Outsourcing innovation and the role of bank debt for SMEs

Elena dAlfonso Silvia Giannangeli

Working Paper Series

n. 28 May 2012

Statement of Purpose
The Working Paper series of the UniCredit & Universities Foundation is designed to disseminate and to provide a platform for discussion of either work of UniCredit economists and researchers or outside contributors (such as the UniCredit & Universities scholars and fellows) on topics which are of special interest to UniCredit. To ensure the high quality of their content, the contributions are subjected to an international refereeing process conducted by the Scientific Committee members of the Foundation. The opinions are strictly those of the authors and do in no way commit the Foundation and UniCredit Group.

Scientific Committee
Franco Bruni (Chairman), Silvia Giannini, Tullio Jappelli, Catherine Lubochinsky, Giovanna Nicodano, Reinhard H. Schmidt, Josef Zechner

Editorial Board
Annalisa Aleati Giannantonio de Roni

The Working Papers are also available on our website (http://www.unicreditanduniversities.eu)

WORKING PAPER SERIES N. 28 - MAY 2012

Contents

Abstract 1. Introduction 2. Theoretical framework 3. Data and empirical methodology 4. Results and discussion 5. Conclusions

3 4 6 9 12 14

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Outsourcing innovation and the role of bank debt for SMEs

Elena dAlfonso Silvia Giannangeli UniCredit Corporate Analysis

Abstract
This paper extends the extant literature on R&D outsourcing by investigating the role played by the use of bank debt as a financing source for R&D. In particular, we argue that in imperfect capital markets, outsourced, contractually stated R&D may expand the borrowing capacity of small and medium-sized enterprises (SMEs), potentially reducing asymmetric information problems between the firm and its lenders and increasing asset redeployability. Moreover, we contend that the specific features of the bank-firm relationship can moderate the relationship between the decision to outsource R&D and the decision to finance R&D using bank debt. We use a sample of 2549 manufacturing SMEs located in Italy and find support for our hypotheses. KEYWORDS: SMEs; innovation; finance; outsourcing JEL CLASSIFICATION:C25; D22; G30; L24; O30

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1. Introduction
Small- and medium-sized firms (SMEs) envisaged tough times during the current financial crisis. The credit slowdown and the rapidly changing business environment have created new and difficult challenges for preserving and expanding the market position of innovative SMEs. To overcome difficult times and maintain their competitive advantage, SMEs must continually develop new products and services (OReagan and Kling, 2011). For many SMEs, however, new product development may be costly due to lacking capabilities; therefore, many SMEs may consider acquiring knowledge and technology from external sources (Vermeulen, 2005). Given the degree of resource intensity required for innovation and the high pace of technology diversification, the outsourcing of R&D has become a common practice (Hagedoorn, 1996; Gassmann et al., 2010: Hsuan and Mahnke, 2011). As a matter of fact, knowledge sources outside the boundaries of the firm are very important for SMEs. The results of the 2008 Community Innovation Survey collected by the European Union in fact confirm that more than half of the SMEs interviewed consider external information sources highly important for their innovative activities. A growing part of the economics and management literature has concentrated on the operational mode of introducing R&D into the production process, investigating the drivers of the choices between technology buy or make (Pisano, 1990; Arora and Gambardella, 1990; Veugelers, 1997; Love and Roper, 2002; Cassiman and Veugelers, 2006; Lokshin et al., 2008; Grimpe and Kaiser, 2010). These studies have indicated that there is a clear trade-off between the advantages and costs of outsourcing as opposed to conducting in-house R&D activities. The use of external R&D sources may have several advantages. For example, outsourcing R&D may reduce the fixed costs of innovation, thus overcoming the potential limitations of in-house R&D budgets (Love and Roper, 2002). Moreover, resorting to external research and development allows access to the economies of scale and scope available to specialist research organizations, thus reducing the time-to-outcome of a research project. External R&D links may also be a useful method of searching the technological environment, possibly permitting access to improved technology developed outside the boundaries of the firm (Veugelers, 1997; Cassiman and Veugelers, 2006). However, externalizing R&D also has potential disadvantages. For example, intellectual property rights and appropriability problems may make external R&D unattractive (Arora and Gambardella, 1990). Moreover, as emphasized by the transaction cost theory under the conditions of asymmetric information, which often prevails in the context of research and innovation, the outsourcing strategy may lead to problems of monitoring costs due to potential opportunistic behavior of R&D suppliers (Pisano, 1990; Ulset, 1996). A part of the literature focused on the motives for technology buy rather than make and investigated the complementarity or substitutability of the two approaches (Arora and Gambardella, 1990; Piga and Vivarelli, 2004; Cassiman and Veugelers, 2006; Lokshin et al., 2008). This paper extends the extant literature and contributes to it by investigating a dimension that has been largely neglected in the studies on R&D outsourcing. Very little attention has been paid to the

