competitive 9.5 0.0 0.0 4.8 1.7 3.9 0ur products are: strongly competitive 27.6 57.1 29.8 31.7 30.5 30.2 moderately 50.5 28.6 62.1 55.6 54.2 55.6 competitive Competitiveness of company’s products on the world market weakly competitive 21.9 14.3 8.1 12.7 15.3 14.2 Company’s technology is: strongly competitive 27.6 28.6 57.3 44.4 55.9 45.5 moderately competitive 60.0 71.4 38.7 49.2 40.7 47.8 Competitiveness of company’s production technology on the domestic market weakly competitive 12.4 0.0 4.0 6.3 3.4 6.7 Company’s technology is: strongly competitive 24.8 42.9 26,6 36.5 23.7 27.7 moderately competitive 47.6 42.9 52.4 47.6 54.2 50.3 Competitiveness of company’s production technology on the world market weakly competitive 27.6 14.3 21 15.9 22 22.1
  • 30. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 29 Table A3. The Three NMS: Results of Factor Analysis Factors Variables 1 2 3 4 5 6 7 8 9 10 11 Beneficial Cooperation (BC) with business partners in i improved access to modern technologies 0.72 BC in improving the production process 0.71 BC in modernization of production equipment 0.91 R&D or design unit in-house 0.53 Process development in-house 0.79 Product development in-house 0.75 Applied research in-house 0.49 Design in-house 0.67 Gathering 0.64 commercial and technical info in-house R&D department cooperates with raw material suppliers 0.81 R&D department cooperates with machinery and equipment suppliers 0.79 R&D department cooperates with independent researchers 0.49 R&D department cooperates with domestic institutes 0.50 R&D department cooperates with foreign institutes 0.63 BC in inventory management and improvement . 0.70 BC in product quality improvements 0.66 BC in product specification and design 0.49 BC in R&D activities 0.48 Process development subcontracted 0.76 Product development 0.72
  • 31. CASE Network Studies & Analyses No.394- Differentiation of Innovation Behavior of Manuf… 30 Factors Variables 1 2 3 4 5 6 7 8 9 10 11 subcontracted Design subcontracted 0.62 Managerial training very important 0.81 Employees training very important 0.82 Employment share of technicians and engineers in 2003 0.82 Employment share of R&D and IT staff in 2003 0.82 Share of sales revenues from sales of new products in 2003 0.65 Sales revenue share of production from manufacturing technology less than 2 years old in 2003 0.61 ISO certificate received 0.51 New products introduced in a firm 0.67 New products sold and being new for domestic market 0.70 R&D intensity in 2003 0.70