THE ECONOMIC RECORD, VOL. 84, NO.

267, DECEMBER, 2008, 434448

ECONOMIC OriginalUK SURVIVAL XXX FIRMEconomic Ltd NEW 2008 1475-4932 0013-0249 Economic Record ECOR Article Oxford,The RECORD Blackwell Publishing Society of Australia

Innovation, Technological Conditions and New Firm Survival*

HIELKE BUDDELMEYER Melbourne Institute of Applied Economic and Social Research; Centre for Microeconometrics, University of Melbourne, Melbourne, Victoria, Australia; and IZA Bonn

PAUL H. JENSEN and ELIZABETH WEBSTER Melbourne Institute of Applied Economic and Social Research; Centre for Microeconometrics; Intellectual Property Research Institute of Australia, University of Melbourne, Melbourne, Victoria, Australia

High neonatal mortality is one of the most salient facts about rm performance in the industrial organisation literature. We model rm survival and examine the relative inuence of rm, industry and macroeconomic factors on survival for new vis--vis incumbent rms in Australia. In particular, we focus on how the intensity of innovation in each industry relates to rm survival. Our results imply that while new rms thrive in risky and innovative industries, they are also more susceptible to business cycle effects such as changes in the rate of growth of industry prots and the availability of equity nance.

* Thanks are due to Alfons Palangkaraya, Jongsay Yong, Paul Gretton, Jonathan Pincus, John Blanchette, Martin Richardson, two anonymous referees, and research staff from the Productivity Commission for comments on this article. Authors thank Debbie Cowley, Sean Applegate, Paul Mills and Jason Baker for vital assistance in collating the data. The authors would also like to thank participants at Entrepreneurship, Institutions and Policies: The 2007 Ratio Colloquium for Young Social Scientists in Stockholm; the 2007 European School of New Institutional Economics Conference in Cargese, Corsica; and the Economic and Social Research Institute, Dublin for helpful comments. Views expressed represent those of the authors. All errors remain the responsibility of the authors. This paper has been funded through an ARC Linkage Grant (LP0348635), which includes the partners IBISWorld, the Australian Bureau of Statistics, the Productivity Commission, Austrade and the Victorian Department of Treasury and Finance. JEL classications: C41, L10, O31 Correspondence: Paul H. Jensen, Melbourne Institute of Applied Economic and Social Research, Level 7, Alan Gilbert Building, The University of Melbourne, Vic. 3010, Australia. Email: pjensen@unimelb.edu.au

The most palpable consequence of entry is exit. Paul Geroski (1995, p. 435) I Introduction High neonatal mortality is one of the most salient empirical regularities about rm performance (Dunne et al. 1988; Baldwin & Raquzzaman, 1995; Geroski, 1995; Caves, 1998). However, like Thompson (2005), we argue that there is no intrinsic reason why rm survival should be related to age. It is not age per se that determines survival, but other factors that may be correlated with age, such as managerial experience, ownership structure and capital constraints. In this article, we examine the role that rm, industry and economy-wide factors play in shaping new-rm survival. The particular focus of this study is the relationship between rm-level and industry-level innovation and the relative survival rates for new and incumbent rms. Our argument is that new rms, being more nimble and exible, have a comparative advantage when the dominant form

434
2008 The Economic Society of Australia doi: 10.1111/j.1475-4932.2008.00509.x

2008

NEW FIRM SURVIVAL

435

of competition in the market is through innovation.1 Tripsas (1997) coins incumbent disadvantage as a core rigidity that arises from years of low-level innovation and selection-induced inertia. Although the idea of new rm adeptness is not novel (many others, at least since the conception of entrepreneurial/routinised technological regimes by Nelson and Winter (1978), have made this point), the way both rm-level innovation and industrylevel innovation is measured in this article is quite different. For rm-level innovation, we create four conceptually distinct time-varying constructs: high-risk innovation investments (proxied by patent applications), high-risk innovation capital (proxied by patent stocks), low-risk innovation investments (proxied by trademark applications) and low-risk innovation capital (proxied by trademark stocks). For the industry-level measure of innovation, we construct a lagged time-varying index of innovation, broadly dened, in each 2-digit manufacturing and 1-digit non-manufacturing industries using commonly-available data such as R&D expenditure and intellectual property (IP) usage. The resultant index captures the amount of innovative activity in an industry and is reective of the underlying technological conditions. A novel feature of our industry-level innovation construct is that it uses a continuous variable rather than the simple binary variables that have typically been used in previous studies, such as whether the industry is low/high technology or whether it is in a formative/mature stage of its lifecycle. Through this new approach, we are able to shed light on the following important question about industry dynamics: Are newborn rms more likely to survive than incumbent rms in industries characterised by rapid technological change? To answer this question, we model rm survival and compare the effect of rm-level and industry-level innovative activity on newborn rms vis--vis incumbent rms, ceteris paribus. We use a exible agedeath relation, which is estimated through a piecewise-constant exponential hazard rate model. A comprehensive dataset is used to construct timevarying rm-level, industry-level and economy-level
1 Sometimes it is argued that incumbent rms are less inclined to compete than young rms because they have invested more (sunk) costs into the prevailing technologies (Tripsas, 1997). However, this should not stop them successfully competing through innovation if and when innovation becomes the prevailing form of competition in the market.

explanatory variables. The data are drawn from an unbalanced panel of approximately 260 000 Australian companies that were alive at some stage during the period 19972005. The presence of numerous cohorts of new rms and time-varying covariates enables us to disentangle the inuence of aggregate macroeconomic uctuations from rm-specic and industry-specic effects. Our main ndings are that new rms are more sensitive than incumbent rms on a number of fronts. First, they are more susceptible to variations in economic conditions: a decline in past industry prots, for example, is associated with a larger (adverse) effect on survival rates for new rms than for incumbent rms, ceteris paribus. Second, new rms are much less likely to survive in industries characterised by high levels of competition (as proxied by the gross entry rate in an industry). This result reects the often noted conclusion (partly reected in Geroskis opening quote) that in industries where there is a lot of turbulence (i.e. high entry/exit), it is the new rms that are more likely to come and go. However, we also nd that new rm survival rates are higher (relative to incumbent rms) the more likely the industry is to compete through innovation. Such a result supports the notion that, in industries characterised by rapidly-changing technological conditions, new rms nd it easier to nd a market niche than incumbent rms (as in Porter, 1979). For new rms, technological change provides opportunity. This nding is largely consistent with other studies that have examined the effects of technological conditions on rm survival (such as Audretsch, 1991; Audretsch & Mahmood, 1995; Agarwal, 1998; Agarwal & Audretsch, 2001; Sarkar et al., 2006). Overall, our ndings seem to support the notion that new rms are the engines of the gale of creative destruction since they enter into technologically dynamic industries with new innovations and displace the dominant technologies of the incumbent rms.2 In the next section of this article, we present the empirical model of rm survival. In Section III, we describe the construction of the dataset used to analyse the determinants of rm survival, including
2 Other studies, such as Gans et al. (2002), also emphasise the role of new entrants in accelerating the gale of creative destruction. However, they argue that this effect varies across industries. In some industries, new entrants play a key role in displacing incumbent technologies, whereas in other industries they reinforce the market power of the dominant rms.

