Research Policy 26 Ž1998.

829–841

Innovation and export behaviour at the firm level

)
Katharine Wakelin
MERIT, P.O. Box 616, 6200 MD Maastricht, Netherlands
Received 28 February 1997; revised 20 October 1997; accepted 12 November 1997

Abstract

This paper considers the role of innovation in determining export behaviour for a sample of UK firms including both
innovating and non-innovating firms. Export behaviour is defined both as the probability of a firm exporting and the
propensity to export of the exporting firms. An empirical model of the determinants of export behaviour is estimated, and the
determinants are found to vary between innovating and non-innovating firms. Non-innovative firms are found to be more
likely to export than innovative firms of the same size. However, the number of past innovations has a positive impact on the
probability of an innovative firm exporting. The paper concludes that the capacity to innovate changes the behaviour of the
firm relative to non-innovating firms. q 1998 Elsevier Science B.V. All rights reserved.

Keywords: Innovation; Export behaviour; Firm level

1. Introduction this paper uses the innovation history of the firms

There is considerable macroeconomic evidence
that differences in innovation, in addition to relative
prices, can influence export behaviour Žsee for in-
stance Fagerberg, 1988, for the OECD countries and
Greenhalgh, 1990, for the UK.. This paper aims to
extend that analysis to the firm level, considering the
role of innovation in determining export behaviour
for a sample of UK firms. The impact of innovation
on firm performance is treated in two ways: the
direct impact of being an innovative firm; and the
role of spillovers of innovations from other firms. In
contrast to other microeconomic studies which have
used R & D expenditure as a proxy for innovation,
)
Corresponding author. Tel.: q31-43-3883886; fax: q31-43-
3216518; e-mail: k.wakelin@merit.unimaas.nl.
taken from the SPRU innovation survey.
The role of innovation in trade behaviour is of
particular interest in the case of the UK. As a
number of studies have pointed out, the UK’s trade
performance in manufacturing, as shown by the UK
share in world manufacturing trade, has been declin-
ing for much of the post-war period, although this
trend may have been reversed in the 1980s. 1 It is
frequently noted Žfor instance by Thirlwall, 1986.
that it is in the area of non-price competitiveness that
the UK economy is particularly weak, reflecting,
among other factors, the poor skills of the work
1
See for instance Landesmann and Snell Ž1989. and Anderton
Ž1992. for examinations of the UK’s changing trade patterns in
the 1980s. This decline in trade share does not necessarily indicate
a decline in ‘competitiveness’; Fagerberg Ž1988. gives a broad
definition of competitiveness.

0048-7333r98r$19.00 q 1998 Elsevier Science B.V. All rights reserved.

