michał brzozowski

Determinants of investment and innovation in Polish manufacturing

industries.

Forthcoming in Post-Communist Economies

Michał Brzozowski

1. Motivation

2. Theoretical background

3. Determinants of investment outlays

4. Determinants of innovative activities4.1 R&D expenditures

4.2 Expenditures on innovations

5. Conclusions

PLAN

Understand short-term output fluctuations Identify conditions for rapid economic growthTest the existence of all-in-one investment and innovations promoting policy

1. MOTIVATION

Neoclassical approach

2. THEORETICAL BACKGROUND

ttt ucYK *

0

*1

*

tt

Nt KKI

0

tt

Nt ucYI

The modified variant of the neoclassical model disentangles the effects of the user cost of capital and output fluctuations distributed lag structures


00

t

uct

YNt ucYI

Investment under uncertainty Hartman (1972) and Abel (1983) demonstrate that because firms can alter variable input to price shocks, a competitive firm’s profit is convex in its output price. Thus mean-preserving increases in price uncertainty increase the marginal profitability of capital, and hence increase investment.


Investment under uncertainty (cont’d)

However, when investment is irreversible this relationship can be reversed.Firms will not invest until the marginal cost of capital is equal to its marginal profitability but they will require additional profitability to compensate for bad shocks in which case they could end up with too much capital.


The neoclassical framework applies to all type of investment spending but...The impact of uncertainty on investment should vary considerably across different types of investment because they are distinct with respect totime horizon of profits’ realization anddegree of irreversibility


Market structureImperfect competition is a precondition of an adverse effect of uncertainty on capital accumulation (or not...)Firm size and market structure are important determinants of innovative behavior since knowledge has public good characteristics.


Empirical formulation


ncompetitio

ambiguity, law y,uncertaint

growth, output cost, user

II tt

Data set & estimation technique2-digit level of NACE rev. 1.121 sectors of Polish manufacturing industryperiod 1994-2004pooled OLS, fixed effects, and random effects

3. DETERMINANTS OF INVESTMENT OUTLAYS

Independent variablesUser cost YGR - rate of growth of sold production PPISD - monthly standard deviation of PPI inflation LAW - the percentage of entrepreneurs complaining about unclear legal regulations being one of the limits to the enterprise’s activity CONC - concentration of sold production index


jtPPIjttjt iUC

Dynamics of investment and sold production in Polish manufacturing


100120140160180200220240260280300

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

sold production investment

Estimates of investment equations


Equation Estimation method

1 Random Effects

2 Fixed Effects

3 Random Effects

UC -1.77*** (-3.06)

-1.90***

(-3.55) -1.98***

(-3.37) YGR 1.76**

(2.29) 1.33

(1.43) 1.60**

(2.03) PPISD -28.47***

(-3.00) 24.75 (1.22)

-- --

LAW -1.44** (-2.01)

-1.14 (-1.54)

-.97 (-1.33)

CONC -460.81***

(-3.49) -- --

-- --

PPISDCONC -- --

-120.75***

(-2.71) -77.15***

(-3.64) Adjusted R-squared Hausman (p-value) Number of obs.

.62

.20 231

.65

.00 231

.61

.97 231

Independent variables:R&D intensity is defined as the ratio of intramural expenditures on research and development activity to sold production of industry Innovation intensity is defined as the ratio of expenditures on innovation to sold production

4. DETERMINANTS OF INNOVATIVE ACTIVITIES

Expenditures on innovation embrace Intramural and extramural expenditures on R&D activity,acquisition of disembodied technology andfixed assets required for the introduction of innovations preparations for the implementation innovations marketing for technologically new and improved products


R&D intensity and innovation intensity in Polish manufacturing


0

0,5

1

1,5

2

2,5

3

3,5

4

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

perc

ent

RDINT INNOVINT

Estimates of R&D intensity equations


4.1 R&D expenditures


1 Random Effects

2 Random Effects

3 Fixed Effects

4 Random Effects

UC .0018 (1.43)

.0024*

(1.92) .0027*

(1.74) -.0021

(1.00) YGR -.0014

(-.85) -.0011 (-.63)

-.0013

(-.51) -.0018

(-.94) PPISD .0312

(1.51) -.04

(-1.04) -- --

-- --

LAW -.0059*** (-3.80)

-.0067*** (-4.21)

-.0064*** (-3.82)

-.0039* (-1.86)

CONC 1.08***

(3.59) -- --

-- --

.71**

(2.07) PPISDCONC --

-- .17*

(1.91) .08

(1.55) .07

(1.34) Adjusted R-squared Hausman (p-value) Number of obs.

.76

.59 231

.75

.80 231

.78

.00 231

.77

.58 231

Estimates of innovation intensity equations


4.2 Expenditures on innovations


1 Random Effects

2 Random Effects

UC -.03*** (-3.08)

-.04***

(-2.70) YGR(-1) -.02

(-1.36) -.02*

(-1.73) PPISD -.01

(-.09) -- --

LAW -.03** (-2.38)

-.0030 (.20)

CONC 1.13 (.63)

-- --

YEAR DUMMIES NO YES Adjusted R-squared Hausman (p-value) Number of obs.

.37

.30 231

.40

.99 231

High user cost uniformly puts a break on both investment in physical capital and innovative activitiesThe intramural expenditures on R&D do not share this characteristic, being primarily discouraged by unclear legal regulations interpreted as systemic uncertainty

5. CONCLUSIONS

The degree of competition have a multifarious influence.The damaging effect of uncertainty on physical capital investment is not perceptible but in manufacturing sectors where market is more concentratedsharper competition dampens R&D at any level of uncertainty and leaves innovation intensity unaltered.

5. CONCLUSIONS

The neoclassical investment theory is supported by results of estimates of physical capital accumulation equation but fails to predict R&D and innovation intensities.The Schmookler hypothesis seems to be invalid in light of the regression analysis of R&D and innovation intensities

5. CONCLUSIONS

There is no one optimal policy geared towards stimulating investment, R&D and innovative activities Low interest rates and low taxes spur investment in physical capital and innovation intensity.Transparent legislation is vital to R&D efforts. Fighting against concentration in the products market may hurt R&D intensity but gives physical

capital investment immunity against inflation.

5. CONCLUSIONS

michał brzozowski

Documents

type of investment spending

different types of investment

theoretical backgrounddata

theoretical background3

price uncertainty

marginal cost of capital

output price

user cost of capital