Innovation Complementarity and Scale of Production

Abstract

An econometrically feasible, structural model ofproduction and innovation decision that is able to verify the existence ofcomplementary relations among strategies is presented. This model is used toanalyze data on firms in the Spanish ceramic tile industry. Taken from DIRNOVA, a database of Spanish firms from 1988 and 1992, the datashow that there is a significant association between product and processinnovation that is mostly due to unobserved heterogeneity.Another keyfinding is that smaller firms appear to be more inclined to innovate. This isthe result of technology in the case of demand innovations (complementarity),but organizational matters (correlation induced by unobserved heterogeneity)are more important in the case of process innovation. (SAA)

Keywords: Manufacturing industries, Firm strategies, Econometrics, Firm age, Product development, Innovation process