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role played by the R&D financing strategy on the choice of a firms R&D mode. Firms engaged in innovation face several important decisions. First, they must decide how much to invest in R&D, and second, how to make that investment (Love and Roper, 2002). Firms, however, also need to make a third important decision, which is how to finance the R&D. The objective of the present paper is to investigate whether the latter decision has an impact on the choice of the R&D mode. In particular, we argue that the choice of financing R&D using bank debt will favor the decision to outsource R&D. As clearly stated by Hall (2002), in perfect capital markets, funding concerns should not affect a firms R&D choices. However, capital markets are far from perfect (see, for instance, Fazzari et al., 1988 and the subsequent research). We argue that asymmetric information problems plaguing the relationship between borrowers and lenders are particularly important in the financing of R&D. In this context, turning to external, contractually stated R&D may reduce information asymmetries and improve the borrowing capacity of innovative SMEs. Moreover, we contend that the specific features of the bank-firm relationship can moderate the decision to outsource R&D and the choice to finance R&D using bank debt. Thus, our hypothesis is that the use of credit to finance R&D will increase the probability of adopting a technology buy strategy when the relation between the innovative borrowing SME and its lenders is particularly weak. The main tenet behind this hypothesis is that a more intense relationship can reduce information asymmetry problems, thus reducing the role of bank debt as a determinant of R&D outsourcing. The empirical results corroborate our hypotheses. We find a positive impact of bank debt on outsourcing R&D. This relationship becomes insignificant for high levels of bank-firm relationship intensity. The contribution of this paper to the extant literature is twofold. First, it investigates a potential driver of R&D outsourcing that has been largely neglected by previous studies. Second, the empirical evidence found by this study sheds light on a potential transmission channel of credit cycles and the banking system at large on firm innovation and R&D strategies. The empirical evidence may be of particular interest as the observation period overlaps with the outset and first phase of the current financial crisis, a period when SMEs are likely to have faced more severe challenges both for their business environments and their demands for credit. The paper is organized as follows: Section 2 discusses our theoretical framework and hypotheses. Section 3 describes the data and explains the empirical strategy. Section 4 discusses the main results, and Section 5 concludes.

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2. Theoretical framework
2.1 Outsourcing R&D and the use of bank credit
A large, well-established theoretical and empirical compilation of literature has indicated that financing innovation is more difficult than financing ordinary investment. As posited by Hall (2002) and Hall and Lerner (2009), one of the main problems faced by external investors is the uncertainty of the returns on innovation investment. R&D investments seem to particularly exacerbate the problems faced by investors as these types of investments involve assets that are both intangible and, highly firmspecific. Asymmetric information and moral hazard problems may prevent the financial sector from properly and accurately evaluating and monitoring firms. As a result, there may be a wedge between the external and internal cost of capital required for backing R&D investments, eventually limiting a firms innovation activity. In the presence of asymmetric information, however, not only the decision about how much to invest in R&D but also the decision about the mode of R&D activities may depend on the availability and use of different financial resources. The decision to outsource part of a firms R&D activities may not be the result only of factors related to the firms technological capabilities, market structure, innovation scale, or input costs (Love and Roper, 2002), but they may also be the result of the use of credit as a financing source for innovation. Evaluation and monitoring problems faced by the financial sector may lessen in the case of external R&D projects as it may be easier to sort out the quality of projects that are disembodied from the firm (Cassiman and Veugelers, 2007). Borrowers have a superior set of information about the quality of their firms innovative projects and may be unwilling to share such information with lenders. Sharing information about on-going research projects could, in fact, reduce the returns of research output in a competitive market (Hall, 2002). When R&D is acquired from external suppliers, the final objectives of the project and the monitoring steps must be clearly stated from the beginning as the costs and the time-horizon within which the project must be accomplished must be explicitly stated in the contract. According to transaction cost theory, R&D outsourcing may be vulnerable to principal-agent problems between the outsourcing firms and the firms suppliers. Furthermore, significant trade-offs affect the decision of whether to outsource R&D projects (Pisano, 1990; Tapon, 1989). Once R&D projects are externalized, however, a detailed and careful contractual governance must be instituted, thus minimizing transaction costs for the outsourcing firms. Cost-minimizing outsourcing contracts are likely to embody conditions both on the outcome and on the suppliers behavior that will potentially convey useful information for evaluating the financial risks attached to the projects (Ulset, 1996). Contrarily, when R&D is conducted in-house, both the objectives and the implementation of innovation projects are less visible to external financers, and the borders between innovation and ordinary activity may be blurred, thus potentially making the uncertainty of the results higher. Piga and Atzeni (2007) find that lenders do not look favorably on large in-house R&D activities of borrowers as they entail a

