Competing Internationally: R&D and Export Activity in a Small Economy

This paper investigates the impact of Research and Development (R&D) on export activities, particularly in the context of small, open economies like Belgium. The study uses firm-level data from the Flemish Community Innovation Survey (CIS) to analyze the relationship between R&D, R&D subsidies, and export performance, considering both domestic firms and multinational enterprises (MNEs). The research employs instrumental variable regressions to address potential reverse causality, using R&D subsidy variables as instruments. The findings indicate a positive effect of R&D on export for both domestic firms and MNEs, with R&D subsidies fostering R&D efforts and indirectly increasing international sales. However, the export stimulus resulting from R&D appears to be smaller for MNEs compared to domestic companies, suggesting that innovation policy can effectively boost exports, especially for domestic firms.

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Czarnitzki, Dirk; Wastyn, Annelies
Working Paper
Competing internationally: On the importance of R&D
for export activity
ZEW Discussion Papers, No. 10-071
Provided in Cooperation with:
ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for
European Economic Research
Suggested Citation: Czarnitzki, Dirk; Wastyn, Annelies (2010) : Competing internationally: On
the importance of R&D for export activity, ZEW Discussion Papers, No. 10-071
This Version is available at:
http://hdl.handle.net/10419/41430
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Dis cus si on Paper No. 10-071
Competing internationally:
On the Importance of
R&D for Export Activity
Dirk Czarnitzki and Annelies Wastyn

Dis cus si on Paper No. 10-071
Competing internationally:
On the Importance of
R&D for Export Activity
Dirk Czarnitzki and Annelies Wastyn
Die Dis cus si on Pape rs dienen einer mög lichst schnel len Ver brei tung von
neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tun
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eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors ar
responsi ble for the con tents which do not neces sa ri ly repre sent the opini on of the ZEW.
Download this ZEW Discussion Paper from our ftp server:
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Non-technical Summary
Export is an important factor for growth and welfare for small, open economies.
Since R&D and innovation are also key factors of growth for an industrialized
economy, it is interesting to analyze the relationship between R&D and export for
Belgium as one example of a small, open and industrialized economy. Because of
possible endogeneity of R&D, we instrument R&D with information on subsidized
R&D projects. Consequently, it can be indirectly identified whether R&D subsidies may
serve as policy tool for stimulating exports. Due to the exceptionally high openness of
Belgium, and the consequential high presence of multinational enterprises (MNEs), we
consider two subsamples of firms, purely domestic firms and MNEs. Differences in the
relationship between R&D and exports may occur between domestic firms and MNEs
due to intra-group transfers and possible centralization of R&D activity in MNEs in a
certain geographical area.
For the analysis, we use data from the Flemish Community Innovation Survey (CIS)
2005 and 2007. Results indicate that there is a positive effect of R&D on exports for the
full sample as well as for both subsamples. Due to possible endogeneity of R&D, we
instrument R&D with data on the lagged number of subsidized R&D projects and the
lagged average size of the subsidized R&D projects. Results of this analysis indicate
that R&D subsidies increase R&D. This is reassuring for policy makers: first, subsidies
lead to more R&D in the economy and, second, R&D increases the international sales
of firms. As this is also the case for MNEs, the concern that R&D subsidies may lead to
more R&D in the economy, but in case of MNEs to no further benefits as production
may take place elsewhere, is reduced. However, there is some evidence that the export
stimulus resulting from R&D is smaller for MNEs than for domestic companies.

