Research Report

The interrelationship between R&D, Innovation and Productivity: Evidence for micro-enterprises

In light of concerns about persistently weak productivity levels in UK firms, this study focuses on the relationship between investment in R&D and innovation activity and how this relates to business growth and productivity. The context for our investigation is micro-enterprises, i.e. employing up to 9 employees. These enterprises dominate the business landscape and in Northern Ireland account for almost 20 per cent of the workforce while also playing an important development role in the economy.
Drawing on survey data of nearly 10,000 micro-enterprises in 3 countries: the UK, Ireland and the US, our analysis emphasises the importance of R&D – an investment activity that is often considered not suitable for small enterprises - in supporting the relationship between innovation and productivity.
Some of our main findings include:
• Despite resource and capability constraints within micro-enterprises, that curtail their ability to undertake R&D, we find that investing in R&D has a strong and positive effect on enhancing the contribution of innovation to productivity and turnover growth. This result is consistent throughout all of our estimations, even though the actual effect might be varied across different types of industry.
• In order to explain the importance of R&D investment, we also estimate the innovation function with two innovation outcomes: product and process innovation. Our results indicate that investing in R&D activity is important not only for product/service innovation, but also for process innovation.
• R&D investment undertaken inside the enterprise is positively associated with both product innovation and process innovation, however R&D acquired externally has no significant relationship with product innovation but is positively related to process innovation.
• In line with previous studies, we identify a significantly lower level of productivity for Northern Ireland micro-enterprises.