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large proportion of intangible assets and provide strong incentives to resort to secrecy, thus exacerbating the information asymmetries between lender and borrower. Furthermore, disembodied technology acquisition through R&D outsourcing (Cassiman and Veugelers, 2007) is more likely to involve generic, non-firm-specific, already-sufficient standard knowledge to minimize both ex-ante search and negotiation and ex-post monitoring and contract enforcement costs (Mowery and Rosenberg, 1989). This circumstance has clear consequences for firm lenders. For example, highly firm-specific assets cannot be redeployed readily as they are tailored to a firms needs and generally do not convey sufficient physical collateral. Hence, they offer poor guarantees for lenders. Mocnik (2001), with respect to a sample of manufacturing Slovene firms, finds evidence of a negative relationship between debt ratio and firm-specific assets. More standard and less firm-specific assets offer lenders some clear advantages in terms of evaluation and redeployability, thus increasing the firms borrowing capacity (Tirole, 2006). From the viewpoint of the demand for credit for R&D, however, there are those financing instruments that might fit better than others with the financing needs embedded in an external or an in-house R&D investment. One of the most relevant characteristics of investments is the time horizon. For creating internal R&D, for example, innovative firms must establish a department and hire highly skilled employees. This is clearly a long-term project that involves the entire internal organization and management of the firm. In such projects, the uncertainty on returns are typically high because they are often related to the knowledge embedded in the human capital of the employees that would be lost if they were to leave the firm. Clearly, this requires investors to seek a higher rate of return, which could induce firms to privilege internal financial sources. Summarizing, there are a variety of reasons to put forth the following hypothesis: Hypothesis 1: In the presence of asymmetric information, the use of bank debt for financing research increases the probability of outsourcing R&D.

2.2 The role of bank-firm relations

The potential economic outcomes of asymmetric information between innovative SMEs and their lenders can be moderated by the characteristics of the bank-firm relationship. A few studies have analyzed, at a micro level, how the banking system can affect a firms innovation decisions (Giannetti, 2009, Herrera and Minetti, 2006, Benfratello et al., 2007), but none of them have considered the impact on the R&D strategic choices with respect to research externalization. A large amount of literature has focused on analyzing, at a macro level, the effects of bank-based versus market-based financial systems on innovation (Carlin and Mayer, 2003 Levine, R. 2002, Tadesse, 2007). One of the main arguments in favor of the higher suitability of bank-based systems in fostering innovation is the fact that banks are more capable of preserving confidentiality, thus increasing a firms willingness to disclose information about technology, knowledge and future business opportunities (Tadesse, 2007). However, even in bank-based systems, it is not