PII S 0 0 4 8 - 7 3 3 3 Ž 9 7 . 0 0 0 5 1 - 6
830 K. Wakelinr Research Policy 26 (1998) 829–841
force, poor product design and quality, after sales
service, and reliability. There have been a number of
studies investigating the impact of non-price compet-
itiveness on UK trade at a sectoral level. Greenhalgh
Ž1990., Buxton et al. Ž1991. and Greenhalgh et al.
Ž1994., have found some evidence of a positive role
for innovation in trade performance. In this paper the
impact on export behaviour of being an innovating
firm is estimated, while controlling for other factors
which influence exports. In addition, the level of
innovation in the sector, and the use of innovations
in the sector are also considered as determinants of
firm export behaviour.
The paper is set out as follows. Section 2 outlines
the characteristics of innovation at the firm level, and
summarises other empirical work concerning the de-
terminants of exports at the level of the firm. Section
3 presents the data set to be used and the empirical
model to be tested; Section 4 gives some descriptive
statistics. Section 5 considers the model specifica-
tion, and discusses the results for the probability of a
firm exporting, and for the propensity of firms to
export. Section 6 concludes.
2. Firm behaviour
It is at the firm level that decisions about the
commitment of resources to innovation, and the in-
novative strategy of the firm are made. It is also
principally at the level of the firm that the benefits of
innovation are enjoyed: in terms of cost reductions,
new markets and potential monopoly rents. This
makes the firm a suitable unit of analysis when
considering the role of technology in export be-
haviour. The sector, and more broadly the country in
which the firm is located, provide the context for
these decisions, and have a strong influence on them.
Considering the relationship between innovation and
exports for firms in a single country does not reflect
on the larger issues of a country’s competitiveness
Žhowever this is defined.. The exports of each firm
give no indication of the imported content of the
firm’s output, nor the level of import penetration
within the industry in which the firm operates.
The tacit and non-codifiable nature of technology,
the importance of learning-by-doing and learning-
by-using in technological change and the potential to
appropriate at least some of the benefits of innova-
tion may lead to the accumulation of innovations by
individual firms. 2 As technology is not always codi-
fiable, the transfer and diffusion of it can occur only
slowly. Firms accumulate skills from using new
technologies, learning via the production process,
and from the implementation of innovations. Innova-
tion becomes a cumulative process ŽRosenberg, 1976,
1982., which is at least partly specific to the firm. 3
One outcome from these firm specific innovation
patterns is that asymmetries exist among firms in
terms of their technological capabilities and their
general economic performance. These asymmetries
provide the motivation for examining differences in
export behaviour between innovating and non-in-
novating firms.
The majority of firm level studies considering
innovation have concentrated on testing the Schum-
peterian hypothesis of a positive relationship be-
tween firm size and innovation. However, a number
has examined the relationship between innovation
and exports. Kumar and Siddharthan Ž1994. analysed
the relationship between R & D expenditure and ex-
ports for 640 Indian firms from 1988 to 1990 grouped
according to industry: they found R & D expenditure
to be an important factor in low and medium tech-
nology industries, and concluded that India does not
have a competitive advantage in high technology
sectors, but innovation positively influences her per-
formance in other sectors. Willmore Ž1992. concen-
trated on the role of transnationals in Brazil’s trade,
estimating both the determinants of exports and those
of imports. He found no significant role for R & D
expenditure as a determinant of exports, although
R & D appeared to play a small negative role with
respect to imports: technological effort led to in-
creased domestic inputs and less reliance on imports.
Hirsch and Bijaoui Ž1985. considered the relation-
ship between R & D expenditure and export be-
haviour for Israel; a small country which experi-
enced a rapid rise in exports in the 1970s. They
tested the importance of innovation advantages for
111 Israeli firms, all of which had undertaken R & D
expenditure and were thus classified as innovators.
2
See for instance Dosi Ž1984, 1988. and Freeman Ž1982..
3
Blundell et al. Ž1995. found evidence of ‘history dependence’
in patterns of firm innovation.
 K. Wakelinr Research Policy 26 (1998) 829–841
Initially, the authors contrasted the propensity to
export of their innovating firms with the average
propensity to export in each sector, and found that
the innovating firms, grouped into sectors, had a
higher propensity to export than the sector average.
In the model which followed, they found lagged
R & D expenditure to be significant in explaining the
rate of change of exports in a cross-section. The size
of the firm, measured by sales, and the change in
firm sales, taken as an indicator of ‘other firm
characteristics’ were also significant. The authors
concluded that innovation is an important factor in
explaining export performance; they also noted that
while a minimum size is probably required to export,
beyond that firm size is not a major factor.
The majority of firm level studies have used
R & D expenditure as an indicator for innovation, and
as a basis for the classification for firms as innova-
tors. Taking information from an innovation survey,
as in this paper, has the benefit of not excluding
those firms too small to have a separate R & D
department, or even a R & D budget, yet which nev-
ertheless innovate ŽPavitt et al., 1987.. The distribu-
tion of such firms may be concentrated in some
sectors, such as the engineering and instrumentation
sectors, in which many innovations are produced as
part of the production process rather than through
R & D. By using the actual number of innovations
produced to classify firms as innovators, the size bias
of R & D expenditure as an innovation proxy can be
avoided. 4
3. The data set and empirical model
The empirical analysis presented here aims to
assess the importance of different determinants of
trade behaviour, in particular the role of innovation.
The differences between innovating and non-innovat-
ing firms are treated in two different ways. First, a
dummy variable is included which takes the value of
one for firms which have innovated; this is designed
4
There have been some studies combining this innovation
survey with other firm data to investigate a range of issues, see for
instance the work of Blundell et al. Ž1995. on the historical
dependence of innovation, and Geroski and Machin Ž1993. for the
relationship between innovation and firm profitability.
831
to test if there is a fixed effect as a result of being an
innovator. In addition, the number of innovations a
firm has had in the past is also included. Second, the
estimates are made separately for the two groups of
firms, innovators and non-innovators, to see if the
determinants of trade behaviour vary across these
two groups; this separation is tested relative to a
model with all firms pooled together. The latter
approach indicates that being an innovator funda-
mentally changes the nature of the firm, so that
innovating firms need to be treated differently from
non-innovating firms.
The data set used in this paper is a microeco-
nomic data set of UK firms which covers 320 firms
for a period of 5 years from 1988–1992 and ac-
counts for over half of total UK manufacturing out-
put over the 5 years. 5 It consists of two sub-sam-
ples. The first sample of innovating firms is chosen
from the firms covered by the SPRU innovation
survey. The definition used for the inclusion of an
innovation in the survey was ‘the successful com-
mercial introduction of new or improved products,
processes or materials’. Only the firms in manufac-
turing sectors were then chosen. As Pavitt et al.
Ž1987. point out, 90% of the innovations were ex-
ploited by firms with their principal activity in man-
ufacturing, so this selection covers the majority of
innovations. The second sample consists of firms
chosen randomly from the population of UK firms;
the innovating firms, which are defined as firms
included in the SPRU survey, are then removed from
the sample to leave a sample of non-innovating
firms. 6 Only firms in the manufacturing sector were
then chosen from this sample. Approximately one
third of the firms are quoted on the UK stock market,
while two thirds are not: the latter are expected to be
generally much smaller in size.
In order to separate differences between sectors
from differences between firms, firms were ran-
domly selected so that there are equal numbers of
5
For details of the data sources, see Appendix A and for more
details on the selection and choice of firms, see the work of
Wakelin Ž1997..
6
The firms are picked randomly from two data sources; Datas-
tream for the quoted firms, and ICC for non-quoted firms. Datas-
tream covers all quoted firms, while ICC has data on more than
half a million non-quoted firms.
832 K. Wakelinr Research Policy 26 (1998) 829–841
innovating and non-innovating firms in each of the
ten sectors Žsee Appendix A for details of the sector
definitions.. The proportion between quoted and
non-quoted firms was maintained. Without this selec-
tion procedure the sample of innovative firms came
from more innovative sectors on average than the
non-innovative firms. Some sectors, such as mechan-
ical engineering, have a high level of technical op-
portunity as a result of the production process; oth-
ers, such as footwear and clothing provide fewer
opportunities.
The data for each firm cover 5 years from 1988 to
1992 inclusive although data are missing for some
firms in some years lowering the number of total
observations. This period is considerably after that
covered by the innovation survey Žwhich covers
1945–1983. and relies on the longevity of the impact
of the innovations, or rather the continuing status of
these firms as innovators Žand of the other firms as
non-innovators.. Some firms may have innovated in
the intervening period and thus be misclassified as
non-innovators. As the survey has not been updated
this risk is unavoidable. The criteria for being in-
cluded in the survey are strict however, indicating
that this problem is likely to apply to only a small
number of firms in the sample at most; as a result we
assume that the problem is not serious. 7
There is increasing consensus in the literature on
international trade that no single factor can neatly
account for the trade patterns of developed countries.
As a result, the empirical model considered here
includes a number of different explanations for ex-
port behaviour. All the variables considered are
available for both groups of firms, and each is
available annually for the period 1988 to 1992. The
definitions of the main variables available in the data
set are given below starting with the dependent
variable:
propensity to export: PX f s X frTS f ;
average capital intensity 8 : KSA f s TK frTS f ;
7
There is no empirical evidence available quantifying to the
seriousness of this problem.
8
Capital intensity is defined relative to sales and not to labour
as the capital to labour ratio was found to be collinear with the
average remuneration variable, making it difficult to separate the
effects of the two variables.
average wages: AS f s TR frSIZE f ;
unit labour costs: ULC f s TR frTS f ;
where X stands for exports, TS for total sales, TK
for total capital, SIZE for the number of employees,
TR for total remuneration of employees, the sub-
script f is for the firm. The explanatory variables are
scaled either by an indicator of firm size, such as the
number of employees, or total firm output. As Dear-
dorff Ž1984. points out, scaling is important in reduc-
ing heteroscedasticity.
Firm characteristics are used to give an indication
of the attributes of the firm, and the general level of
firm competitiveness. The capital variable indicates
the level of firm assets, including machinery and
buildings, which embody past innovations, as well
as influencing the marginal cost of the output of the
firm. As a result a positive relationship between
capital intensity and exports is expected.
The two labour cost variables defined above, unit
labour costs and average wages, are included to
indicate labour costs and skill levels. Unit labour
costs are likely to have a negative impact on exports
in cost sensitive export markets. For the average
wage variable, a high average wage may indicate a
firm with a large degree of accumulated human
capital; this implies that the coefficient on the aver-
age salary variable might be positive. There is con-
siderable evidence for the importance of skills in
determining the export performance of developed
countries at a more aggregate level Žfor instance,
Oulton, 1996 for the UK and Germany.. Fagerberg
Ž1988., however, found only a small role for relative
unit labour costs in influencing the export market
shares of 15 industrialised countries; he found in-
vestment and technology to play a more important
role. Verspagen and Wakelin Ž1997. on the other
hand, found relative wage costs to be an important
factor in explaining bilateral trade flows between
OECD countries in some sectors. It appears that the
evidence relating to the importance of wage levels in
affecting trade at the sector level is mixed.
Firm size is expected to have a positive relation-
ship to exports as larger firms have more resources
with which to enter foreign markets. This may be
particularly the case if there are fixed costs to export-
ing such as gathering information or covering the
uncertainty of a foreign market. There may also be
economies of production and marketing which bene-
 K. Wakelinr Research Policy 26 (1998) 829–841 833

