Foreign Knowledge Has an Important Role to Play for Swiss Businesses

New technological developments and innovative products and services are essential for Swiss businesses if they want to compete on an international level. It is therefore important to gain a better understanding of which factors make businesses more innovative, and how to incentivize innovative behaviour.

In a new study, Spyros Arvanitis, Florian Seliger and Martin Wörter investigate the influence of technological knowledge – particularly international knowledge – on business performance. The authors differentiate between two types of knowledge capital stock¹ : Stock generated by researchers abroad, and stock built up exclusively by researchers in Switzerland. On this basis, they looked at three questions:

1- On the whole, do increased stocks of knowledge capital influence the innovation performance (sale of new, innovative products) and productivity of a business?

2 - Do these effects differ for foreign and domestic knowledge?

3 - What are the channels through which the two categories of knowledge capital can affect productivity

Increased R&D activities abroad

Foreign subsidiaries of Swiss businesses are an important source of foreign knowledge. According to the Federal Statistical Office (FSO), foreign R&D activities by Swiss businesses have increased rapidly since the mid-80s. This is largely down to the pharmaceutical industry. According to information from the KOF Innovation Survey, the proportion of research-oriented businesses engaged in R&D activities abroad increased from 10% to 18% between 2002 and 2015.

However, the proportion of all companies involved in R&D in Switzerland fell from around 30% to 14% during the same period. Development of R&D is heading in opposite directions in Switzerland and abroad – a rather worrying trend for Switzerland’s future as a centre for research. Other sources of innovation-relevant knowledge are cooperations (in the form of joint ventures or agreements, for example) and R&D commissions.

Positive effect only where employees are highly qualified

During an initial phase, the authors investigated whether and to what extent the two types of knowledge capital influence the commercial success of new, innovative products. They found that greater knowledge capital also significantly increased sales of new or modified products for businesses in Switzerland. However, this overall effect is driven by international rather than domestic knowledge capital.

Furthermore, the authors demonstrated an overall positive and significant link between knowledge capital and the productivity of a business. However, no significant effects were revealed for foreign knowledge capital. International knowledge capital stock has a significant positive effect if the business is able to bring out a new, innovative product with relatively high sales. By comparison, the positive effect of domestic knowledge stock depends on highly qualified staff. That means: A positive effect on productivity only exists when both elements are present in a business – own knowledge stock and staff with good formal training.

The size of the business is another important aspect. Significant positive effects of international knowledge capital are only seen for large companies with more than 250 employees. Large businesses usually have “complementary assets” (such as international marketing and distribution channels, etc.), as well as more financial resources, which have a positive effect on commercial exploitation of innovative products. Furthermore, bigger business are more likely to be internationally oriented, so they benefit from fixed cost degression – i.e. they can spread high, fixed R&D costs over a potentially larger output.

These findings are relevant for technological policy. They show that foreign knowledge capital contributes to the innovative capacity and productivity of domestic businesses. The following measures could therefore be sensible from an economic policy perspective:
- Support for international cooperations for developing new technologies
- Facilitated access to foreign markets, especially for smaller businesses
- Creation of points of contact and support offers for Swiss businesses in Switzerland and abroad
- Public monitoring of technology clusters

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¹ Knowledge capital was measured based on the number of patented inventions (patent applications). The authors differentiated between inventions that were generated with the help of foreign researchers (foreign knowledge capital), and inventions with no foreign contribution (domestic knowledge capital). The required information was taken from patent specifications, some of which contain information on the researchers’ residential addresses. The authors also made use of the KOF Enterprise Panel. It provides information about various company characteristics and performance indicators.