The link between innovation and finance

This thesis comprises three essays on the relationship between innovation and finance. Although previous research has acknowledged the multi-faceted nature of innovation, this thesis unpacks its constituent elements, compares alternative drivers of innovation — focusing on the role of financial variables —, and explores when each of these drivers is important relative to the others. Evidence is based on survey data on Italian manufacturing firms over the years 1995-2003. The main contribution of this dissertation is to show how innovation at the firm level varies across different dimensions, documenting several robust empirical regularities, which must be accounted for. The first essay explores the determinants of various characteristics on the propensity to innovate in the Italian manufacturing sector. First, we concentrate on firms characteristics, and include in the study age of firm, size of firm, export shares of revenues and group membership. Second, we examine industry characteristics, such as type of industry in terms of technology level and market concentration. We also test the impact of characteristics of the firm's geographical area, including an indicator of financial development for the firm region. We finally extend our model including financial variables at the firm level in order to evaluate the association between profitability & risk and innovation. The second essay further examines the determinants of innovation, focusing on why firms develop product innovations rather than process innovation, or product and process innovations simultaneously. Empirical studies have highlighted the different impact of product and process innovation on various factors (such as, for example, international competitiveness, the level of employment and the types of skills used, and on the profit rate of firms). However, little is known from either a theoretical or an empirical point of view about the determinants of these different types of innovation. The third essay examines the question of whether access to credit is empirically more difficult for innovative firms than for those undertaking traditional investment projects. The idea that market financing of innovative projects is likely to encounter severe obstacles is not new. Indeed, it dates back at least to Schumpeter's defence of monopoly power since it not only guarantees that innovative firms can internalise the benefits of their innovations, but also provides funding for future innovative projects. Testing this proposition requires information on the innovative content of a given firm and on the limits to borrowing it encounters. Using the above mentioned survey data, we are able to identify credit constrained firms and use this information to make inferences on bank's lending strategies towards firms whose investment projects differ according to expected return and riskiness.

Du savetier au financier: la famille Borel, de Neuchâtel à San Francisco

The Borel Family From Neuchâtel to San Francisco : From shoemaker to banker Did you know that the Cable Car was owned by Swiss citizens? BACKTRACKING : PRIVATE FINANCING OF PUBLIC METROPOLITAN INFRASTRUCTURES Executive Summary: Did you know that one of San Francisco most famous fixtures, the Cable car, was owned by Swiss citizens? Through this detailed study of the Borel family, and its business and investment plans we will observe an example of private financing of public metropolitan infrastructures in the 19th Century and see if it can teach us lessons for tomorrow’s needs? TOPICS Looking at today’s infrastructures, one does not always remember how much work contracting firms had to accomplish in order to produce our contemporary standard of urban comfort . What is to be said of yesterday’s planners or engineers and the credit they deserve? We often hear stories of local events brought to epic proportions, but who are the responsible players who really proved the feasibility of regional infrastructures? Who actually did support, sponsor or finance such achievements? The present study is a trial to propose a new view over such apparently hidden business phenomenons. This research shows us an inspiring case-study of local entrepreneurs who gather key success-factors. The author concentrates on the economic aspect of infrastructure financing to which modern metropolitan society owes its specific urban growth. Contemporary challenges such as job creation, globalisation, technology transfer and local economic development are all interconnected to metropolitan development. XIXTH CENTURY METROPOLITAN INFRASTRUCTURES FINANCING Le Temps, 30th July 1998, D. Masmejan : «Alfred Borel, Auguste’s elder son, enters the finance world. He meets an extraordinary businessman fate. His understanding of the economic impact of the Californian Gold Rush allows him to seize the opportunity of the westward American expansionism. He sails to San Francisco in 1855 where he is the founder of the «Alfred Borel & Company», followed in 1856 by a Mortgage fund (the “Caisse Hypothécaire” bank). The same year sees the foundation of Credit Suisse in Zurich. Alfred Borel investment bank participates in very important infrastructure projects in California and elsewhere in the second half of the XIXth century. At first, its investment into the worldwide famous San Francisco Cable Car is marginal and then becomes overwhelming. Other investments include the “Los Angeles Railway Company” or the “United Railroad Company”, the San Francisco Waterworks, other banks and real estate.» DETAILED RESEARCH ALLOWING TO UNDERSTAND FINANCIAL DECISION MAKING The author reviews financial decision-making through personal correspondence and private accounting in some of those completely documented yearly archives. The «sixth Switzerland» well-connected to the Presbyterian «Huguenot International» cosmopolitan network leads us to detailed research and discoveries. The accounting of 1866 to 1884 goes through the 3rd and 4th San Francisco City real estate crises that the mortgage bankers Borel brothers had to endure. Alfred Borel faced the 2nd Californian real estate crisis (which resulted from the first loss of public interest in gold mines in the years 1854-1858). Then he went back to Switzerland after the death of his father and uncles in order to reconstitute the Swiss end of the pipe connecting his bank’s investors to the Borel family network. He left duty of the day-to-day San Francisco business to his younger brother Antoine after having set up asset management rules. Together both brothers explored new ways of diversifying the investment of the funds they are managing and place them into infrastructures networks. Taking shares «upstream» into equipment industries (for instance the wire works delivering the precise traction rope of cable cars) or other real estate assets, allowed them to guarantee superior interests payments to European investors or creditors in comparison with other financial markets. This anticyclical economic strategy set up their financial success that occurred during the 5th local economic recession, which coincides with the beginning of the big worldwide Victorian economic crisis (1880-1895). UNIQUE SPECIFICITY OF THIS RESEARCH This research process is rarely accomplished in engineering and architecture schools, construction and infrastructures institutes or research centers. The integrity of construction professionals precludes their questioning « where does the whole process originate from?». Builders ultimately considered themselves as «honest craftsmen» that have to dedicate their energy and resources to the proper technical execution of the clients wishes and orders. Customers duty is then to write the project’s specifications and thus to initiate its process. The author of this case-study demonstrates the feasibility of comparisons between similar structural change periods in the XIXth century and the years 1990-2000. Hence, a new theme of interdisciplinary studies for engineers could be implemented by promoting this systemic approach between urban infrastructure financiers, suppliers and users. Last but not least, the insider observations and outsider revelations which are featured in this work are seldom considered in an engineering historical approach. It is not often that an author with a contemporary outsider vision has access to family archives that entirely document bicentennial confidential banker correspondence.