fit large firms. In addition, the square of firm size is
used to allow for non-linearities in the relationship
between size and exports.
It is possible that a minimum size is required to
overcome the additional costs of exporting, beyond
which increases in size have no impact on export
behaviour. There are a number of studies which
include such non-linearities; both Kumar and Sid-
dharthan Ž1994. and Willmore Ž1992. find a negative
relationship for the quadratic term of size in the
context of developing countries. Although size is an
advantage in exporting, this may not apply to very
large firms which can be more orientated towards the
domestic market due to, for example, a domestic
monopoly giving them no incentive to export. A firm
faced with a domestic monopoly can exploit domes-
tic demand; a foreign market would typically have a
higher elasticity of demand, and would involve the
domestic firm becoming a price taker. Following this
hypothesis the quadratic term of size is expected to
have a negative coefficient.
Finally, innovation variables at a sectoral level
showing the innovation potential of the sector, and
the use of innovations in the sector, are expected to
have a positive relationship with exports. The differ-
ent innovation variables available are:
User, the number of innovations used in the sector
from 1979 to 1983, taken from the SPRU survey,
scaled by the number of enterprises in the sector;
Prod, the number of innovations produced in the
sector for 1979–1983, from the survey, excluding
each firm’s individual innovations, scaled by the
number of enterprises in the sector;
R & D, the expenditure on R & D in the sector
scaled by the number of enterprises in the sector.
The innovations produced in each sector are an
indication of the technological opportunity of the
sector, while innovations used show the innovation
spillovers from other firms in the economy. At the
two-digit sector level, 67% of innovations are used
in a different sector from the sector that produced
them ŽRobson et al., 1988.; the use of innovations
thus indicates spillovers of innovations both within
and between sectors. A positive coefficient would
indicate the importance of the innovative environ-
ment in influencing the export patterns of firms.
Firm level R & D expenditure is available only for
the quoted firms in the sample; instead the number
of firm innovations, FIRM, taken from the SPRU
innovation survey, is used as an indicator of a firm’s
past technological capabilities. In the first model,
being an innovator is also included as a firm charac-
teristic by including a dummy variable Ž DUM . for
innovating firms.
4. Descriptive statistics
Some descriptive statistics for the variables are
given below in Table 1 for the four separate classifi-
cations of innovating exporters and non-exporters,
and non-innovating exporters and non-exporters.