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straightforward that the appropriate incentives for information sharing between borrowers and lenders are provided. Information sharing depends on the specific nature of the relationship, which can be defined by a variety of factors, some of which are the duration, number of banks used and the share of debt with each bank. If, for example, the firm is financed through multiple banks, information sharing may not take place. For example, Giannetti (2009) finds evidence that in high-tech sectors, a weak relation with the bank reduces innovation. The micro level analysis on bank-firm relationships is not, therefore, an ignorable factor in innovative activity. A strong relation with the bank, in fact, reduces a firms financial constraints and improves liquidity because it reduces information asymmetries (Castelli et al. 2006). A closer relationship with the bank implies a lower impact of asymmetric information, reducing the above-mentioned asset specificities differences between outsourcing and internal R&D. Even in a bank-based country such as Italy, the firm-bank relationship can be a relevant factor in reducing the asymmetric information and can moderate the bank debt impact on the strategic choice of outsourcing research. Thus, in the second part of our analysis we test the following: Hypothesis 2: A stronger bank-firm relationship moderates the role of bank debt in explaining the outsourcing of R&D.

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3. Data and empirical methodology

The empirical analysis is based on the EU-EFIGE/Bruegel-UniCredit dataset, which gathers information on manufacturing firms located in several European countries. The database contains qualitative and quantitative information on a wide spectrum of aspects regarding firms activities, including innovation and R&D choices. The data refer to 2007-2009 and were collected during the first semester of 2010 through a CATI-based questionnaire filed by 15000 firms in Europe. The present analysis draws from this large database and analyzes 2549 manufacturing SMEs located in Italy . Our empirical strategy is based on estimating a discrete choice model for the firms decision to outsource R&D. In fact, the first hypothesis put forward in Section 2 states that, in the presence of asymmetric information, the use of bank debt for financing research increases the probability of outsourcing R&D. To test whether the outsourcing decision is influenced by the R&D financing mix, we adopt a direct measure of the share of R&D expenses financed using bank debt (Bank). The dichotomous outcome variable, D_ExtR&D, is defined as taking a value of 1 if the firm partly or entirely outsources its R&D activities during the triennium, and zero otherwise. We estimate a probit equation model taking the following form: D_ExtR&D = 1 (x + u1 >0) with u1 ~ N(0,1) Clearly, Hypothesis 1 predicts that the coefficient of variable Bank will be positive and significant. In addition to the variable Bank, the set of explanatory variables in (1) includes several control variables that have been investigated by previous empirical literature as potential drivers of R&D outsourcing. These include Firm absorptive capacity: A robust literature finds that the more pronounced the ability of an organization to absorb the new knowledge generated outside its boundaries, the higher the incentives to externalize R&D activities (Cohen and Levinthal, 1989; Arora and Gambardella, 1994; Schmidt, 2010). In the current analysis, we adopt two different proxies for a firm absorptive capacity: the share of graduated employees (Grade_employees) and the R&D expenses-to-turnover ratio between 2007 and 2009 (R&Dintensity). IPR protection ((D_IPR)): Intellectual property right protection (IPR) could, indeed, indicate high technology spillovers at the industry level and, therefore, higher concerns at the firm level for appropriability of innovation output (Levin et al. 1987, Cassiman and Veugelers, 2002). The latter is likely to reduce the firms propensity for outsourcing R&D (Lai et al., 2009). ICT endowment (D_ICT): R&D outsourcing may be favored by a sufficient information and communications technologies (ICT) endowment. R&D managers increasingly use the possibilities of 0 (x + u1 0) (1)

