Reviving Demand-Pull Perspectives: The Effect of Demand Uncertainty and Stagnancy on R&D Strategy

Abstract

This paper looks at the effects of demand uncertainty and stagnancy on firms’ decisions to engage in R&D activities and the amount of financial effort devoted to it. The paper contributes to the innovation literature in three respects: first, it adds to the revived debate on demand-pull perspectives in innovation studies, by specifically looking at demand-related (lack of) incentives to invest in innovation. Also, importantly, it complements the emerging literature on barriers to innovation in a two-fold way: first, by focusing on demand-related obstacles rather than the more explored financial barriers; second, by analyzing in detail whether experiencing uncertainty or lack of demand is a sector-specific feature, namely whether firms active in high or low tech manufacturing or in knowledge intensive or low tech services are more or less dependent on demand conditions when deciding to perform R&D. We find that uncertain demand and lack of demand are perceived as two completely different barriers. While uncertainty on demand does not seem to constrain R&D efforts, the perception of lack of demand does strongly reduce not only the amount of investment in R&D but also the likelihood of firms to engage in R&D activities. We interpret this evidence in terms of the specific phase of the innovation cycle in which decisions to invest in R&D are taken. Sectoral affiliation does not seem to matter when it relates to demand conditions, supporting the conjecture that positive expectations on market demand is a structural and necessary condition to be fulfilled for all firms prior to invest in R&D.

Keywords: R&D strategy, barriers to innovation, demand uncertainty, lack of demand, innovative inputs, panel data

JEL Classification: C23, O31, O32, O33