Table 1
Descriptive statistics: means Žstandard deviations.
Innovators Non-innovators
Exporters Non-exporters Exporters Non-exporters
Propensity to export 0.43 Ž0.26. 0.38 Ž0.31.
Average capital intensity 0.49 Ž0.27. 0.39 Ž0.34. 0.51 Ž0.49. 0.43 Ž0.65.
Unit labour costs 0.22 Ž0.09. 0.20 Ž0.11. 0.23 Ž0.10. 0.26 Ž0.16.
Average remuneration Ž£. 13,578 Ž3575. 13,805 Ž5748. 12,485 Ž3947. 10,742 Ž3802.
Number of innovations 3.9 Ž9.6. 1.7 Ž2.5.
Number of employees 14,311 Ž25, 637. 1867 Ž6382. 2883 Ž9318. 134 Ž240.
Innovations produced by sector 546 Ž425. 526 Ž465. 529 Ž431. 461 Ž455.
Innovations used by sector 305 Ž176. 278 Ž196. 296 Ž193. 250 Ž187.
R & D in the sector Ž£ million. 721 Ž704. 483 Ž610. 765 Ž741. 489 Ž631.
Number of observations Ž N . 355 200 350 180
Proportion exporting 0.64 0.64 0.66 0.66
834 K. Wakelinr Research Policy 26 (1998) 829–841
They are taken as averages across the 5 years for
each of the variables.
The most interesting difference between the
classes is the variation in average firm size as shown
by the number of employees. On average, smaller
non-innovative firms export than innovative firms,
indicating that being an innovative firm does not
necessarily provide an incentive to export. On the
contrary, relative large innovative firms do not enter
export markets: the average size of the innovative
non-exporters is 1867 employees, while the equiva-
lent for the non-innovators is 134 employees. How-
ever, innovative firms that do export have a higher
propensity to export than non-innovators 9. Overall,
the proportion of observations having positive ex-
ports is similar across the two groups despite the
much large average size of the innovating firms. 10
This result indicates that small innovative firms are
less likely to enter export markets than the equiva-
lent non-innovating firms. Those innovative firms
which do export are much larger, and have a higher
proportion of innovations Žalmost 4 on average
against 1.7 for the non-exporters.. Smaller innova-
tive firms may concentrate on the domestic market
due to their favourable position in that market. Past
innovations may have given them good links with
other firms, or greater power in the market place thus
limiting the incentive to search out new markets
abroad.
Firm size shown by the number of employees,
and the number of innovations are both highly posi-
tively skewed. There is a small number of very large
firms, and a small number of firms with a very large
number of innovations. In general, many of the
smaller firms have one or two innovations, while
there are some firms which have over 20. Due to this
variation, the number of innovations ŽFIRM. is also
included in the later model along with the status of
the firm as an innovator or non-innovator, to capture
the importance of the extent of innovations.
9
Hirsch and Bijaoui Ž1985. also found a higher propensity to
export for Israeli firms, but they did not look at the probability of
exporting.
10
This is not the same as the number of firms exporting as there
are five observations per firm and some firms export in one year
and not in another.
The use of sample means to summarise the data
may disguise the complexity of the relationship be-
tween innovation and firm size. Pavitt et al. Ž1987.
found a U-shaped relationship between innovation
and firm size, based on the innovation survey data
used here. Small specialised firms were found to be
very active in innovation, while large firms exploited
the possibilities of R & D based diversification into
other product markets. Nevertheless, the descriptive
evidence points to an increasing relationship between
firm size and innovation, with innovating firms being
characterised by higher than average size when con-
trasted with non-innovating firms.
While the sector distribution between innovators
and non-innovators is the same due to the selection
of the sample, the sector distribution within each
group can be analysed. The exporting firms appear to
be generally located in more innovative sectors within
each group, especially when R & D expenditure is
considered. On the whole however, the difference
between sectors does not seem large enough to ex-
plain export behaviour in each group. Section 5 will
examine if being an innovator does lower the proba-
bility of exporting using an econometric model for
export behaviour.
5. The results
5.1. The choice of specification
In the data set there are a number of firms which
have no exports. The dependent variable, the propen-
sity to export, which varies between 0 and 1 by
definition, therefore frequently takes a value of zero.
As a result OLS regression may not be the most
suitable estimation procedure. 11 In order to find the
best model specification two alternative models are
tested against each other, following Cragg Ž1971..
The first specification estimates a single censored
Tobit model. This uses all the available information
from the explanatory variables, but includes both the
decision of whether or not to export, and the level of
exports, in one model Žsee Lin and Schmidt, 1984
for details.. The alternative specification separates
11
As it can give estimates, which imply predictions of the
propensity to export outside its possible range, i.e., higher than
one and lower than zero.
 K. Wakelinr Research Policy 26 (1998) 829–841 835