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connecting and coordinating R&D initiatives via remote sources of innovation (Oshri et al., 2009). As with other technological advances that reduce the transaction costs of exchanging innovation problems and solutions across company boundaries, ICT does promote the emergence of external markets for innovation (Hsuan and Mahnke, 2011). Outsourcing (D_Outsourcing): Transaction costs of organizing external R&D will likely be higher in smaller firms or those firms in a relatively weak market position. These firms may also find it more difficult to fully exploit the commercial benefits from successful R&D (Love and Roper, 2002). Firms that outsource part of their production process approach are likely to own the required capability for managing external suppliers, thus minimizing principal agent problems. They are also more likely to externalize R&D (Fritsch and Lukas, 2001). Business group (D_Group): Being part of a business group eases outsourcing agreements by reducing transaction costs within the group and improving appropriability conditions over R&D results. Accordingly, firms belonging to business groups may be less reluctant to buy R&D from structures that are external to the firm but belong to the same group. D_SOUTH: Several studies have noted that localized social capital may influence the economic behavior of individuals and firms (see, for instance, Guiso et al., 2004 and subsequent research). In a recent paper Laursen et al. (2011) determined that firm location in a region with high social capital positively influences the effectiveness of externally acquired R&D on innovation. This argument may be very relevant in Italys case, where the northern regions highly outperform the southern regions as for the endowment of localized social capital (Guiso et al., 2004). We further control for firm size (Size), measured as the natural logarithm of the average number of employees during the observation period. Finally, we control for industrial sector, defined in accordance with the OECD technological classification as high-tech (HTECH), medium-high tech (MHTECH), medium-low tech (MLTECH), and low tech sectors (LTECH) . To account for censoring problems due to the limited observability of variable D_ExtR&D, we adopt a probit model with sample selection (also known as Heckman-probit model), where the probability of performing R&D activities is estimated upon the first step (Heckman 1979). In fact, a firm choice to outsource part of its R&D projects can be observed only if a firm has chosen to perform some form of R&D. Not controlling for such sample selection problems would mislead the interpretation of the results because two different types of zeros in the D_ExtR&D variable would be mixed (i.e., those firms performing R&D in-house and those firms not performing R&D at all). The selection equation takes the following form: D_R&D = 1 (z + u2 >0) with u2 ~ N(0,1) 0 (z + u2 0) (2)

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where variable D_R&D is a dichotomous variable taking value of 1 if the firm performed some form of R&D during the triennium 2007 to 2009. The explanatory variables in equation (2) are drawn from the economics of innovation literature, particularly Hall et al. (2008) and include firm size (SIZE), age (Age Class 0-10 and Age Class 10-20), family ownership (D_FAMILY), firm human capital (Grade_employees), a dichotomous variable taking value of 1 if the firm has mainly foreign competitors (D_Foreign) and the export intensity (i.e., the share of turnover sold abroad, or Export). Finally, we include the dichotomous D_SOUTH location indicator and a set of dummy variables for the sector technological intensity. Table 1 summarizes the explanatory variables used in the estimationof model (1)-(2) and the expected signs of explanatory variables in (1), while table 2 shows the descriptive statistics of the variables discussed thus far. The second hypothesis put forward in Section 2 posits that a stronger bank-firm relationship moderates the role of bank debt in explaining the outsourcing of R&D. In order to test Hypothesis 2, we breakdown the full sample into two subsamples and test whether the effect of bank debt is larger when SMEs lack an intense relationship with their financers,. The EU-EFIGE/Bruegel-UniCredit dataset offers a nice proxy for the bank-firm relationship, that is, the number of banks used by each SME in the sample. The number of lending relations has been used as a proxy for the intensity of the bank-firm relation: borrowing from multiple banks can reduce a banks incentives to generate information from the relationship with a firm (Herrera and Minetti, 2007; Petersen and Rajan, 1994). The sample is split into two subgroups identified based on whether the number of banks used by each SME lies below or above the median value in the sample. Two subsamples are thus identified: the low intensity group composed of 1254 SMEs (corresponding to firms with more than three banks) and the high intensity group composed of 1295 firms (corresponding to SMEs maintaining relations with a maximum of three banks). To empirically test Hypothesis 2, we estimate the abovediscussed model (1)-(2) and compare the coefficients of the variable Bank, thus obtained. Clearly, we expect that variable Bank will have a larger effect on the probability of outsourcing R&D in the Low-intensity subsample. The results are shown in table 3 and table 4 in the next section. Table 5 shows the correlation matrix among all explanatory variables.

