Labor unions may affect innovation negatively

An interesting paper by Daniel Bradley, Incheol Kim, and Xuan Tian got recently published in Management Science (link to the SSRN version):

We examine the causal effect of unionization on firm innovation. To establish causality, we use a regression discontinuity design relying on “locally” exogenous variation generated by elections that pass or fail by a small margin of votes. Passing a union election leads to an 8.7% (12.5%) decline in patent quantity (quality) three years after the election. A reduction in R&D expenditures, reduced productivity of current and newly hired inventors, and departures of innovative inventors appear plausible mechanisms through which unionization impedes firm innovation. Our paper provides new insights into the real effects of unionization and has important implications for policy makers when they alter union regulations or labor laws to encourage innovation.

The study is a nice example of a regression discontinuity design (RDD), which is used in order to identify causal effects. If you would just compare patenting of unionized firms with those that aren’t your analysis would be plagued by all sorts of unobservable confounders. For example, unionized firms could differ substantially in terms of organizational culture or product market strategies that likewise affect firms’ innovation activities.

The RDD avoids this problem by comparing only those firms in which union elections have been very close; e.g. 52% vs. 48% in favor of unionization or 49% vs. 51% against. Such small margins in terms of employees voting for or against unionization are most likely not the result of the above mentioned unobserved confounders but rather of chance alone. If that is the case, an RDD is able to eliminate the selection effect and any remaining, statistically detectable differences are directly attributable to a causal impact of unionization.

A drop of 8.7% in patent counts (12.5% when looking at citation weighted patents) is sizeable and the authors do a great job in exploring, both empirically and theoretically, the likely reasons for such a large effect. A couple of years ago we established a works council at ZEW. I hope that this didn’t have the same impact on our innovativeness too…


Why Tobit models are overused

In my field of research we’re often running regressions with innovation expenditures or sales with new products aon the left-hand side. Usually we observe many zeros for these variables because firms do not invest at all in R&D and therefore also do not come up with new products. Many researchers then feel inclined to use Tobit models. But frankly, I never understood why. Continue reading Why Tobit models are overused

Networking For Innovation

Olav Sorenson from Yale published a new NBER working paper called “Innovation Policy in a Networked World”. The essay is quite interesting because it reviews insights we got from social network theory (no, not Facebook, although you could analyze Facebook with the same tools) and puts them into context for designing effective policy measures to stimulate innovation. Continue reading Networking For Innovation

Innovation on (government) demand?

Next week we will organize the 7th ZEW/MaCCI Conference on the Economics of Innovation and Patenting in Mannheim and the program will be great. We will have Bronwyn Hall from Berkeley and Pierre Azoulay from MIT as keynote speakers. I’m definitely looking forward to hear them speak.

Myself, I will present a new project on the relationship between public procurement and innovation. In brief the research question is the following. Continue reading Innovation on (government) demand?

Cardwell’s Law

While reading Joel Mokyr’s newest book I came across an older paper of him, which I found very interesting. It is about what Mokyr calls Cardwell’s law*— the empirical regularity that “most societies that have been technologically creative have been so for relatively short periods”. Throughout economic history successful countries in terms of innovation and economic growth have usually lost their competitive edge pretty soon again and were overtaken by others. Continue reading Cardwell’s Law

Do Most Companies Even Try to Innovate Anymore?

This post first appeared on (Harvard Business Review, 14 April 2017).

We are living in the age of the superstar firm. Companies like Samsung, Google, or BMW—the top players in their respective industries—are prospering. Yet economic growth remains sluggish in many parts of the world. The reason for that paradox, as the OECD has warned, is that the productivity gap between firms at the global frontier and those lagging behind has widened. Continue reading Do Most Companies Even Try to Innovate Anymore?

How effective are patents really?

Today, an interesting NBER working paper by Deepak Hegde from NYU Stern and coauthors got published:

We provide evidence on the value of patents to startups by leveraging the random assignment of applications to examiners with different propensities to grant patents. Using unique data on all first-time applications filed at the U.S. Patent Office since 2001, we find that startups that win the patent “lottery” by drawing lenient examiners have, on average, 55% higher employment growth and 80% higher sales growth five years later. Patent winners also pursue more, and higher quality, follow-on innovation. Winning a first patent boosts a startup’s subsequent growth and innovation by facilitating access to funding from VCs, banks, and public investors.

Continue reading How effective are patents really?