Table 2
The choice of specification
Probit Y s Y Truncated Y s PX
a 0.15 Ž0.18. y0.30 Ž0.12.
KSA 0.18 Ž0.09. ) ) 0.16 Ž0.04. ) ) )
AS 0.02 Ž0.009. ) ) 0.03 Ž0.005. ) ) )
SIZE 0.78 10y4 Ž0.11 10y4 . ) ) ) 0.15 10y4 Ž0.02 10y4 . ) ) )
SIZE 2 y0.56 10y9 Ž0.11 10y9 . ) ) ) y0.11y9 10 Ž0.25 10y10 . ) ) )
USER 1.66 Ž0.92. ) y0.76 Ž0.40. )
ULC y0.15 Ž0.33. 0.11 Ž0.20.
DUM y0.59 Ž0.09. ) ) ) y0.008 Ž0.04.
FIRM 0.04 Ž0.02. ) ) y0.0005 Ž0.003.
N 1040 694
)
Significant 10%.
))
Significant at 5%.
)))
Significant at 1%.
s Truncateds 0.36 Ž0.02..
Loglikelihood: probits y590.0; truncated 46.7.

the decision of whether or not to export from the
decision of how much to export. The first stage uses
the whole data set and considers the decision of
whether or not to export using a probit model. 12
The model assumes an underlying Y ) which cannot
be seen. Instead a variable Y can be observed which
takes a value 1 when Y ) is greater than 0, and 0
when it is equal or less than zero. For the second
stage only the subset of firms which export are
considered. A truncated estimation procedure is used
as the dependent variable is observed only if it is
greater than zero. This double specification can be
tested as the unrestricted model against a Tobit
model as the restricted model. The unrestricted model
is given below in Eqs. Ž1. and Ž2.:
Y s a q b 1 KSA q b 2 AS q b 3 SIZE q b4 SIZE 2
qb5 FIRMq b6 INN q b 7 ULC q b 8 DUMq e
Ž 1.
where Y s 1 if x ) 0, x is exports and Y s 0 if
x s 0. For the firms for which Y s 1:
PX s d q g 1 KSA q g 2 AS q g 3 SIZE q g4 SIZE 2
qg 5 FIRMq g6 INN q g 7 ULC q g 8 DUMq m
Ž 2.
where all the variables are as defined earlier. INN is
12
The models are estimated using Newton’s method of estima-
tion for maximum likelihood estimation, taking the OLS estimates
as the starting values.
one of the choice of innovation variables, which is
the number of innovations used ŽUSER. in the re-
sults given below. For the restricted Tobit model Eq.
Ž2. is estimated for the whole sample. Taking the
Tobit model as the restricted model, and the probit
and truncated together as the unrestricted model, the
Tobit model was rejected at 99% probability using a
x 2-squared likelihood ratio test Žthe test statistic is
50.4.. 13 The results are given below in Table 2, with
the 5 years of data pooled together; the standard
errors are given in brackets. 14 The first column of
the table shows the results for the probit model for
the probability of exporting; the second column gives
the truncated model for the propensity to export for
the sub-set of exporting firms.
There appear to be important differences between
the influence of the innovation variables in the two
models. The number of innovations used at the
sector level is positively and significantly related to
the probability of exporting, and is negative and
significant for the propensity to export of the export-
ing firms. 15 In addition, the dummy variable for
innovating firms is negatively significant in the model
13
The probit model correctly predicts 68% of the outcomes
from the mode; s is the standard error of the residual.
14
Dummies for each year were also included but were not
significant.
15
These results are the same substituting PROD or sector
RandD for USER in the model.
836 K. Wakelinr Research Policy 26 (1998) 829–841
for the probability of exporting, but insignificant in
the model for the propensity to export. However, the
number of innovations FIRM has a positive impact
on the probability of exporting Žand no relationship
to the propensity to export.. 16 Firms with a large
number of innovations are more likely to export,
indicating heterogeneity even within the group of
innovating firms.
These results confirm the pattern found in the
descriptive statistics in Table 1. The number of firm
innovations and the level of innovation in the sector
increases the probability of exporting, while the sta-
tus of being an innovator decreases the probability.
Small innovative firms appear to be more orientated
towards the domestic market. Given their size this is
unlikely to be a preference for direct production
abroad rather than exports as multinational firms are
generally large in size. The most likely explanation
appears to be that exporting is something that small
firms are forced to do in order to reach new markets,
and in the case of innovative small firms they feel
less pressure than non-innovative firms to search for
new markets as they are relatively secure in their
domestic markets. Section 5.2 will investigate the
relationship separately for the two groups of innovat-
ing and non-innovating firms.
5.2. The probability of exporting
Taking the probit model for the probability of
exporting, a model separating the firms into innovat-
ing and non-innovating firms was tested to see if the
probability of exporting varies over the two groups.
The restricted probit model is that given in column
two of Table 2 which already has separate intercepts
for the innovating and non-innovating firms; the
unrestricted model separates the explanatory vari-
ables for the two different groups as well. A Chi-
squared test was then made for the unrestricted
model relative to the restricted model, following the
test outlined above. The restriction was rejected at
99% confidence level, indicating that the innovating
firms should be estimated separately from the non-
innovating firms.
16
Geroksi Ž1991., using the same innovation survey, found that
lags of innovation put to eleven years old had a significant affect
on productivity growth. Thus, the most recent innovations in the
survey may still be positively influencing firm performance.
Thus, it appears that the two sets of firms—in-
novators and non-innovators—behave differently.
This may be due directly to the accumulated eco-
nomic benefits of the individual innovations them-
selves, or that innovating firms have some generic
differences from non-innovators, such as better man-
agement. Size is certainly one factor, as we have
seen from the descriptive statistics the innovating
firms are significantly larger than the non-innovating
firms on average. However, the role of both size and
the quadratic term seems to be similar for each
group; size is positively significant while the
quadratic term is negatively significant. So it appears
that innovating firms have different determinants for
the probability of exporting which cannot just be
explained by their difference in size. This is consis-
tent with the results of Geroski and Machin Ž1993.;
they found that the determinants of profits varies
between innovating and non-innovating firms.
The calculations were repeated with two alterna-
tive innovation variables: PROD—the number of
innovations produced in the sector, and R & D—the
level of R & D expenditure in the sector. For each of
these innovation variables, the restricted model was
rejected relative to the model separating the non-in-
novating from the innovating firms. The results are
given in Table 3; the first half of the table gives the
results for the innovating firms, the second half for
the non-innovating firms.
The results for many of the variables are as
expected. Size clearly plays an important role in
export behaviour, and a U-shaped relationship is
confirmed. Firm innovations raise the probability of
exporting, as shown earlier. The capital intensity
variable has a positive effect as expected but this
effect is not significant for either group of firms.
There are three main differences between the results
for the innovating and non-innovating firms and they
refer to the two labour variables—average salary and
unit labour costs—and the sector innovation vari-
ables. The differences are outlined below. 17
Ž1. The sign on the average wage variable is
different for the two groups: positive and significant
17
The models each have the same percentage of correct predic-
tions at 67%; each model has a similar explanatory power: no one
sector technology variable appears to perform better than another.
Table 3
The unrestricted probit models, dependent variablesY
a KSA AS SIZE SIZE 2 INN ULC FIRM
InnoÕators N s 536
USER y0.21 Ž0.27. 0.23 Ž0.19. y0.005 Ž0.01. 0.68 10y4 ) ) ) Ž0.11 10y4 . y0.47 10y9 ) ) ) Ž0.11 10y9 . 1.62 Ž1.25. 1.01) Ž0.58. 0.03 ) Ž0.02.
PROD y0.31 Ž0.29. 0.27 Ž0.20. y0.006 Ž0.01. 0.68 10y4 ) ) ) Ž0.11 10y4 . y0.48 10y9 ) ) ) Ž0.11 10y9 . 1.92 ) Ž1.04. 0.95 ) Ž0.58. 0.03 ) Ž0.02.
R&D y0.16 Ž0.28. 0.21 Ž0.20. y0.006 Ž0.01. 0.68 10y4 ) ) ) Ž0.11 10y4 . y0.48 10y9 ) ) ) Ž0.11 10y9 . 0.43 Ž0.31. 0.95 ) Ž0.58. 0.03 ) Ž0.02.