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4. Results and discussion

Table 3 reports the estimation results for the total sample. The coefficient of variable BANK results in a positive value and is statistically significant. The calculated marginal effect indicates that, on average, increasing the share of R&D expenditure covered using bank credit would increase the probability of outsourcing R&D by 1%. While the magnitude of this effect is not very large, it offers support to the hypothesis that the use of bank debt positively influences the probability of externalizing part of a firms R&D activities. Among the control variables, we find only weak evidence in favor of the importance of a firms absorptive capacity as only the variable Grade_Employees results in a positive value and is statistically significant. In accordance with transaction cost theory, we find that the probability of outsourcing R&D is higher in SMEs that buy using outsourcing agreements as part of their production process. Moreover, belonging to a business group and adopting IPRs enhances the probability of outsourcing R&D, thus suggesting that in these cases, principal-agent problems arising from suppliers opportunistic behavior may be lower. Contrary to what is emphasized in Hsuan and Mahnke (2011), ICT endowment is not found to play any role in stimulating R&D outsourcing. Similarly, our proxy of social capital and the technological intensity classes are found to have no effect on R&D outsourcing in the sample. The second column in Table 3 summarizes the estimation results of the selection equation. These results, although not directly related to the hypotheses put forward in this paper, deserve some attention. Overall, large firms are found to be more likely to undertake R&D activities, thus confirming much of the empirical literature on the relationship between size and innovation (Acs and Audretsch, 1988 and subsequent research). Moreover, R&D activities are found to be favored by more skilled human capital and by the firms exposure to international competition. High and medium-high firms are more likely to conduct R&D activities than low-intensity firms (baseline in the regression). Finally, firms located in the southern regions of Italy are generally less involved in R&D. The age of the firm seems not to be associated with R&D activity in the firms of this sample. Additional support for our hypothesis is delivered by the results obtained after splitting the sample into the two subgroups defined according to the number of banks used during the observation period. As already discussed, maintaining borrowing relations with a number of banks reduces a banks incentive to fully exploit the information regarding firm quality and behavior. The problems of asymmetric information may be exacerbated in this case, and, according to the arguments discussed in Section 2,,the nay be a positive influence of the use of credit on the probability to outsource R&D. The results in table 4 lend support to this view because a positive relation between R&D outsourcing and the share of R&D expenditures covered by bank credit registers only in the low-intensity subsample, whereas insignificance emerges among firms maintaining a more intense relationship with the banking system. As for the remainder of the control variables, all of the variables related with transaction cost reduction (the use of IPR, being part of a group, outsourcing part of the production process and also the ICT endowment) are found to be notably significant only in the high-intensity subgroup.

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Contrarily, none of these factors are found to be significant in the low-intensity subsample, where only the use of credit and the firm endowment of skilled human capital positively impact the probability to outsource R&D. Overall, the empirical evidence supports the hypothesis that outsourced R&D projects may lessen some problems of evaluation and monitoring that typically plague R&D activities and result in potential financing constraints. Lenders may find it easier to sort out the quality of projects when a contract between the innovative firm and its suppliers is set up for the several reasons spelled out in section 2. This result does not hold true for any firm in the sample, however. In fact, results seem to suggest that firms enjoy a stricter relationship with their lenders and, therefore, maintain an intense level of information sharing and choosing whether to outsource part of their R&D projects based on the costs implicit in the different R&D modes. While it is not possible to control the factors affecting the costs of internal R&D (Love and Roper, 2002), at least not in the present analysis, there is clear evidence that the external mode of conducting R&D is favored by lower transaction costs. No role seems to be played by the use of credit in financing R&D. However, firms that have weak relationships with their lenders seem to benefit from the positive link between externalized R&D and credit.

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5. Conclusions
This paper builds on the management and economics literature on R&D outsourcing and extends it by addressing the role played by R&D financing strategies. Namely, we found support for the hypotheses that, in the presence of asymmetric information, the use of bank debt for financing research increases the probability of outsourcing R&D. Moreover, this relationship is moderated by the information sharing between the lender and the borrower, as summarized by a closer bank-firm relationship. Our research contributes to the extant literature by investigating a potential driver of R&D outsourcing that has been largely neglected by previous studies. Furthermore, we shed some light on a potential transmission channel of credit cycles on firm R&D strategies. The findings suggest in fact that challenging credit market conditions may reduce the viability of the technology buy strategy. The analysis, however, clearly suffers from some limitations, which are mostly due to the cross-sectional type of data available. Repeated observations over time would allow to evaluate and compare the robustness of the relationships highlighted by the present study during different phases of the credit cycle. Yet, the results found by this study have potentially interesting implications for envisioning new solutions for overcoming the problems of information asymmetries embedded in innovation financing. In this context, the use of external R&D can be considered a useful mechanism to lessen the problems associated with investment evaluation and monitoring by lenders. We believe this result is promising in that it opens the door for envisaging potential developments in the financing markets aimed to reduce the opacity of R&D activities from the viewpoint of lenders. Moreover, this result confirms that firms behavior, and in particular the adoption of some strategies which facilitate the sharing of information about technology, knowledge or future business opportunities with lenders, may be effective in reduce the well-know problems of market failure in the financing of innovation. We consider our contribution a first step in this area of research, an area that deserves continued investigations.

