Privatization’s effects on r & d investments

In this chapter, we theoretically model the impact of the State as a sole or principal shareholder on the firm’s commitment to invest in R&D activities and to protect the results of the innovation process. Drawing on the theoretical arguments introduced in Chapter 1 as to the objectives of principal, the management incentive system and the amount of information available to principals and agents, we hypothesize that privatization processes negatively affect firm-level R&D investments, and positively affect appropriability concerns and patent productivity. To test our hypotheses, we analyze a panel-data set of 35 companies, operating in 11 different industries, fully or partially privatized through public offering in 9 European countries during the period 1980-1997. First, we compare pre- and post- privatization R&D efforts and patent quantity and quality. We then explore possible differences emerging between the privatization announcement and its actual implementation, relatively to trends in the precedent and in the following periods. We argue that, over this time-window, a significant restructuring can affect the allocation of resources to R&D activities and their organization, given the priority to maximize the value of the company to increase the financial returns for the Government from the public offer. Finally, we use a fixed effects regression model to control for alternative explanations (e.g. industry effects, scale effects) in assessing R&D and patent behavior of firms facing privatization. The results support our hypotheses, showing a significant reduction of R&D intensity at the firm level, controlling for industry and time effects. Differences emerge with regard to the amount of shares being transferred, to the level of technological opportunities and to the degree of liberalization of the industry. At the same time, our findings document an increase in patenting by privatized companies. Moreover, using citations to measure patents quality, we find that the rise in patenting activity following privatization is not accompanied by a decline in the quality of the awards, which remains constant or even increases in some cases. These two results combined suggest an improvement in terms of R&D productivity of privatised firms. We conclude by discussing the implications of these results for future research and for public policy decisions to proactively address possible under investment risks in R&D accompanying privatization process.