Innovation and firm performance: An econometric analysis on the Belgian pharmaceutical sector

Abstract

The past century has seen living standards increase substantially because of a lot of new products and breakthrough innovations. By the same token, pharmaceuticals have been relying heavily on bringing new products to the market in order to survive and make a profit. However, accruing the forthcomings of medicines is not self-evident. A means of appropriation is required. In this master thesis we focus on patents. As measures of innovative success they are at the center linking innovative efforts to firm performance. As a means of operationalization, the conceptual framework that was adopted, is inspired by Crépon, Duguet & Mairesse (1998). It disentangles innovation and performance applying three structural equations. We test whether firms with higher innovative efforts have more patents and study whether this means that they are more productive. The dataset used, was compiled from three different sources. It combines R&D information extracted from Belgian annual reports with patent data from the European patent office and financial information obtained from Bureau van Dijk. In general, the structural equations were found to be adequately representing the way innovation is translated in financial prosperity asserting a positive linkage between R&D intensity, patent counts and labor productivity. In summary, we can conclude that firms making a higher R&D effort will perform better. We also found the effect of competition is ambiguous and the results suggest open innovation enters the dynamics solely as a determinant of R&D.