2008 The Economic Society of Australia

436

ECONOMIC RECORD

DECEMBER

the linking of rm-level data on company registration/ deregistration, IP and accounting variables with other industry-level and economy-level characteristics. Section IV then contrasts the estimations for new and incumbent rms. Section V concludes. II Empirical Model The probability of rm death is modelled using a hazard rate model. The hazard h is the instantaneous probability of death for rm i at time t conditional on having survived up to that point and can be written as:
hi (t x t ) = h0 (t )exp(x i,t) ,

(1)

where h0(t) is the baseline-hazard function and x i,t is a vector of (time-varying) explanatory variables which impose a proportional characteristicspecic shift on the baseline hazard. Since the mortality rate is dened with respect to time, h0 is written as an unspecied function of time. In our analysis, company age in years is the unit of timeanalysis. Our hazard function is therefore discrete and represents the probability that a company will die sometime between age t and t + 1 (conditional on having survived up until age t) given a set of rm, industry and macroeconomic conditions measured at time t. We use a piecewise-constant specication for our baseline hazard because it is a exible specication which avoids potential mis-specication bias resulting from choosing an inappropriate parametric specication for the baseline hazard. In summary, the probability of a rm dying as it ages is estimated as a exible (baseline) prole, generic to all rms, that is proportionally shifted up or down depending on the values of the (calendar-time varying) explanatory variables. We estimate the empirical model specied in Equation (1) for two different types of rms: NEWBORN and INCUMBENT rms. We dene NEWBORN rms to be any rm that was rst registered as a company on or after the rst date of our period of analysis, 31 March 1997, and before the last date of our analysis, 31 March 2005. INCUMBENT rms are dened as any rm whose date of registration as a company precedes 31 March 1988 and for whom we observe information during the period 19972005.3 The
3 Although we do not observe rms before the start of our observation window, we do know exactly how old they are when rst observed. Furthermore, the fact that they are observed implies that the event of interest, rm death, has not yet taken place. Hence, our data exhibits a classic case of left truncation. In addition, as is common in duration data,

two categories of rms, new and incumbent, are non-overlapping samples.4 The 9-year window that we have used to dene an incumbent rm ensures that, conditional on company age, we have a clear separation between companies that are classied as NEWBORN or INCUMBENT. Although we lose some information in doing so (those companies that were born between 31 March 1988 and 31 March 1997), the benet of dening the sample in this way is that we avoid the situation where a company born in 1996 is arbitrarily classied as incumbent, while a company born in 1997 is classied as new. Separating the new from the incumbent rms in this manner should make it apparent that this is not a model of industry dynamics. Rather, it is an empirical model aimed at deepening our understanding of the forces that shape rm survival. (i) Dependent Variable Our dependent variable is the hazard rate: the probability that this is the last year the company is registered with the Australian Securities and Investment Commission (ASIC), conditional on having survived up to this point.5 (ii) Firm-level Explanatory Variables The empirical literature identies a number of factors affecting rm survival which we classify as rm-level, industry-specic or macroeconomic factors. These form the basis of our explanatory variables, which are described below. The rst rm-level variables included in the empirical model relate to innovation. For each rm in each year, we use patent applications as a measure of high-risk (or new-to-the-world) investment and
our observations are right censored since for the majority of rms death will not have been observed prior to the end of our observation window. Our estimation accounts for both the left truncation and right censoring. 4 That is, 9-year-old rms exist in the new rm sample but not in the incumbent sample. 5 Since we do not observe the reason for deregistration, we cannot distinguish between deregistrations that occur as a result of business failure and those that occur for personal reasons or as a result of a merger. Other Australian data suggests that business exits occurring as a result of takeover/merger or sale account for approximately 21 per cent of all exits (Bickerdyke et al., 2000). However, anecdotal evidence suggests that companies that acquire a new rm through takeover often do not deregister the purchased rm. To the extent that this is true, the fact that we do not directly account for mergers will not bias our estimates.

2008 The Economic Society of Australia

2008

NEW FIRM SURVIVAL

437

trademark applications as a measure of low-risk (new-to-the-rm) investments. These variables are denoted as PATENTAPPS and TMAPPS, respectively. As these variables are measured as applications (rather than grants), they are measures of the ow of IP (i.e. they reect current innovation investments). Such innovations may or may not be granted by the patent and trademark ofce (IP Australia), and may or may not turn out to ll a niche in the market, so they embody both legal and market uncertainty. Patent applications are more expensive than trademark applications, partly because the threshold for patent eligibility (novelty and non-obviousness) is much harder for the applicant to demonstrate than the test for trademark eligibility (distinctiveness).6 The average cost of a standard patent application depends on the complexity of the application, but it has been estimated by IP Australia to be in the vicinity of $A6000 to $A10 000 (including attorney fees). A trademark application, in contrast, costs less than $A1000 (depending on the number of classes7 involved). Hall (1987) found evidence that the survival is affected by the stock of knowledge and other intangible assets that are proxied by accumulated R&D expenditures. We extend this idea and derive innovation capital measures from past patent and trademark grants that are still in-force. These PATENTSTOCK and TMSTOCK variables are calculated using renewal data and, therefore, capture more economically-valuable innovations since IP owners must outlay monies in order to renew IP rights.8 At IP Australia, annual patent maintenance (i.e. renewal) fees are $A250 for Years 59, $A400 for Years 1014, and $A900 for Years 1519. The total cost associated with maintaining a patent for the full 20-year period in Australia (which is the maximum legal life) is roughly $A8000, which is comparable with the cost in other developed nations. Although the annuities required to renew a patent are not substantial, the fact that assignees must pay money
6 As a corollary, it follows that a patent application is also much harder to examine than a trademark application. 7 A trademark class refers to the sector for which you wish the trademark to apply. For example, you may apply for a trademark in perfume, jewellery and watches, which would equate to three different classes. 8 Alternatively, the patent stock variable could be measured using patent citations as weights. However, IP Australia does not provide citation data so we use renewals to construct the patent stock variable.