Das Wichtigste in Kürze
Exporte sind ein wichtiger Bestandteil kontinuierlichen Wachstums kleiner, offener
Volkswirtschaften. Da Forschung und Entwicklung (FuE) ebenso wichtige Faktoren
nachhaltigen Wachstums darstellen, scheint es sinnvoll den Zusammenhang zwischen
Exportleistung und FuE auf der Firmenebene zu analysieren. Dazu verwenden wir in
dieser Studie Daten belgischer Firmen als ein Beispiel einer kleinen, offenen
Volkswirtschaft.
Da es mögliche Rückkopplungseffekte zwischen Exporten und FuE geben kann,
wird FuE in dieser Studie nicht als exogene Variable betrachtet, sondern mit
Informationen über erhaltene Forschungssubventionen instrumentiert. So kann indirekt
ein Zusammenhang zwischen Innovationpolitik und deren internationalen Valorisierung
hergestellt werden.
Wir benutzen Daten der Flämischen Innovationserhebungen 2005 und 2007. Es
zeigt sich, dass zwischen Exporten und FuE ein signifikanter, positiver Zusammenhang
besteht. Ferner erhöhen Forschungssubventionen die FuE-Intensität der
Förderempfänger und tragen somit indirekt zur Intensivierung internationaler Umsätze
bei. Dieses Resultat findet sich sowohl für Firmen, die nicht Teil einer internationalen
Unternehmensgruppe sind, als auch für multinationale Unternehmen. Dies reduziert
mögliche politische Bedenken, dass die Förderung von multinationalen Unternehmen
zwar zu mehr FuE in einer Volkswirtschaft führt, aber nicht zu weiteren Erträgen, weil
die Produktion innovativer Güter oder die Implementierung kostenreduzierender
Produktionsverfahren im Ausland stattfinden.

Competing internationally:
on the importance of R&D for export activity1
Dirk Czarnitzki a,b,c and Annelies Wastyn a,b,c
a) K.U.Leuven, Dept. of Managerial Economics, Strategy and Innovation, Belgium
b) Centre for R&D Monitoring (ECOOM) at K.U.Leuven
c) Centre for European Economics Research (ZEW), Mannheim, Germany
September 2010
Abstract
Export is an important factor to improve growth and welfare especially for
industrialized small, open economies such as Belgium. Policy may be interested in key
variables that can influence export. This paper finds evidence for the importance of
R&D for export activities using Belgian firm-level data. To control for reverse
causality, R&D-subsidy variables are used to instrument R&D. The results show that
R&D policies may indirectly help to increase the export performance of the economy.
Due to the exceptionally high openness of Belgium, two subsamples of firms are
considered, domestic firms and multinational firms. We observe positive effects of
R&D on export for both domestic and MNEs. Once we instrument R&D because of its
potential endogeneity, however, it turns out that the effect of R&D on exports is larger
for domestic firms than for multinational companies.
Keywords: Export, R&D, Multinational enterprises, Innovation Policy
JEL-Classification: F23, O33, O38
Annelies Wastyn
K.U.Leuven
Dept. of Managerial Economics, Strategy and
Innovation
Naamsestraat 69
3000 Leuven
Belgium
Phone: + 32 16 326 651
Fax: [phone]
E-Mail: [e-mail]
Dirk Czarnitzki
K.U.Leuven
Dept. of Managerial Economics, Strategy
and Innovation
Naamsestraat 69
3000 Leuven
Belgium
Phone: + 32 16 326 906
Fax: [phone]
E-Mail: [e-mail]
1 We thank Katrin Hussinger and participants of following conferences and workshops for helpful
comments: “ZEW PhD Workshop” in Mannheim, Germany; “Düsseldorf-Leuven-Mannheim Seminar on
Competition and Innovation” in Düsseldorf, Germany, “Competition and Innovation Summer School
2010” in Turunç, Turkey, and “European Association for Research in Industrial Economics” Conference
in Istanbul, Turkey. Financial support from IWT Flanders is gratefully acknowledged.

1
1 Introduction
In a global world, exports are obviously one channel for increasing a nation’s
growth and long-term wealth. This is especially true for industrialized small, open
economies. For policy makers, it may sound attractive to foster exports compared to
other options of internationalization, such as foreign direct investment or licensing.
Although potential profits of foreign direct investment and licensing would flow back
to the home country as they do with exports, export activity has the feature that
employment would be maintained or increased in the home country. Even if foreign
direct investment would exhibit higher expected profits in certain industries, keeping
employment in the home country is certainly attractive for policy makers.
What is a key variable that policy can use to influence long-term export success,
however? The literature usually analyses the relationship between exports and
productivity of a firm (see e.g. surveys by Wagner, 2007). In this paper, we take a
slightly different perspective. R&D and innovation are typically seen as a major
drivers of productivity growth (see e.g. Griliches, 1994; Hall and Mairesse, 1995) and
thus also for exports of industrialized countries (Cassiman and Golovko, 2007, 2010;
Cassiman et al., 2010). Whereas the literature on exports and productivity is vast, the
relationship between R&D and exports received less attention in the field (see e.g.
Hirsch and Bijaoui, 1985; Ebling and Janz, 1999; Arnold and Hussinger, 2005). We
are interested in potential effects of policy and therefore study whether exports are
stimulated by R&D. As there is a reverse causality concern that R&D may be
triggered by export experience of the firms (see e.g. Ebling and Janz, 1999;
Lachenmaier and Wössmann, 2006), we will use instrumental variable regressions.

