Determinants of R&D Investment by Start-up Firms

The start-up of small and medium enterprises (SMEs) is attracting much attention due to their contribution to innovation. However, few econometric studies have been carried out on the factors affecting research and development (R&D) activities by SMEs at the start-up stage. Using firm-level, industry-level, and regional data, this paper quantitatively examines the determinants of R&D investment by manufacturing SMEs at the start-up stage (within 15 years of incorporation), comparing the results with those of the entire sample of manufacturing SMEs, including many mature firms. Previous studies have focused on firm characteristics such as firm size and financial constraints, and industry characteristics such as appropriability of innovative outcomes and technological opportunity as the determinants of the R&D investment. In addition to these factors, this paper also sheds light on regional factors such as the agglomeration of research institutes and qualified human resources. Specifically, this study employs a Probit analysis on the probability of R&D investment, and a Tobit analysis on R&D intensity. Empirical results demonstrate that firm size and appropriability have significant positive impacts on both the probability of R&D investment and R&D intensity of start-up firms, while technological opportunity and the regional agglomeration of research institutes and human resources have significant positive effects on R&D intensity. Basically the same results were obtained from the entire sample of SMEs, except for the effects of the academic background of the presidents and the cash flow. While these factors have significant positive effects on R&D investment with regard to the entire sample, their effects are not significant with regard to the start-up firms. On the whole, the results suggest that the formation of the regional intellectual infrastructure is important to promote the R&D activities of start-up firms and SMEs.