The paper adds to the scattered empirical evidence on the role of
obstacles to innovation in a three-fold way. First, we correct for the
usual sample selection bias by filtering out firms not interested in
innovation from 'potential innovators'. We then analyse the impact of
obstacles on the translation of firms' engagement in innovative
activities onto actual innovative outputs. Second, we assess what mostly
affects firms' rate of failure in this process, whether finance or,
rather, knowledge or demand-related constraints. Third, we do so in a
panel framework, which allows to account for endogeneity and firms'
unobserved heterogeneity through individual effects.
We find that demand- and market-related factors are as important as financing conditions in determining firms' innovation failures. This evidence puts much of the latest hype on finance in perspective and brings back into the picture traditional demand and market structure arguments of why firms fail to innovate. The empirical analysis is based on an unbalanced panel of firm data from four waves of the UK Community Innovation Survey (CIS) between 2002 and 2010 merged with the UK Business Structure Database.
Keywords: Barriers to innovation, Innovative firms, Potential Innovators, Failed Innovators, Panel data
JEL Classification: C23 O31 032 033