Michał Brzozowski

1. Determinants of investment and innovation in Polish manufacturing industries.Forthcoming in Post-Communist Economies Michał Brzozowski

2. PLAN 1.Motivation 2. Theoretical background 3. Determinants of investment outlays 4. Determinants of innovative activities 4.1 R&D expenditures 4.2 Expenditures on innovations 5. Conclusions

3. 1. MOTIVATION • Understand short-term output fluctuations • Identify conditions for rapid economic growth • Test the existence of all-in-one investment and innovations promoting policy

4. 2. THEORETICAL BACKGROUND • Neoclassical approach

5. 2. THEORETICAL BACKGROUND • The modified variant of the neoclassical model disentangles the effects of the user cost of capital and output fluctuations distributed lag structures

6. 2. THEORETICAL BACKGROUND • 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.

7. 2. THEORETICAL BACKGROUND • 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.

8. 2. THEORETICAL BACKGROUND • 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 to • time horizon of profits’ realization and • degree of irreversibility

9. 2. THEORETICAL BACKGROUND • Market structure • Imperfect 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.

10. 2. THEORETICAL BACKGROUND • Empirical formulation

11. 3. DETERMINANTS OF INVESTMENT OUTLAYS • Data set & estimation technique • 2-digit level of NACE rev. 1.1 • 21 sectors of Polish manufacturing industry • period 1994-2004 • pooled OLS, fixed effects, and random effects

12. 3. DETERMINANTS OF INVESTMENT OUTLAYS • Independent variables • User 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

13. 3. DETERMINANTS OF INVESTMENT OUTLAYS • Dynamics of investment and sold production in Polish manufacturing

14. 3. DETERMINANTS OF INVESTMENT OUTLAYS Estimates of investment equations

15. 4. DETERMINANTS OF INNOVATIVE ACTIVITIES 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

16. 4. DETERMINANTS OF INNOVATIVE ACTIVITIES Expenditures on innovation embrace • Intramural and extramural expenditures on R&D activity, • acquisition of disembodied technology and • fixed assets required for the introduction of innovations • preparations for the implementation innovations • marketing for technologically new and improved products

17. 4. DETERMINANTS OF INNOVATIVE ACTIVITIES R&D intensity and innovation intensity in Polish manufacturing

18. 4. DETERMINANTS OF INNOVATIVE ACTIVITIES 4.1 R&D expenditures Estimates of R&D intensity equations

19. 4. DETERMINANTS OF INNOVATIVE ACTIVITIES 4.2 Expenditures on innovations Estimates of innovation intensity equations

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

21. 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 concentrated • sharper competition dampens R&D at any level of uncertainty and leaves innovation intensity unaltered.

22. 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

23. 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 investmentimmunity against inflation.