Non-innoÕators N s 504
USER y0.49 ) Ž0.28. 0.05 Ž0.12. 0.06 ) ) ) Ž0.02. 0.14 10y2 ) ) ) Ž0.24 10y3 . y0.21 10y7 ) ) ) Ž0.39 10y8 . 1.58 Ž1.60. y1.37 ) ) Ž0.56.

K. Wakelinr Research Policy 26 (1998) 829–841

PROD y0.57 ) ) Ž0.28. 0.05 Ž0.12. 0.06 ) ) ) Ž0.02. 0.14 10y2 ) ) ) Ž0.24 10y3 . y0.21 10y7 ) ) ) Ž0.40 10y8 . 2.47 ) ) Ž1.20. y1.36 ) ) Ž0.56.
R&D y0.50 ) ) Ž0.27. 0.06 Ž0.12. 0.06 ) ) ) Ž0.02. 0.14 10y2 ) ) ) Ž0.24 10y3 . y0.21 10y7 ) ) ) Ž0.39 10y8 . 1.02 ) ) Ž0.13. y1.26 ) ) Ž0.56.
)
Significant at 10%.
))
Significant at 5%.
)))
Significant at 1%.
McFadden’s R 2 : USER s 0.10; PRODs 0.12; R&Ds 0.12.
Loglikelihood: USER sy228.5; PRODsy226.8; R&Ds 289.3.

Table 4
The unrestricted truncated models, dependent variables PX
a KSA AS SIZE SIZE 2 INN ULC FIRM
InnoÕators N s 348
USER y0.27 ) ) ) Ž0.10. 0.27 ) ) ) Ž0.06. 0.02 ) ) ) Ž0.005. 0.97 10y5) ) ) Ž0.17 10y5 . y0.71 10y10 ) ) ) Ž0.17 10y10 . y0.46 Ž0.38. 0.58 ) ) ) Ž0.20. y0.001 Ž0.002.
PROD y0.27 ) ) ) Ž0.10. 0.26 ) ) ) Ž0.06. 0.02 ) ) ) Ž0.005. 0.94 10y5) ) ) Ž0.16 10y5 . y0.71 10y10 ) ) ) Ž0.17 10y10 . y0.25 Ž0.31. 0.62 ) ) ) Ž0.20. y0.001 Ž0.002.
R&D y0.27 ) ) ) Ž0.10. 0.27 ) ) ) Ž0.06. 0.02 ) ) ) Ž0.005. 0.92 10y5) ) ) Ž0.16 10y5 . y0.66 10y10 ) ) ) Ž0.17 10y10 . y0.19 ) ) Ž0.09. 0.62 ) ) ) Ž0.20. y0.001 Ž0.002.