to renew patents suggests that the underlying invention is likely to have some commercial value.9 Trademarks cost $A250/class to register and are initially valid for 10 years: they can be renewed in perpetuity at a cost of $A300/class for 10 years. We experimented with several ways to represent both IP ow and stock variables involving dummy and continuous variables. Since the specic form did not substantially alter the results, we only present one form, which is log of one plus the number of applications or years in-force.10 The fact that we measure innovative activity using IP data introduces a possible endogeneity issue into our empirical model when rms realise they are about to die and lower innovative activity. This is the so-called shadow of death (Griliches & Ragev, 1995; Almus, 2004). To the extent that this is true, we may underestimate the true effect of innovation on the likelihood of rm survival. To attenuate this effect we use lagged measures of both patent and trademark applications (but not of the stock variables since these predominantly reect historical decisions).11
9 The total cost of renewing a patent might be quite substantial, however, if the patent is renewed in multiple jurisdictions since maintenance fees apply in each jurisdiction. Although we do not have data on the proportion of patent grants that are renewed to full term in Australia, Hegde and Sampat (2007) show that less than half (44 per cent) of all patents issued in 1992 by the USPTO were renewed to full term. 10 Adding one to the number of applications/stocks results in the log being zero for observations with no applications/stocks. All of the IP variables have been aggregated to the ultimate parent company level and then matched to each company. Accordingly, a parent company and a subsidiary will have the same IP values for any given year. 11 We argue that patent and trademark stocks are not subject to the shadow of death because they have different costrisk proles from their respective applications. Patent and trademark stocks represent innovative activities that were instigated some years ago but have proven successful enough that the rm renews its legal title over the property. As such, they are similar to plant and equipment that the rm keeps maintaining because they contribute to the production of goods in demand. These sorts of assets are more proven and embody lower risks than new assets. In addition, renewal fees are modest compared to the costs of the original R&D behind a patent or trademark. Hence, we expect that a rm that has good reason to fear an impending nancial crisis will most likely cancel new R&D projects rather than choose not to renew an asset that is returning good prots.

2008 The Economic Society of Australia

438

ECONOMIC RECORD

DECEMBER

We also included a number of rm-level dummy control variables in the model. The rst is LARGE, which is included here to indicate the size of the company, since rm size (or start-up size) has consistently been shown to be an important determinant of survival (Dunne & Hughes, 1994; Audretsch et al., 2000; Segarra & Callejon, 2002). One plausible explanation for this result is that liquidity constraints decrease with rm size. This seems plausible in Australia since there is evidence suggesting that the vast majority (approximately 75 per cent) of all business expenditure on innovation is nanced by internal resources (see Australian Bureau of Statistics, 2003) and newborn rms are less likely to have such nancial reserves. Most studies use employment (normalised by the minimum efcient scale) to measure rm size, but these data are not available to us here, so we simply use a dummy variable to differentiate large rms from other rms. LARGE takes the value 1 if the rm has 200 or more employees or assets worth more than $A200m, and 0 otherwise. Ownership structure of the rm has also been shown to play an important role in shaping rm survival (see e.g. Heiss & Koke, 2004). To account for this, we include the following dummy variables. PRIVATE is a dummy variable that indicates whether the company is privately owned. Two further dummies indicate whether the company is part of a family as either a subsidiary (SUBSIDIARY) or a parent of subsidiaries (PARENT). The missing category is independent rms. These variables are included as Audretsch and Mahmood (1995) and Audretsch (1995) have previously argued that the hazard rate should be systematically lower for rms that are subsidiaries of incumbent rms presumably because the parents managerial experience (and other tacit knowledge) can be transferred to its subsidiary. (iii) Industry-level Explanatory Variables We include a variable called GROSSENTRY, which describes the competitive environment in which a rm operates. For each industry in each year, this is calculated as the number of entrants divided by the number of incumbents in the companys 2-digit ANZSIC industry (i.e. it is a gross entry rate). This time-varying variable is included in the model on the basis that the number of new entrants in an industry exerts direct competitive pressure on incumbents and, therefore, affects survival. As a consequence, industries with high levels of entry are also associated with high levels of exit (see e.g. Geroski, 1995), so it is

important to control for the level of gross entry in the industry when estimating the likelihood of exit. It has also been argued that high levels of entry could reect low barriers to entry in an industry (Segarra & Callejon, 2002). Our main focus for this study is a time-varying composite measure of the innovativeness of the industry, INDINNOV. This annual index is based on a set of common, and often publicly-available data, comprising R&D expenditure; R&D employment; labour productivity; patent, trademark and design applications; and a survey measure of organisational change in each 2-digit manufacturing and 1-digit non-manufacturing industry.12 We weight each component according to the major types of innovation expenditure in each industry using data from the ABS 2005 Innovation Survey, as described in the Appendix. The construction of this variable is designed to capture a broad cross-section of innovative activities, including all types of process, product and organisational innovations in each year over the period 19972005.13 The index is meant to reect the innovativeness of the rms environment. This variable is lagged 1 year to avoid any inuence of rm survival on industry measures of innovativeness in the estimation. Many other studies have attempted to capture the effects of technological conditions (or variants on this such as technological regimes, technological activity and technological intensity), including Agarwal (1998), Agarwal and Audretsch (2001), Audretsch and Mahmood (1995) and Sarkar et al. (2006). Each study has had to deal with limited data available for constructing a plausible measure of industry innovation. Previous attempts, such as Audretsch and Mahmood (1995), used a simple cross-sectional calculation of the number of innovations by total employment in 1 year to proxy industry innovativeness. Other empirical approaches have used simple dichotomous variables, such as whether the industry is high/low technology or whether the industry is in a formative/mature stage of its lifecycle. For instance, Agarwal and Audretsch (2001) use the net entry of rms in an
12 The innovation index excludes activity from nontrading government organisations. Because R&D data were not available, it was not possible to construct a meaningful innovation index for Agriculture, Forestry and Fishing; Accommodation, Restaurants and Cafes; Education; or Government Administration and Defence. 13 Since we do not directly observe process innovation, labour productivity has been included in the INDINNOV index to proxy its effect.

