Spatial dependence in the regional innovation performance of small- and medium sized enterprises : A spatial econometric approach to identifying the drivers of SME innovation in European NUTS regions

Sammanfattning: Being a crucial sector in Europe’s economy, small and medium-sized enterprises (SMEs) require involvement in innovative activities to perpetuate their competitiveness. Nevertheless, European-wide funding programs that aim to foster innovation at the regional level have been criticized for not being adequately tailored to SMEs’ innovation patterns and dynamics. Against this background, this thesis sheds light on the innovation processes occurring among SMEs by explaining their innovation performance as a function of potential innovation drivers. Mindful of the relevance of geography in innovative activities, this thesis investigates whether SME innovation performance in a European region is subject to spatial dependence.   Firstly, the presence of spatial dependence is determined using Moran’s I to indicate the magnitude and significance of spatial autocorrelation in the level of SME innovation performance. In the second step, a cross-sectional spatial regression analysis examines the drivers of the innovation performance while accounting for spatial autoregressive processes. This analysis follows a bottom-up approach proposed by Elhorst (2010) to specify the suitable model for SME product and business process innovations. Additionally, the Generalized Spatial Two-stage Least Squares (GS2SLS) method accounts for heteroskedasticity of any form in the disturbances. This paper finds evidence for the presence of spatial dependence in the region’s level of SME product and business process innovation performance, implying that regions with high levels of SME innovation performance tend to be surrounded by regions with high levels and vice versa. The results from the regression analysis indicate that SMEs draw from non-R&D activities and collaboration, which offset the disadvantages these firms face. Moreover, while public and private R&D expenditures still play a role in product innovation, at least partly, the involvement in R&D activities is less important for SMEs introducing process innovation. Based on the results obtained, this paper proposes policy adaptations allowing a better environment for SMEs to participate in innovative activities.