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Tables: Table 1

Explanatory variable

Description
share of R&D expenses financed through bank debt natural logarithm of the average number of employees in 2007-2009 dummy variable taking value 1 if the firm is less than 10 years old dummy variable taking value 1 if the firm is more than 10 and less than 20 years old R&D expenses-to-turnover ratio during 2007-2009

D_R&D selection equation Included

D_ ExtR&D outcome equation Included Expected sign x +

Bank Size Age Class 0-10 Age Class 10-20 R&Dintensity Grade_employees

x x x

x x x

+ +

share of employees devoted to R&D activities

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D_Outsourcing

D_ICT

D_IPR

dummy indicator taking value 1 if the firm purchases her inputs and services from subcontractors via an outsourcing agreement in 2007-2009 dummy indicator taking value 1 if the firm has a broadband connection and use specific software for managing the sales/purchases network dummy variable taking value 1 if the firm adopted some type of protection of intellectual property right (patent, trademark, industrial design or copyright). dummy variable taking value 1 if the firm is part of a group dummy variable taking value 1 if the firm is owned by a family share of turnover sold abroad in 2007-2009 dummy variable taking value 1 if the firm has mainly foreign competitors dummy variable taking value 1 if the firm is located in the South of Italy (Sardegna, Sicilia, Campania, Calabria, Abruzzo, Basilicata, Molise)

D_Group D_Family Export D-Foreign D_South

x x x x x x

Table 2 Descriptive statistics of the dependent, explanatory and sorting variables

Mean Dependent variables: D_ExtR&D D_R&D Explanatory varibles: Size Age Bank R&Dintensity Grade_employees D_Outsourcing D_ICT D_IPR D_Group D_Family Export D_Foreign D_South Sorting variable: Lending relations High intensity subgroup: Low intensity subgroup: 0.13 0.54 3.30 28.78 15.04 3.97 6.54 0.66 0.81 0.22 0.14 0.76 22.95 0.47 0.14 4.04 2.32 5.78

Std. Dev. 0.34 0.50 0.64 19.50 29.43 7.46 10.37 0.47 0.39 0.42 0.35 0.43 28.10 0.50 0.35 2.57 0.69 2.60

Min 0 0 2.30 0 0 0 0 0 0 0 0 0 0 0 0 1 1 4

Max 1 1 5.51 159 100 100 100 1 1 1 1 1 100 1 1 30 3 30

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Table 3 Estimation results of model (1) and (2), total sample

Constant Size Age class 0-10 Age class 10-20 Bank ReDIntensity Skilled_Employees D_Outsourcing D_ICT D_IPR D_GROUP D_South D_Family Export D_Foreign

Total sample (2549 obs.) Outcome equation Selection equation dep. var.: D_ExtR&D dep. var.:D_R&D -1.037 ** -1.542 *** 0.411 0.164 -0.051 0.357 *** 0.081 0.044 0.020 0.084 -0.025 0.064 0.002 ** 0.001 0.001 0.004 0.007 * 0.019 *** 0.004 0.003 0.167 * 0.089 0.052 0.106 0.165 ** 0.080 0.353 *** 0.102 -0.106 -0.232 *** 0.130 0.079 0.111 * 0.062 0.006 *** 0.001 0.302 *** 0.062 0.021 0.168 -0.172 0.110 -0.054 0.093 37.240 *** 1.670 0.439 *** 0.138 0.277 *** 0.073 -0.141 *** 0.060

htech mhtech mltech Wald test LR test rho=0

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Table 4 Estimation results of model (1) and (2), High intensity and Low intensity subsamples