2008 The Economic Society of Australia

2008

NEW FIRM SURVIVAL

439

industry to determine whether an industry is in a mature stage of its development (which is reected by negative net entry). This is combined with a proxy for whether the rm is in a high/low technology industry based on the level of R&D employment in the industry. More recent studies, such as Sarkar et al. (2006), use a similar approach to capture the effects of the innovative environment (as dened) on rm survival. Although much progress has been made in measuring technological conditions, we believe there is still some way to go. One of the problems with the existing measurement of the phenomenon is that it often forces rms (or products) to be in either one state of development (formative) or another (mature). In doing so, they grossly simplify the complexity of industry evolution: industries do not really move from one discrete stage of their lifecycle to another; rather, they are in a constant state of ux. If nothing else, the detailed case-study work exemplied by Klepper and Simons (1997) has shown us that, indeed, there are powerful evolutionary forces at work in industries and there are certain stages of development that are analogous to a lifecycle.14 What is needed to capture these effects is a time-varying continuous variable. That is exactly what we have done here. The INDINNOV variable captures the underlying innovative conditions in the industry as they change over time: industries with higher levels of innovativeness are associated with higher levels of (broadlydened) technological change. Allowing technological conditions to change over time is an important facet of this variable since other studies purporting to explain evolution include time-invariant constructs. While our 1-digit and 2-digit industry denitions do not necessarily correspond exactly to the rms market, to the extent that they are more precise than economy-wide measures of innovation they have information content. There is also clear evidence that within-industry innovation correlations of our innovation index are much higher than between-industry innovation correlations.15
14 An important difference is that unlike animals, rms and industries may be innitely lived. While products may come and go, most industries (and some rms) may be with us forever. Therefore, it is important not to take the analogy too far. 15 The average correlation of the innovation index between the 2-digit manufacturing industries is 0.354 (with a standard deviation of 0.36). The average correlation of the innovation index between the 1-digit manufacturing industries is 0.034 (with a standard deviation of 0.36).

One of the costs of focusing on systematic interindustry effects is that it becomes difcult to capture rich rm-level characteristics that have previously been shown to shape survival: factors such as start-up size (Mata & Portugal, 1994; Geroski, 1995; Mata et al. 1995; Caves, 1998) and minimum-efcient scale (Dunne et al. 1988). We use dummy variables at the 2-digit manufacturing and 1-digit non-manufacturing industry level to control for these unobserved time-invariant industry characteristics. (iv) Macroeconomic Explanatory Variables The likelihood of rm survival is also affected by conditions in the market place: for instance, business cycle effects and the buoyancy of demand at the macroeconomic level (see Boeri & Bellman, 1995). To capture this effect, we include two timevarying measures from the demand side: GDP being the change in gross domestic product (GDP); and GOS being the change in industry gross operating surplus. Both variables have been lagged 1 year to exclude any possibility of endogeneity. In addition, we include an index of the Australian stock market, STOCKMKT, to reect the ease of access to external equity. III Data and Descriptive Statistics Our dataset is an unbalanced panel of 261 510 companies (observed over the period 19972005), which was created by linking rm-level registrations/deregistrations from ASIC16 with data on patents and trademarks from IP Australia and accounting data from a proprietary dataset, IBISWorld.17 In order to determine each companys industrial classication, the data were then matched (by company name) to a listing of all companies in the Yellow Pages. Our unit of analysis was the Australian Company Number (ACN). Companies that changed names or addresses during the period 19972005 were treated as continuing entities. A parentsubsidiary concordance for each year was determined using ASIC share ownership les. Since we observe the population of companies in Australia, the age prole is diverse: companies range in age from newborn to 124 years old. We were able to match 67 per cent of the population of companies across to the Yellow Pages. Non-matches are partly a result of the fact
ASIC maintains a complete record of all company registrations and deregistrations in Australia. 17 The match was done on company name.
16

2008 The Economic Society of Australia

440

ECONOMIC RECORD

DECEMBER

Table 1 Company Birth and Death Rates, by Year 19972005 Year 1997 1998 1999 2000 2001 2002 2003 2004 Average Stock (number) 229 942 243 909 257 626 265 883 268 050 269 542 273 088 277 064 261 510 Birth rate (% of stock) 9.9 8.7 7.9 7.0 5.1 5.4 5.7 5.6 6.8 Death rate (% of stock) 1.8 1.9 3.2 2.8 4.1 3.9 3.6 3.6 3.1 Death rate of new rms (% of stock) 0.03 0.50 1.83 2.16 3.95 3.89 3.53 3.35 2.91

that the Yellow Pages lists trading names while ASIC lists company names. Thus, any non-matched bias is most likely to affect industries where company names differ from trading names (e.g. retail shops and restaurants). However, there is no reason to believe that our matched sample varies systematically from the population. Finally, we also linked the dataset across to macroeconomic variables on the change in GDP and prots.18 Thus, the nal complete linked dataset provides rm-level, industry-level and economy-level variables, most of which are time-varying.19 To understand the pattern of entry and exit over the period, we took the stock of matched companies registered in ASIC in 1997 and, for each subsequent year up to 2005, we tracked incumbents, newborn rms and deaths. Table 1 presents a summary of the stock of companies in each year and the relevant birth and death rates. Our data indicates that the death rate ranged from 1.8 to 4.1 per cent (with an upward trend), while birth rates ranged from 5.1 to 9.9 per cent (with a downward trend). Although the birth and death rates are negatively correlated, the net birth rate is always positive over the period of study.20 Among most developed
ABS Cat. rbabf01.xls; rbabf07.xls; 8140.0.55.002. The only variables that are time-invariant are dummy variables like LARGE and PRIVATE. 20 The correlation between the aggregate exit and aggregate entry rates is 0.94. At the industry level, the correlation is 0.73. Once macroeconomic conditions are taken account of, however, this negative correlation disappears. As we will see in the multivariate setting, entry and exit are in fact positively correlated, ceteris paribus.
19 18

countries, average rm death rates have been found to vary from 3.3 to 8.2 per cent of rms in a given market over a single year (Cable & Schwalbach, 1991; Agarwal & Gort, 2002). Part of the relatively low Australian company death rate can be attributed to the strong macroeconomic climate in our sample period; however, it is difcult to make precise comparisons across countries due to the many and varied denitions of rm adopted.21 The trend decline in the birth rate and rise in the death rate most likely reects the tapering of the business cycle since the mid1990s. Table 2 presents average descriptive statistics on rm-level (e.g. size, ownership structure, and patent/trademark stocks/ows), industry-level (e.g. gross entry rate and industry innovativeness) and macroeconomic variables (e.g. stock market, demand and prot conditions). For both new and incumbent rms, the descriptive statistics were calculated as averages for each variable over the period 19972005. Broadly, we nd that new rms are less likely to be large or a public company, but more likely to be an independent rm, compared with incumbent rms. At the same time, new rms have considerably lower patent/trademark ows (applications) and stocks than incumbent rms. The distribution of entrants across industries is not dissimilar from the distribution of
21 The denition of a rm can vary according to whether it includes micro rms (sole traders or very small entities), unincorporated businesses, subsidiaries separately from parents and establishments rather than ownership units.

