Review of Industrial Organization 15: 43–64, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
The Determinants of Innovation: R&D, Technology
Transfer and Networking Effects
JAMES H. LOVE
Department of Economics, Unversity of Strathclyde, 100 Cathedral Street, Glasgow G4 OLN, UK
Northern Ireland Economic Research Centre, Queen’s University of Belfast, Belfast BT7 1NJ, UK
Abstract. The traditional analysis of innovation has focused on the Schumpeterian hypothesis of
a positive link between market power and innovation. This often includes an implicitly linear view
of the innovation process, with R&D as a necessary ﬁrst step. This paper widens the determinants
of innovation beyond R&D to include technology transfer and networking effects, thus extending
the standard Schumpeterian analysis. When tested on a dataset of c. 1300 UK manufacturing plants,
R&D, technology transfer and networking are found to be substitutes in the innovation process, with
the two latter intensities especially important in increasing the extent of innovation. There is no
evidence that (actual) monopoly power increases the extent of innovation, but there are signiﬁcant
plant and sectoral effects on innovation.
Key words: Innovation, R&D, technology transfer, networking
JEL Classiﬁcation: L29, O31, O39
Economic analyses of industrial innovation have focused largely on the Schum-
peterian hypothesis which, baldly stated, asserts a positive link between ﬁrm size
or monopoly power and innovative activity. Large ﬁrms, it is argued, may be in
a better position to carry out the R&D necessary for innovation and may also
be better placed to exploit the market potential of each innovation. Much of the
empirical research on the Schumpeterian hypothesis concentrates on one or other
of these issues providing limited support for the underlying hypothesis. The classic
survey of the literature by Kamien and Schwartz (1982), for example, suggests
that large size confers some advantage in terms of R&D activity and innovation,
This research was partly funded by the Department of Economic Development (Northern Ire-
land) as one element of the NIERC research programme on ‘Innovation and Industrial Change’. The
survey data were collected under the EU KONVER initiative. We are grateful for useful suggestions
made by participants at the 24th EARIE conference in Leuven, Belgium, and for the constructive
comments of two anonymous referees.