Constant Size Age class 0-10 Age class 10-20 Bank ReDIntensity ReDEmployees D_Outsourcing D_ICT D_IPR D_GROUP D_South D_Family Export D_Foreign htech mhtech mltech Wald test LR test rho=0

Low intensity subsabpe (1254 obs.) Outcome equation Selection equation dep. var.: D_ExtR&D dep. var.:D_R&D -1.281 ** -1.296 *** 0.506 0.235 0.001 0.372 *** 0.113 0.062 -0.156 0.126 -0.152 * 0.094 0.002 ** 0.001 0.000 0.005 0.013 ** 0.024 *** 0.005 0.005 0.120 0.117 -0.066 0.130 0.098 0.099 0.155 0.129 -0.472 *** -0.129 0.125 0.198 0.135 0.092 0.003 * 0.002 0.209 ** 0.088 0.252 0.548 ** 0.219 0.219 0.144 0.351 *** 0.129 0.108 -0.015 -0.212 ** 0.127 0.087 22.530 ** 1.330

High intensity subgroup (1295 obs.) Outcome equation Selection equation dep. var.: D_ExtR&D dep. var.:D_R&D -1.338 *** -1.313 *** 0.514 0.246 -0.007 0.197 *** 0.113 0.069 0.170 0.110 0.084 0.088 0.002 0.002 0.000 0.006 0.016 *** 0.004 0.004 0.006 0.224 * 0.128 0.291 * 0.173 0.273 ** 0.123 0.626 *** 0.162 -0.183 -0.049 0.170 0.104 0.074 0.088 0.007 *** 0.002 0.379 *** 0.088 -0.305 0.438 ** 0.261 0.184 -0.610 *** 0.268 *** 0.188 0.101 -0.192 -0.056 0.135 0.085 37.240 *** 1.670

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Table 5 Correlation matrix among explanatory variables

Size Size Age class 0-10 Age class 10-20 D_Family Export D_Foreign Bank R&Dintensity Grade_employees D_Outsourcing D_ICT D_IPR D_Group D_South htech mhtech mltech 1.000 -0.069 -0.099 -0.094 0.213 0.179 0.035 0.028 0.086 0.143 0.089 0.184 0.285 -0.042 0.040 0.051 0.014 * * * * *

Age class Age class D_Family 0-10 10-20 1.000 -0.197 -0.024 -0.036 -0.069 -0.004 0.033 0.032 -0.013 0.015 -0.037 0.058 0.081 0.010 -0.014 0.006

Export

D_Foreign

Bank

R&Dintens Grade_em D_Outso D_ICT ity ployees urcing

D_IPR

D_Grou

* * * * * * * *

* * *

1.000 -0.026 -0.069 * -0.055 * -0.029 -0.009 -0.033 -0.004 0.015 -0.019 -0.006 0.103 * 0.010 -0.016 0.014

1.000 -0.004 0.010 -0.002 -0.009 -0.069 0.010 0.061 0.006 -0.227 0.010 -0.071 -0.051 0.039

* * * * * *

1.000 0.553 0.030 0.178 0.149 0.157 0.115 0.224 0.091 -0.155 0.008 0.205 -0.150

* * * * * * * * * *

1.000 0.012 0.116 0.104 0.181 0.099 0.179 0.054 -0.141 -0.033 0.152 -0.095

* * * * * * * * *

1.000 0.021 0.025 0.071 -0.025 0.060 -0.046 -0.045 -0.074 0.052 -0.029

* *

* *

1.000 0.199 0.076 0.078 0.141 0.056 -0.049 0.170 0.086 -0.087

* * * * * * * * *

1.000 0.099 0.062 0.145 0.212 0.058 0.249 0.116 -0.150

* 1.000 * 0.106 * 1.000 * 0.137 * 0.059 * 0.077 * 0.074 * -0.044 * -0.061 * 0.002 0.057 * 0.059 * 0.038 * -0.059 * -0.012

* * * * *

1.000 0.023 0.009 0.060 * 0.061 * -0.103 *

1.000 -0.007 0.121 0.065 -0.025

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