2
These regressions in turn allow using R&D subsidy variables as instruments which
will directly identify whether R&D subsidies can serve as policy tool for stimulating
exports.
We study the relationship between R&D activity and export of firms using data
from Belgium. This country can be seen as a representative for a case study of a
small, open European economy. For instance, Belgian’s GDP amounted to 345 billion
EUR in 2008. The total volume of exports amounted to 321 billion EUR. The growing
importance of exports in an ever more globalized world is striking for Belgium:
nominal GDP growth between 2001 and 2008 is about 33%, but the growth of exports
amounts to 46%. (All figures mentioned here were obtained from official Eurostat
statistics). Belgium’s high degree of openness can also be seen in both the inward and
outward stocks of FDI. The FDI stocks as a percentage of GDP amounted to 133
(122) inward (outward). The inward (outward) FDI stocks of other European
countries are much lower: Austria 34 (37), Finland 32 (42), Denmark 44 (55), Ireland
62 (63), Sweden 53 (67) (Source: UNCTAD, 2009).
In terms of Gross Expenditure on R&D (GERD), Belgium ranges at about the
EU27 average with a GERD to GDP ratio of about 1.9% in 2007. However, Belgium
is lagging behind other small European countries in terms of R&D. Sweden’s R&D
intensity reaches 3.9%, Finland’s 3.5% and both Denmark’s and Austria’s about 2.4%
(Source for all R&D data: OECD Main Science and Technology Indicators). Thus,
there is potential for policy to increase R&D, and in turn possibly exports.
Because of the exceptionally high openness of Belgium, and the consequential
high presence of multinational enterprises (MNEs), we consider two subsamples of
firms. We compare the purely domestic firms with the MNEs, that is, firms being

3
either a Belgian parent company or a Belgian subsidiary of a foreign parent company.
To the best of our knowledge, this is the first study on the relationship between R&D
and export investigating the scope for innovation policy and distinguishing between
domestic firms and MNEs.
We find that R&D subsidies indeed foster R&D efforts in the firm. In the full
sample as well as in both subsamples there is a positive effect of R&D on export
performance.
The remainder of the paper proceeds as follows: the second section discusses
existing literature on export and R&D in more detail, the third section introduces the
data and variables used. The empirical analysis is presented in section four, and the
final section concludes.
2 The importance of R&D for export
2.1 Studies on the relationship between export and innovation or R&D
International trade theories emphasize the importance of R&D for export. The
product life cycle theory of international trade (Vernon, 1966; Krugman, 1979;
Dollar, 1986) indicates that innovation makes it possible to create a competitive
advantage necessary for competing on international markets. Endogenous growth
models treat innovation as endogenous (see Grossman and Helpman, 1989; Young,
1991). These models indicate that the effect might be two-way. Innovation may be
necessary for dealing with increased competition after entry into foreign markets.
However, this effect can also be reversed so that entering a foreign market and
accessing technological expertise increases the probability of ‘learning by exporting’
which may eventually lead to innovation.