2008 The Economic Society of Australia

2008

NEW FIRM SURVIVAL

441

Table 2 Descriptive Statistics for New and Incumbent Firms, 19972005 Average Patent applications Trademark applications Patent stock (days) Trademark stock (days) Large Private Subsidiary Parent Gross entry rate Industry innovativeness Stock market index Change in GDP Change in industry gross operating surplus Industry distribution Agriculture, forestry Mining Manufacturing Electricity, gas and water Construction Wholesale trade Retail trade Accommodation, cafes and restaurants Transport and storage Communication services Finance and insurance services Property and business services Government administration Education Health and community service Cultural and recreation services Personal and other services Industry total New rms 0.004 0.026 0.035 0.491 0.004 0.976 0.015 0.040 5.500 0.324 33.646 3.669 0.046 0.014 0.004 0.244 0.001 0.120 0.025 0.073 0.017 0.039 0.005 0.031 0.304 0.000 0.000 0.072 0.021 0.028 100.0 Incumbent rms 0.015 0.060 0.235 1.551 0.027 0.933 0.226 0.023 5.218 0.325 31.560 3.690 0.038 0.024 0.011 0.300 0.001 0.103 0.037 0.084 0.012 0.039 0.002 0.034 0.240 0.000 0.000 0.056 0.031 0.026 100.0 Total 0.009 0.043 0.131 0.999 0.016 0.953 0.126 0.031 5.351 0.325 32.645 3.680 0.042 0.020 0.007 0.274 0.001 0.111 0.032 0.079 0.014 0.039 0.003 0.033 0.270 0.000 0.000 0.064 0.026 0.027 100.0

Note: This is the total of the 9 2-digit manufacturing industries. GDP, gross domestic product. Sources: ABS, IP Australia, IBISWorld data.

incumbent rms. Since the distribution of new and incumbent rms varies slightly across calendar years, the averages for the economy-wide variables are not the same. IV Results and Analysis The results from the estimated hazard functions are presented in Table 3. We present two different models: Model 1 is a constrained model that excludes the innovation index while Model 2 is an unconstrained model. Both Models were estimated using the piece-wise constant exponential hazard function with company age in years as the unit of

time analysis.22 This means that we are modelling, say, the probability of a rm being deregistered by age 20 given that it has survived at least 19 years. Figure 1, which gives a graphical representation of the propensity to die at each company age, shows the clear positive relation between mortality and youth.
22 As a robustness check, we also estimated all three models using a standard Cox regression. As the signs and statistical signicance of the explanatory variables were consistent across all three models, we only present the piecewise constant exponential hazard function results here.

2008 The Economic Society of Australia

442

ECONOMIC RECORD

DECEMBER

Table 3 Hazard Function Estimates, New and Incumbent Firms Dependent variable: Firm death (or deregistration) Explanatory variables (a negative coefcient implies a lower propensity to die) PATENTAPPS (f ) (Lagged) TMAPPS (f ) (Lagged) PATENTSTOCK (f ) TMSTOCK (f) LARGE (f) PRIVATE (f ) SUBSIDIARY (f) PARENT (f ) GROSSENTRY (i) INDINNOV (i) (Lagged) STOCKMKT (e) GDP (e) (Lagged) GOS (i) (Lagged) Industry dummies Number of observations 0.136*** (34.86) 0.106*** (11.21) 0.214** (2.31) Yes 780 641 0.059*** (15.26) 0.134*** (14.30) 0.026 (0.28) Yes 729 508 Model 1 Model 2

New rms 0.143 (0.77) 0.342*** (4.62) 0.025 (1.20) 0.042*** (8.42) 1.609*** (5.49) 0.128** (2.37) 0.475*** (8.31) 0.318** (2.52) 0.146*** (19.12)

Incumbent rms 0.393*** (4.82) 0.239*** (5.77) 0.046*** (5.02) 0.022*** (7.49) 0.940*** (10.14) 0.489*** (10.66) 0.289*** (8.13) 0.699*** (9.41) 0.034*** (4.52)

New rms 0.116 (0.63) 0.340*** (4.57) 0.028 (1.35) 0.041*** (8.17) 1.686*** (5.51) 0.123** (2.25) 0.493*** (8.55) 0.291** (2.30) 0.148*** (19.02) 0.298* (1.92) 0.136*** (33.97) 0.105*** (10.84) 0.246** (2.52) Yes 755 664

Incumbent rms 0.390*** (4.68) 0.250*** (5.88) 0.046*** (4.95) 0.023*** (7.60) 0.913*** (9.81) 0.500*** (10.67) 0.292*** (8.06) 0.698*** (9.22) 0.031*** (3.99) 0.629*** (4.11) 0.063*** (15.57) 0.136*** (14.17) 0.071 (0.72) Yes 703 299

Notes: Absolute value of Z-statistics in brackets. ***, ** and * denote signicance at the 1, 5 and 10 per cent levels, respectively. (f), (i) and (e) indicate whether the variables are measured at the rm-level, industry-level or economy-level, respectively. Apart from the LARGE and PRIVATE dummy variables, all co-variates are time-varying. Time of analysis is time since company birth (in years). The innovation index excludes activity from non-trading government organisations. In addition, because of the nature of their R&D data, it was not possible to construct a meaningful innovation index for Agriculture, Forestry and Fishing; Accommodation, Restaurants and Cafes; Education; and Government Administration and Defence. Accordingly, the number of observations in Model 2 is fewer than for Model 1.

Each model is estimated separately on the subsample of incumbent rms and the subsample of new rms. The dependent variable in all models is the hazard rate. The (time-varying) explanatory variables are listed in the rst column; along with information on whether the variable was measured at the rm-level (f), industry-level (i) or the economylevel (e). Since this is a hazard function, a positive (negative) coefcient implies a positive (negative)

effect on the probability of rm death (i.e. deregistration from ASIC). The analysis of our results focuses on the relative importance of the explanatory variables in determining the rate of survival for new rms vis--vis incumbent rms. The results are intuitively appealing: although there is no formal deductive model presented here, the empirical model was constructed inductively so we have strong a priori

2008 The Economic Society of Australia

2008

NEW FIRM SURVIVAL

443

Figure 1 Smoothed Hazard Estimate

beliefs about the sign and signicance of each explanatory variable. In general, we would expect, for example, that aggregate economic uctuations affect rm survival. and this is exactly what we nd: increases in the growth of GDP and prots generally increase the likelihood of rm survival. We also nd that industry turbulence exists: in those industries characterised by high levels of gross entry, there is also a lot of rm exit and the effect is particularly pronounced for new entrants. Our main ndings can be grouped into three areas. First, we examine the effect of rm innovative behaviour on new rm survival vis--vis incumbents. Specically, do the four rm-level measures of innovative activity high-risk innovation investments, high-risk innovation capital, low-risk innovation investments and low-risk innovation capital have different impacts on new and incumbent rm survival rates? In Model 1, while the coefcient on patent applications for new rms is insignicant, the effect of patent applications on incumbent rms death is positive and signicant: in other words, patent applications are correlated with incumbent rm exit. However, this does not mean that patent applications per se cause the rm to exit: rather, it reects the fact investment in new-to-the-world technology is risky and may not nd a niche in the market. The lack of signicant effect of patent applications on new rm survival most likely reects the very low number of new rm applications (see Table 2). By contrast, trademark applications (which reect current investments in brand and marketing capital) appeared to strongly increase the likelihood of survival for both new and incumbent rms.

