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On the Estimation of True State Dependence in the Persistence of Innovation

Arroyabe, Marta F and Schumann, Martin (2022) 'On the Estimation of True State Dependence in the Persistence of Innovation.' Oxford Bulletin of Economics and Statistics. ISSN 0305-9049

Oxf Bull Econ Stat - 2022 - Arroyabe - On the Estimation of True State Dependence in the Persistence of Innovation.pdf - Published Version
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This paper explores the persistence often found in firms’ innovation and advances current research by investigating its actual nature. Previous studies have aimed at disentangling true state dependence from spurious state dependence by using a random effects (RE) dynamic panel probit approach, thereby imposing strong conditions on the underlying structure of the unobserved heterogeneity. Building on recent advances in the econometric literature, which allows for true fixed effects estimation of dynamic nonlinear panel data models, we demonstrate that relaxing the assumptions on the unobserved heterogeneity can have a considerable effect on the estimates of true state dependence. While we confirm the existence of a strong persistence of innovation in firms, we however find that true state dependence only explains about half of the persistent behaviour displayed by firms; this is in contrast to the popular RE methodology that attributes 70% to 100% of persistence to true state dependence. Our results suggest that policy programs aimed at encouraging initial innovations alone are useful but may not possess a long-term stimulating effect on innovation activity.

Item Type: Article
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 24 Jan 2022 13:08
Last Modified: 20 Jun 2022 15:14

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