4
At the firm level, several authors have also analyzed the relationship between
export and innovation or R&D. Some authors focus on innovation as an output
measure of innovation effort, typically measured by dummy variables indicating the
implementation of a new process, the introduction of a new product, or a single
variable measuring any type of innovation. Wakelin (1998), Roper and Love (2002)
and Bleaney and Wakelin (2002) find different determinants of export for innovators
and non-innovators for the UK (Wakelin, 1998; Roper and Love, 2002 and Bleaney
and Wakelin, 2002) and Germany (Roper and Love, 2002). Belderbos et al. (2009)
find for Belgium that product innovation is important to improve exports.
Other authors focus on R&D, as input measure of innovation effort. Hirsch and
Bijaou (1985), Ito and Pucik (1993), Barrios et al. (2003) and Kirbach and
Schmiedeberg (2008) find a positive effects of R&D intensity on export performance
as measured by either export probability, export sales volume or export growth for
respectively Israel, Japan, Spain and Germany. In contrast, Schlegelmilch and Crook
(1988) restricted their analysis to a subsample of British exporting firms only, and
could not confirm an effect of R&D on export intensity.
All the studies above have in common that they do not account for a potential
reverse causality between export and innovation or R&D. Some authors are using lags
of R&D and innovation. However, the validity of this approach may be questioned, as
innovation and R&D may be highly persistent over time (see e.g. Peters, 2009).
Therefore, some scholars explicitly account for the potential endogeneity of R&D.
Becker and Egger (2009) study the effect of product and process innovation on export
for German firms, and interpret both innovation measures as a treatment. They apply
a heterogeneous treatment effects model suggested by Gerfin and Lechner (2002)

5
which is implemented using econometric matching techniques. Results again confirm
the importance of product innovation for the propensity to export. This effect gets
larger if product innovation is combined with process innovation. Process innovation
alone, on the other hand, does not have a positive impact on the propensity to export.
Other studies account for the potential endogeneity of R&D by estimating either
an interdependent system of equations or by using instrumental variable (IV)
approaches. Lachenmaier and Wössmann (2006) as well as Van Beveren and
Vandenbussche (2010) investigate the effect of innovation, or R&D respectively, on
export using IV regressions. Their results also confirm a significant positive effect of
innovation on exports for respectively Germany and Belgium. Ebling and Janz (1999)
estimate a system of interdependent equations for export and innovation, and find
evidence that in Germany there is a positive effect of innovation activities on export.
No evidence is found for the influence of export on innovation activities. Girma et al.
(2008) look at the two-way effect of R&D and export for both British and Irish firms
by using interdependent equations. Significant results are found for the effect of R&D
on export and for the reverse learning-by-exporting effect for Irish firms but not for
British firms. For foreign firms located in Ireland, no effect was observed. This study
indicates a difference in effect between foreign and domestic firms which we will
discuss more into detail in the next section.
2.2 Export of multinational enterprises
Research concerning the importance of the internationalization of firms is mainly
concentrated on the effect on general firm performance. Performance differences are
often attributed to the foreign ownership aspect of the affiliates. The theory of the
multinational firm suggests, however, that it is the multinational dimension that

6
induces performance gaps, but not the fact of being foreign-owned (see e.g. Bellak,
2004, for a survey). For example, De Backer and Sleuwaegen (2003) find a
significantly higher productivity in Belgium for foreign-owned firms compared to
domestic-owned firms. Doms and Jensen (1998) as well as Criscuolo and Martin
(2009) make a distinction between domestic firms, foreign-owned MNEs and
domestic-owned MNEs, using respectively data from the United States and from
Great Britain. They indicate that the distinction between foreign-owned firms and
domestic-owned firms is not as important as assumed. It is mainly the multinational
dimension of a firm, whether foreign-owned or domestic-owned, that makes the
distinction.
With respect to innovation differences, Frenz et al. (2005) show that for UK
financial services it is the multinational aspect that is a more significant characteristic
than the foreign ownership itself. In this line, Castellani and Zanfei (2007) find for
Italy that productivity as well as innovation behavior significantly differs between
MNEs and domestic firms.
When it comes to the effect of multi-nationality and innovation on export,
empirical studies are scarce. Ebling and Janz (1999) only include a multinational
indicator along with innovation measures in their export equation for Germany. No
significant results of the multinational indicator are found. Girma et al. (2008) extend
this approach and look for an answer on how being a domestic versus foreign firm
changes the effect of R&D on export intensity, and vice versa. For this study, data
from Ireland and Great-Britain are used. The two-way effect only appears to be
present for domestic Irish firms. One possible explanation for no effect in Great-
Britain is the different structure of the economy. Great-Britain is a large economy