The situation regarding patent and trademark stocks was similar to that for applications except that patent stocks were associated with an improved chance of survival for incumbent rms. As we know from other empirical research (e.g. Harhoff et al., 1999), the distribution of patent value is highlyskewed: most patents have no economic value and a tiny proportion have enormous economic value. Such a nding is consistent with our results since we show that it is not until the lter of the market has been applied that we observe any strong, systematic benets of holding a patent. This reinforces the importance of being able to separate current investments, many of which will not be successful, from past, successful investments. The coefcient on TMSTOCK is negative and signicant for both types of rm, but about twice as large in absolute size for new rms, which implies that having low-risk innovation capital is more important for new rms than incumbents. Our second set of ndings relates to the intensity of innovation in the industry. Are newborn rms more/less likely to survive in industries where competition occurs though rapid technological change and what does this tell us about the gale of creative destruction? This is an important empirical issue on which there is evidence suggesting that new rms (entrants) have a substantial advantage over established rms (incumbents) in industries where there is technological turbulence (for a recent example see Sarkar et al., 2006). Although there is little evidence to explain why this observation holds, the received wisdom is that new rms are small and are able to use their agility to nd a niche in rapidly-evolving markets and gain a foothold in the market. While existing rms do have an incentive to destroy existing technology, perhaps the incentive to be proactive is much weaker than that for new entrants. To test this hypothesis, we estimate the model both with and without our index of industry innovativeness. As shown in Model 2, the coefcient on the INDINNOV variable differs between new and incumbent rms. For incumbents, rapidlychanging technological change (under our broad meaning) increases the likelihood of exit, while it has a weak effect on reducing the likelihood of exit for new rms. In the presence of rapidlychanging technology, it appears that new rms do comparatively well ceteris paribus. For new rms, technological change brings opportunity. This has important implications for how we explain industry evolution since it implies that new entrants enter turbulent industries (presumably carrying

2008 The Economic Society of Australia

444

ECONOMIC RECORD

DECEMBER

new technology), and survive. Thus, it is not the case that new rms enter such an industry, stay a short time and then exit (the revolving door). Rather, technological progress relies on entrants to come up with innovations, enter the market and displace (or at least offer an alternative) to existing technology. In and of itself, this is not a new nding since other studies have previously argued that entrants play a pivotal role in the gale of creative destruction. However, our study takes an important step forward: we introduce a measure of technological conditions that is time-varying. An important limitation of the Sarkar et al. (2006) study is that ... our measure of technology intensity is timeinvariant, in that each industry is characterised as highly technology-intensive, or not, for its entire lifecycle (p. 536). One potential limitation of our approach is that there is a prima facie case for endogeneity of the INDINNOV variable, if we assume that new rms are on average more innovative than incumbent rms. In this case, any industry-year in which new rms have a higher survival rate, for whatever reason (compared with incumbents), will also appear to be more innovative. However, we can rule out this potential problem in our model since INDINNOV is lagged and thus relates to the state of the industry in the year prior to the rms death. Furthermore, the relatively low number of rms that exit (relative to the stock of rms) suggests that the innovativeness of the industry as a whole would be rather insensitive to rm exit. Yet, there is one more theoretical mechanism through which rm survival could affect industry innovation, even if industry innovation is lagged to avoid the obvious endogeneity trap: unobserved heterogeneity. To the extent that this unobserved heterogeneity is time-invariant, we have controlled for this through the use of industry dummy variables (which in essence are industry xed effects), leaving only time-varying unobserved heterogeneity. Consequently, the most plausible, systematic reason why a new, innovative rm will have a higher probability of surviving is because it is a more successful innovator in its environment.23
There are three possible causes of the association between the intensity of industry innovation and differential rates of new versus incumbent rm exit: (i) the rms least able to compete in an innovative environment incumbents are more prone to exit; (ii) the exit of the least innovative rms in an industry incumbents causes the industry to appear more innovative on average;
23

With respect to the measure of industry competition, the relative coefcients on GROSSENTRY showed that new rms are less likely to survive in industries where a lot of competition arises from new rms entering the industry, ceteris paribus. This is in line with our a priori expectations since GROSSENTRY is indicative of low barriers to entry. The third and nal area of analysis relates to the importance of aggregate economic uctuations on the likelihood of rm survival. In order to understand the importance of these cyclical factors on survival, we separately identied three factors: the growth in market demand, the growth in industry prots and the growth in the stock market. All three variables were included in each of the models and show robust results. Our rst, and arguably most important, result is that new rms are considerably more sensitive to uctuations in past industry prots and external equity conditions than established rms. Increases in the proliferation of past prots and external equity appear more likely to nurture newborn and incumbent rms. Despite the fact that our results are generally intuitively appealing, some puzzles remain. For
or (iii) a third independent factor is causing an industry to become more innovative and more incumbent rms to exit (note: the hypothesis that new rms are less able to compete in an innovative environment than incumbents does not t the regression results). We are arguing that (i) is the most likely explanation of the observed result. Point (ii) is also placisible. However, given that less than 5 per cent of rms exit in any given year, exit is very unlikely to have a discernable, instantaneous effect on the innovativeness of the industry as a whole. The point is that causation from exit to industry innovation is unlikely to be powerful enough to be the only cause of the association. It merely adds a cumulative causation effect to the existing effect. Point (iii) is also possible: there may be an unobservable industry phenomenon at work. However, if this is the case, this unobservable factor must be correlated with the industry innovation index to produce the statistical estimates we get in the hazard equations. Given that the innovation index varies considerably over time and across industries, this would have to be a very powerful independent factor. It would most likely be an underlying cause of industry innovation (such as technological conditions or exposure to the tradable sector). In this case, we have to argue that rm exit is caused not by innovative competition (which is hypothesis (1)) but by the underlying determinants of innovation (e.g. technological conditions and exposure to the tradable sector). The causal relationship must be quite independent of industry innovation. We argue that this possibility is remote.

