Innovation and productivity in SMEs: empirical evidence for Italy

Innovation in SMEs exhibits some peculiar features that most traditional indicators of innovation activity do not capture. Therefore, in this paper, we develop a structural model of innovation that incorporates information on innovation success from firm surveys along with the usual R&D expenditures and productivity measures. We then apply the model to data on Italian SMEs from the Survey on Manufacturing Firms conducted by Mediocredito-Capitalia covering the period 1995-2003. The model is estimated in steps, following the logic of firms' decisions and outcomes. We find that international competition fosters R&D intensity, especially for high-tech firms. Firm size and R&D intensity, along with investment in equipment, enhances the likelihood of having both process and product innovation. Both these kinds of innovation have a positive impact on firm's productivity, especially process innovation. Among SMEs, larger and older firms seem to be less productive.