Review of Industrial Organization 24: 1–24, 2004.
© 2004 Kluwer Academic Publishers. Printed in the Netherlands.
Management Control and Innovative Activity
and KORNELIUS KRAFT
Centre for European Economic Research (ZEW), P.O. Box 10 34 43, 68034 Mannheim, Germany;
University of Dortmund, Vogelpothsweg 87, 44227 Dortmund, Germany
Abstract. This paper discusses theoretically the different incentives of managers versus ﬁrm own-
ers to invest in innovative activities. There are opposing effects concerning R&D intensity in the
manager-controlled ﬁrm. Our study on the determinants of R&D intensity presents empirical results
concerning this question. A sample of German ﬁrms with 4,126 observations is used to estimate Tobit
and semiparametric censored least absolute deviation (CLAD) models. It turns out that the owner-led
ﬁrms invest less into R&D than the managerial ﬁrms. With respect to the manager-led ﬁrms, we have
mixed results concerning the question whether expenditures on R&D depend on the control exerted.
Key words: Censored regression models, incentives, innovative activity, managerial versus owner-
JEL-Classiﬁcations: C14, C24, D21, O31, O32
Since the beginning of the discussion on innovation, a major emphasis has been
given to the central role of the entrepreneur for this process. For example, Kirzner
(1985) in line with the view of Mises (1951) as well as Schumpeter (1942)
(a) the market is an entrepreneurial process,
(b) a learning process is central to the market and
(c) entrepreneurial activities are creative acts of discovery.
In stark contrast to these statements on the entrepreneurs, nowadays big ﬁrms are
led by managers which leads to a classical principal agent problem. Managers are
mainly paid on the basis of a ﬁxed salary
and it is rather questionable whether
they always act in the interest of the capital owners. According to Mises (1951) an
entrepreneur is deﬁned by the following criterion: “There is a simple rule of thumb
to tell entrepreneurs from non-entrepreneurs. The entrepreneurs are those on whom
the incidence of losses on the capital employed falls”. If this deﬁnition is used, the
vast majority of the leading ﬁrms in all developed capitalist countries are not led
Author for correspondence. E-mail: firstname.lastname@example.org
Cf. Jensen and Murphy (1990) for a much discussed study on the determinants of salaries in the