2008 The Economic Society of Australia

2008

NEW FIRM SURVIVAL

445

example, most of the literature tends to nd that the ownership structure matters; for instance, that newborn rms that are subsidiaries of existing rms (de alio births) have systematically better survival rates than newborn rms that are independent entities (de novo births) primarily because of initial endowments and other market entry conditions (see Khessina and Carroll (2002) for a discussion). However, we nd evidence that is contrary to this. One plausible explanation may be that existing rms spin-off risky parts of their business and let them sink or swim. While there may be some transfer of tacit knowledge to the new rm, the parent ultimately refuses to underwrite the risk associated with the edgling rm. V Conclusions Much research has been dedicated to describing and understanding the powerful evolutionary forces that shape product markets and industries. In the process, much has been learnt about the causes and effects of entry, growth and exit of rms. In this article, we take a new look at the role that rm, industry and macro-specic factors play in shaping rm survival. Our particular focus is on the roles the rms innovative activity and the innovativeness of its industry play in determining survival. At the rm level, we include innovation with different risk proles to consider how market uncertainty affects rm survival. Adopting such an approach enables us to overcome some of the selection bias that has often been encountered in other studies which nd that successful innovation causes survival. While we nd, consistent with other studies, that young rms are more prone to early death, we also nd that new rms are more advantaged in certain contexts. Compared with incumbents, new rms stocks of low-risk capital is their major source of comparative advantage vis--vis incumbents. At the industry level, we develop the notion that the intensity of innovation has differential effects for entrants and incumbents. Although this idea is not novel (it forms the basis of Nelson/Winters technological regimes), we construct a novel time-varying index of the underlying technological conditions. We therefore improve upon previous studies that use simple binary variables to examine whether an industrys stage of development (formative/mature) inuences the likelihood of an entrant surviving (and thereby effectively destroying the incumbent technology). Our results are consistent with the thesis that new rms thrive in more uncertain and innovative climates

compared with their established counterparts. However, they are comparatively disadvantaged in industries where there is evidence of low barriers to entry. This apparent new-rm advantage in innovative industries may occur either because new rms are more agile than incumbents or because in less innovative industries, the conventional systematic forces in survival such as size and nancial assets dominate over the unpredictable forces associated with change and newness. We also nd that entrants are more sensitive to uctuations in past industry prots and the stock market. However, we cannot tell from our analysis whether those rms that fail do so because of their underlying lack of fundamentals, such as poor technical and market knowledge, industrial capabilities and sub-optimal scale of operations, or from short-term cash-ow problems. Nonetheless, there is no reason why during economic and stock market downturns rms are less intrinsically productive than during upswings. Accordingly, downturns will see the loss of rms that have more potential than those that survive during an upswing.
REFERENCES Agarwal, R. (1998), Small Firm Survival and Technological Activity, Small Business Economics, 11, 215 24. Agarwal, R. and Audretsch, D. (2001), Does Entry Size Matter? The Impact of the Life Cycle and Technology on Firm Survival, Journal of Industrial Economics, 59, 21 43. Agarwal, R. and Gort, M. (2002), Firm and Product Life Cycles and Firm Survival, American Economic Review, 92, 184 90. Almus, M. (2004), The Shadow of Death An Empirical Analysis of the Pre-Exit Performance of New German Firms, Small Business Economics, 23, 189 201. Audretsch, D. (1991), New-Firm Survival and the Technological Regime, Review of Economics and Statistics, 73, 44150. Audretsch, D. (1995), Innovation and Industry Evolution. MIT Press, Cambridge, MA. Audretsch, D., Houweling, P. and Thurik, A.R. (2000), Firm Survival in the Netherlands, Review of Industrial Organization, 16, 111. Audretsch, D. and Mahmood, T. (1995), New-Firm Survival: New Results Using a Hazard Function, Review of Economics and Statistics, 77, 97103. Australian Bureau of Statistics (ABS) (2003), Innovation in Australian Businesses, Cat no. 8158.0, Table 10.4, ABS Canberra, ACT. Baldwin, J. and Raquzzaman, M. (1995), Selection Versus Evolutionary Adaption: Learning and Post-Entry Performance, International Journal of Industrial Organization, 13, 50122.

2008 The Economic Society of Australia

446

ECONOMIC RECORD

DECEMBER

Bickerdyke, I., Lattimore, R. and Madge, S. (2000), Business Failure and Change: An Australian Perspective, Productivity Commission Staff Research Paper, Canberra. Boeri, T. and Bellman, L. (1995), Post-entry Behavior and the Cycle: Evidence from Germany, International Journal of Industrial Organization, 13, 483 500. Cable, J. and Schwalbach, J. (1991), International Comparisons of Entry and Exit, in Geroski, P. and Schwalbach, J. (eds), Entry and Market Contestability. An International Comparison. Blackwell, Oxford, UK. Caves, R.E. (1998), Industrial Organization and new Findings on the Turnover and Mobility of Firms, Journal of Economic Literature, 36, 1947 82. Dunne, P. and Hughes, A. (1994), Age, Size, Growth and Survival: UK Companies in the 1980s, Journal of Industrial Economics, 42, 115 54. Dunne, T., Roberts, M. and Samuelson, L. (1988), Patterns of Firm Entry and Exit in US Manufacturing Industries, RAND Journal of Economics, 19, 495 515. Griliches, Z. and Ragev, H. (1995), Firm Productivity in Israeli Industry 1979 88, Journal of Econometrics, 65, 175 203. Gans, J.S., Hsu, D.H. and Stern, S. (2002), When does StartUp Innovation Spur the Gale of Creative Destruction?, RAND Journal of Economics, 33, 571 86. Geroski, P.A. (1995), What do we know about entry?, International Journal of Industrial Organization, 13, 421 40. Hall, B. (1987), The Relationship between Firm Size and Firm Growth in the US Manufacturing Sector, Journal of Industrial Economics, 35, 583 606. Harhoff, D., Narin, F., Scherer, F.M. and Vopel, K. (1999), Citation Frequency and the Value of Patented Inventions, Review of Economics and Statistics, 81, 5115. Hegde, D. and Sampat, B.N. (2007), Examiner Citations, Applicant Citations and the Private Value of Patents, University of California Berkeley (mimeo, dated 10 September). Heiss, F. and Koke, J. (2004), Dynamics in Ownership and Firm Survival: Evidence from Corporate Germany, European Financial Management, 10, 16797. Khessina, O.M. and Carroll, G.R. (2002), Product Dynamics of de novo and de alio Firms in the World Wide Optical Disk Drive Industry, 198399, Presented at the Academy of Management Meetings, Denver. Klepper, S. and Simons, K.L. (1997), Technological Extinctions of Industrial Firms: An Inquiry into Their Nature and Causes, Industrial and Corporate Change, 6, 379 460. Mata, J. and Portugal, P. (1994), Life Duration of New Firms, Journal of Industrial Economics, 42, 227 45. Mata, J., Portugal, P. and Guimaraes, P. (1995), The Survival of New Plants: Start-Up Conditions and Post-Entry Evolution, International Journal of Industrial Organization, 13, 459 81. Nelson, S.G. and Winter, S. (1978), Forces Generating and Limiting Concentration Under Schumpeterian Competition, Bell Journal of Economics, 9, 524 48.

