The Firm or the Region: What Determines the Innovation Behavior of European Firms?

Abstract: This paper examines the determinants of innovation behavior in European firms that are predominantly small and medium in size. The aim is to assess the absolute as well as the relative impact on innovation behavior of firm‐specific (i.e., internal) factors on the one hand and region‐specific characteristics on the other. Two hypotheses are advanced and tested. The first is that—contrary in part to some recent literature on regional and national innovation systems—firm‐specific determinants of innovation are more important than either region‐specific or external factors. The second hypothesis is that in high‐tech regions dominated by a small number of very large firms the innovation behavior of the smaller firms is more strongly influenced by regional factors than by factors internal to the firm. Whereas the first hypothesis is confirmed by the empirical results presented here, the second is not. Because firm‐level innovation determinants are of great importance in the European regions investigated in this study, we suggest that local innovation policy should focus more on the specific needs of small‐ and medium‐sized enterprises (SMEs) in particular regions than on improving regional conditions for innovation in general. The analysis is mainly based on data from the European Regional Innovation Survey (ERIS) and includes information from more than 8,000 interviews with manufacturing firms, service firms, and research institutions in 11 European regions. The logit analyses reported in this paper used data from some 1,800 manufacturing firms.