Non-innoÕators N s 346
USER y0.54 ) ) Ž0.26. 0.16 ) Ž0.09. 0.05 ) ) ) Ž0.01. 0.37 10y4 ) ) ) Ž0.13 10y4 . y0.38 10y9 ) Ž0.23 10y9 . y1.76 ) Ž0.99. y0.83 ) Ž0.46.
PROD y0.72 ) ) Ž0.29. 0.17 ) Ž0.09. 0.05 ) ) ) Ž0.01. 0.38 10y4 ) ) ) Ž0.14 10y4 . y0.44 10y9 ) ) Ž0.24 10y9 . 0.32 Ž0.85. y0.66 Ž0.46.
R&D y0.46 ) ) Ž0.23. 0.14 ) Ž0.08. 0.05 ) ) ) Ž0.01. 0.31 10y4 ) ) ) Ž0.13 10y4 . y0.26 10y9 Ž0.23 10y9 . y0.80 ) ) ) Ž0.27. y0.85 ) ) Ž0.43.

Innovators: s USER s 0.47Ž0.05.; s PRODs 0.48Ž0.05.; s R&Ds 0.47Ž0.05.. Loglikelihood: USER s 26.7; PRODs 25.0; R&Ds 30.5.
Non-innovators: s USER s 0.27Ž0.01.; s PRODs 0.27Ž0.01.; s R&Ds 0.27Ž0.01.. Loglikelihood: USER s 46.6; PRODs 46.1; R&Ds 47.8.

837
838 K. Wakelinr Research Policy 26 (1998) 829–841
for the non-innovators and negative but not signifi-
cant for the innovators. The positive relationship for
the non-innovators indicates a possible skill effect
for those firms: firms with higher average salaries
are characterised by higher skills which in turn in-
creases the probability of them exporting. The skill
effect is not found for the innovating firms.
Ž2. Unit labour costs are negatively related to the
probability of exporting for the non-innovating firms,
indicating that cost considerations play some role in
their export performance with higher cost firms less
likely to export. For the innovating firms, unit labour
costs are positively related to the probability of
exporting. This positive sign may indicate that inno-
vating firms export higher quality goods which are
less price sensitive.
One explanation for these surprising results for
the innovating firms is that many smaller innovative
firms are not exporting when similar sized non-in-
novating firms are. These non-exporting innovative
firms have neither higher unit labour costs than the
exporters, nor lower average salaries. It is possible
that many innovative firms with high average salaries
Žand thus high skills. and low unit labour costs are
choosing not to enter export markets, leading to the
surprising signs on the labour variables.
Ž3. The results for the sector-level innovation
variables also show some variation over the two
groups. As a result of the selection method, the two
groups of firms come from the same sectors. Any
differences between the groups are thus due to dif-
ferences in the importance of those sector character-
istics to the firms, rather than to the characteristics of
different sectors. The production of innovations in
the sector has a positive impact on the export proba-
bility of both groups of firms, while the use of
innovation has no significant role. The R & D expen-
diture of other firms in the sector has a positive
impact on non-innovators, and a much smaller effect
which is not significant on innovators. This is despite
the balancing of the sample into the same sectors.
The R & D expenditure of other firms has potentially
two different roles: R & D reflects greater competi-
tion in the sector as firms spend R & D to improve
products and lower costs; or the R & D of other firms
in the sector may spill over to firms providing a
positive externality. The non-innovative firms appear
to experience the positive spillovers from R & D
expenditure, indicating that non-innovative firms in
high R & D spending sectors are more likely to ex-
port.
Section 5.3 investigates the propensity to export
of the firms instead of their probability of exporting.
5.3. The propensity to export
The second model, for the propensity to export of
the exporting firms alone, was then estimated using
each of the three innovation variables. The restricted
model including both the innovating and non-in-
novating firms together was rejected relative to the
unrestricted models in all three cases; confirming the
differences between the two groups of firms. The
results for the three unrestricted models are given in
Table 4.
These results show important differences in the
capital intensity, unit labour costs, SIZE 2 and inno-
vation variables for the two groups of innovating and
non-innovating firms.
Ž1. The capital intensity variable, KSA, is posi-
tively and significantly related to exports for all the
firms, but the size of the coefficient is larger for the
innovating firms. As technical change is embedded
in capital equipment, so that capital embodies past
innovations, we would expect it to increase the
propensity to export of the innovating firms more
than the non-innovators.
Ž2. The quadratic term of the size variable is
negative for both the groups but not always signifi-
cant for the non-innovators and with a lower coeffi-
cient. Unlike the probit model already discussed, the
negative relationship between increasing size and the
level of exports affects innovating firms more than
non-innovators. Overall, however, the inverted U-
shaped relationship between exports and firm size
can still be seen.
Ž3. While the average wages variable is positively
related to exports for both groups of firms, there is a
noticeable difference in the unit labour cost variable.
The latter is positive and significant for the innovat-
ing firms, and negative and significant for the non-
innovators, as with the probability of exporting. The
explanation advanced for the probability of exporting
Žthat there are innovative firms choosing not to
export. can no longer apply as we are considering
only the sub-group of firms which export. It appears
 K. Wakelinr Research Policy 26 (1998) 829–841
that innovative firms’ exports are less-sensitive to
cost than those of non-innovative firms. One expla-
nation for this result is that innovating firms export
higher quality goods and are thus less likely to be
adversely affected by high unit labour costs.
The skill-effect for the average salary variable is
now found for both groups of firms, indicating that
the negative relationship found for innovating firms
in Table 3 is due to the firms which do not export.
These firms do not appear to be not exporting due to
lack of skills, or innovations, or excessively high
unit labour costs; rather their decision to stay in
domestic markets may be a question of preference.
For the larger innovative firms which do export, high
unit labour costs are clearly no deterrence to success
in export markets, perhaps as these large firms com-
pete on characteristics other than price.
Unlike the probit model the choice of innovation
variable affects the results. The production of inno-
vations ŽPROD. is not significant for either group.
The production of innovations appears to increase
the probability of exporting but does not affect the
propensity to export. Sector R & D expenditure, on
the other hand, is negative and significant for all
firms. The positive spillover effects found when
considering the probability of exporting are no longer
present. On the contrary, the R & D expenditure of
other firms seems to indicate rivalry between firms
in terms of competition. The use of innovations is
also negatively related to the propensity to export for
the non-innovating firms. There is no evidence of
positive spillovers of innovation on export perfor-
mance. The sensitivity of the results to the innova-
tion variable used indicates that the results of studies
which rely exclusively on R & D data Žsuch as those
of Hirsch and Bijaoui, 1985; Kumar and Sid-
dharthan, 1994. may differ from those presented here
and in other papers using actual innovation counts.
To summarise, the models give some consistent
results. Innovating firms should be studied separately
from the non-innovating firms, as the determinants
of the probability of exporting and the propensity to
export vary significantly for these firms. Unit labour
costs have a negative effect on non-innovating firms’
export behaviour, but have a positive one on innovat-
ing firms’ exports, indicating that the former are
more price sensitive than the latter. There seems to
be a positive role for skills in affecting the export
839
behaviour for all firms, and firm size also plays an
important role in exports.
6. Conclusions
This paper has analysed the role of firm specific
characteristics in influencing trade behaviour at the
firm level. Particular emphasis has been placed on
the innovation characteristics of the sector, and the
firm, and the impact this has on firm behaviour. By
considering the relationship between trade and inno-
vation at the firm level, the paper has a number of
advantages over more aggregate studies. It is only at
the firm level that the influence of firm character-
istics can be separated from those of the sector. By
balancing the two groups of firms by their sectors of
origin, the analysis abstracts from differences in
sectors and concentrates on the role of firm charac-
teristics.
Examining trade behaviour at the firm level al-
lows an assessment of the diversity among firms, and
particularly between innovating and non-innovating
firms. As the results show, there are considerable
differences in the reactions of innovating and non-in-
novating firms, and in the determinants of their
export behaviour. One of the main results to emerge
from the analysis is that innovating and non-innovat-
ing firms behave differently both in terms of the
probability of exporting and the level of exports.
This implies that the capacity to innovate fundamen-
tally changes the behaviour of the firm.
Given their size, innovating firms are less likely
to enter export markets than non-innovating firms, as
shown by the descriptive statistics and the sign on
the dummy variable for being an innovator. Large
innovative firms are likely to export, and the more
innovations they have had, the higher the probability
that they will enter export markets. However, smaller
innovative firms with one or two innovations are less
likely to export, and more likely to service the
domestic market alone than the equivalent non-in-
novative firms. The most likely explanation for this
is that the cost of entering export markets is higher
for smaller firms, which thus prefer to stay in domes-
tic markets. In the case of innovative firms they may
have advantages in that domestic market which re-
duces the necessity to search out new markets. As
840 K. Wakelinr Research Policy 26 (1998) 829–841