Porter, M.E. (1979), The Structure Within Industries and Companies Performance, Review of Economics and Statistics, 61, 214 27. Sarkar, M.B., Echambadi, R., Agarwal, R. and Sen, B. (2006), The Effects of the Innovative Environment on Exit of Entrepreneurial Firms, Strategic Management Journal, 27, 519 39. Segarra, A. and Callejon, M. (2002), New Firms Survival and Market Turbulence: New Evidence from Spain, Review of Industrial Organization, 20, 1 14. Thompson, P. (2005), Selection and Firm Survival: Evidence from the Shipbuilding Industry, 18251914, Review of Economics and Statistics, 87, 26 36. Tripsas, M. (1997), Unravelling the Process of Creative Destruction: Complementary Assets and Incumbent Survival in the Typesetter Industry, Strategic Management Journal, 18, 119 42.

Appendix The innovation index, which has been devised in collaboration with IBM, is constructed using the following equation: I = 1(RD) + 2(Patents) + 3(Trademarks) + 4(Designs) + 5(OrgMan) + 6(Productivity)

(1)

where j denotes the intensity of the j-th measure of innovative activities R&D intensity which is the mean of R&D expenditure as a proportion of valued added, R&D employment and R&D research staff as a proportion of total employment (RD); 24 patent applications per person employed (Patents); trademark applications per person employed (Trademarks); design applications per person employed (Designs);25 the mean of three survey questions on the extent of business resources devoted to organisational change (e.g. restructuring and changes in work practices), managerial change (e.g. new management techniques and enterprise bargaining) and the marketing of new products or processes (OrgMan); and value added per person employed (Productivity).26 Thus, there are six distinct components of the innovation index. Each data component is disaggregated by industry and year. These various quantitative measures of innovation are intended to represent innovative activities at different stages of the innovation pathway. Each of these items captures different points in the innovation lifecycle.

24 25

ABS 81040_table 16 and 18_ 2005_06. Revised series. IP Australia data. 26 ABS catalogue 5 20 614. week, 6 29 105.xls.

2008 The Economic Society of Australia

2008

NEW FIRM SURVIVAL

447

R&D data, for example, captures both the initial investment made in conducting research about a potential innovation and the subsequent expenditure made in conducting the trials necessary to ensure that the innovation actually works. Intellectual property, in contrast, reects the outputs of innovative activity: these are typically observed after the R&D process has been completed and new products (or modications of existing products) are launched on the market. The effect of combining these dimensions into an innovation index is to provide us with a much more comprehensive picture of the breadth and depth of innovative activity across all stages of the innovation pathway. To compute the index, we need to know the importance of each individual component since the components do not necessarily have equal importance. That is, we need to know the values of the weighting factors (the j s). ABS estimates of enterprises expenditures across the three types of innovation have been used as these weights (see Cat. no. 8158.02005; Table 2.14, column 4). Accordingly, our estimating equation is: I = 18.1(RD) + 12.2(Patents) + 12.2(Trademarks) + 6.1(Designs) + 16.2(OrgMan) + 35.1(Productivity). (2) According to the ABS, during 2004 and 2005, goods and services innovations comprised (1.8/3.7) or 48.6 per cent of all business innovations. We allocate this weight between R&D intensity, patent applications

per person employed, trademark applications per person employed and design applications per person employed since they are the major indicators of goods and services innovations. Within this group of goods and service related measures, we use equal weights since we have no information on their relative importance. The contribution to the index from operational process innovations is (1.3/3.7) or 35.1 per cent. We apply this weight to our measure of Productivity. The contribution from organisational and managerial innovations it is (0.6/3.7) or 16.2 per cent and we apply this to the mean of the three survey questions OrgMan. The index for each industry was calibrated to make 2005 equal 100 in each industry. To make the index comparable across industries, we weighted each industry by the proportion of businesses in each industry who reported that they had undergone one of three main innovative activities (as dened by the ABS). These weights are reported in Table 1.2 Cat. no. 8158.0 Column 2. Odd years of missing data were interpolated. R&D data was not available for Agriculture, Forestry and Fishing; Accommodation, Restaurants and Cafes; Education; or Government Administration and Defence. Data on patent, trademark and design applications (from IP Australia) were collated at the industry level by matching the name of the business to business listings. The survey data used to construct OrgMan has been collected annually at the Melbourne Institute since 2001 and includes approximately 200 valid responses a year. Table A1 presents descriptive statistics for the innovation index, disaggregated by industry.

2008 The Economic Society of Australia

448

ECONOMIC RECORD

DECEMBER

Table A1 Descriptive Statistics for Innovation Index by industry, 19972005 Industry Mining Manufacturing Food, beverage and tobacco Textile, clothing, footwear and leather Wood and paper product Printing, publishing and recorded media Petroleum, coal, chemical and associated product Non-metallic mineral product Metal product Machinery and equipment Other manufacturing Electricity, gas and water Construction Wholesale trade Retail trade Transport and storage Communication services Finance and insurance services Property and business services Health and community service Cultural and recreation services Personal and other services Minimum 37.94 26.77 30.70 25.46 35.01 28.83 25.72 31.90 20.87 20.42 31.37 23.30 23.32 20.47 25.52 18.47 28.83 26.04 23.02 30.96 24.19 Mean 50.81 34.21 34.64 31.43 49.31 36.16 30.92 36.86 31.25 30.09 48.77 28.90 32.62 22.49 31.41 32.69 45.33 30.42 31.06 40.20 29.97 Maximum 74.51 40.76 41.76 39.59 63.82 45.73 48.02 46.69 42.18 63.67 67.49 33.10 44.33 26.10 64.19 49.33 78.48 34.12 52.43 61.46 41.26

2008 The Economic Society of Australia