the same relationship is not found for larger more The sector level R & D expenditure came from
innovative firms this may relate to the fixed costs of First Release, CSO Number 188, December 1993,
entering foreign markets which are higher for smaller ‘Business Enterprise Research and Development
firms. 1992’.
The implications of the results for government Manufacturing was defined as between 2100 and
policy are considerable. First, it appears that the 4992 of the 1968 SIC classification.
production of innovations at the sector level im-
proves the probability of all firms exporting, both Sector Ž1980 SIC classification. Number of
innovative and non-innovative. The innovative envi- firms
ronment can thus act as an encouragement to export. Metal manufacturing and 18
This relationship is not confirmed for the propensity goods Ž22 and 31.
to export, where no positive spillovers were found. Non-metallic manufacturing 12
Second, low unit labour costs appear to play little Ž24.
role in export behaviour at the firm level for innovat- Chemical and man-made 32
ing firms. Innovating firms with higher unit labour products Ž25 and 26.
costs are both more likely to export and have a Mechanical engineering Ž32. 100
higher propensity to export. In addition, higher aver- Office and data machinery Ž33. 10
age wages have a positive impact on export be- Electrical and electronic 54
haviour for both innovating and non-innovating firms, machinery Ž34.
possibly reflecting the importance of skills in export Transport Ž35 and 36. 22
behaviour. Instruments Ž37. 12
Food, textiles, leather, footwear, 40
timber, paper and printing Ž41–47.
Acknowledgements Rubber, plastics, other manufacturing 20
9Ž48 and 49.
I would like to thank Nigel Pain, Martin Weale Total 320
and two anonymous referees for their helpful com-
ments.

Appendix A. Data sources
Data on innovations come from ‘Innovation in the
UK since 1945’ Science Policy Research Unit, Uni-
versity of Sussex, data obtained from the ESRC
archive, Essex.
Additional firm balance sheet data, total sales,
exports, total capital, average remuneration, the
number of employees came from two sources: Datas-
tream provided the data for the quoted firms Žinclud-
ing firm level R & D expenditure., and ICC the data
on non-quoted firms via Datastream.
The sector level data, total UK manufacturing
output, sector output, the number of enterprises per
sector, the sector concentration ratio, all came from
the Central Statistical Office, Report on the Census
of Production 1991 Summary Volume, PA 1002,
from Business Monitor.
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