EPFL1999

The sources of process innovation in user firms

Marcellus Bogers

Previous research has shown that innovation can have various sources and different forms. Innovation can thus be developed by different types of organizations or individuals for several reasons, and it can be related to product or process technologies. One particular stream of research has explored the role of users as a source of innovation. Examples of user innovations can be found in a variety of fields and settings such as mountain biking, snowboarding, open source software, scientific instruments, oil refining, semiconductor manufacturing, and even the World Wide Web. What these innovations have in common is that they were all initially developed by people or organizations that wanted to solve a specific need and benefited from using their innovation rather than selling it. A particular type of user innovator is a "user firm" which develops new or improved production technology for its own internal use. Such process innovation is characterized by determinants and outcomes, which are fundamentally different from for example product innovation. In particular, process innovation may be driven by learning-by-doing, which is a form of problem-solving or experimentation that takes place on the production floor rather than in research and development (R&D). However, the exact drivers and consequences of process innovation in general and learning-by-doing in particular are not yet fully explored. Therefore, the objective of this thesis is to increase the understanding of the antecedents and impact of process innovation in user firms by exploring the role of non-R&D activities and learning-by-doing. This thesis consists of four parts. Each of them addresses a specific aspect related to the sources of process innovation in user firms. The first paper particularly argues that process innovation relies on different learning mechanisms than product innovation. Using data from the Swiss Innovation Survey of the Swiss Institute of Business Cycle Research (KOF) at ETH Zürich, the paper shows which are the external and internal knowledge sources (related to R&D, manufacturing and marketing) that lead to innovation. The second paper further investigates R&D and non-R&D activities as sources of innovation and develops two measures to quantify the magnitude of non-R&D innovation. The results show that a substantial part of the firms develop innovations without R&D and that non-R&D process innovation has a very large impact on the overall cost reductions in the Swiss economy. In order to better understand the sources and attributes of process innovation in user firms, a questionnaire was conducted in a sample of Swiss manufacturing firms. Based on the results, the third paper shows the pervasiveness of major and especially minor process innovation. It also explores the sources of process innovation within the firms and identifies the practices related to the accounting, protection, appropriation, and monitoring of process innovation, which are often of an informal nature. The fourth paper investigates in more detail how such practices drive learning-by-doing and process innovation. The findings firstly show which complementary systems of practices are implemented in user firms to promote the innovative contribution of production floor workers and secondly how these practices drive learning-by-doing for either major or minor process innovation.

EPFL2009

Technological innovation strategy in natural resource based industries

Bettina Lynda Bastian

This thesis analyses innovation and technology strategy within a primary industry, notably the upstream oil and gas industry. Industries that exploit and produce finite natural resources are challenged by specific external risks that do not receive much attention from management literature otherwise, especially with regard to organizational innovation behaviour, and thus merit such research focus. On one hand, primary sector firms are confronted with exhaustible nature of finite natural resources. On the other hand, those finite natural resources are fixed to certain locations and companies have to operate in numerous countries in order to exploit resource deposits. In this context, they are often confronted with tremendous socio-political constraints that may have a negative impact on their businesses. This research work raises questions specific to natural resource based industries, notably (1) how can firms defend or even expand their competitive position when they are challenged by the depletion of their core resources? How can firms compensate for an exhaustible resource? (2) How do we evaluate contingencies like political risk for competitive advantage and what role does innovation play in this context? This dissertation takes the format of a "compilation thesis", in this case, three compiled articles. Within the first paper we focus on the resource based view (RBV), a central theoretical approach in management science, which explains how unique firm resources and capabilities contribute to value creation and lead to sustained competitive advantage. We1 apply the assumptions of RBV to the context of finite natural resources and ask if its analytical power is sufficient to explain competitive advantage of companies active in the primary sector, such as hydrocarbon and ore production. Paper 2 analyses how firms respond to geophysical constraints, such as natural resource depletion, and how these depletion issues affect organizational capability building and operational performance in terms of resource exploration and recovery. Paper 3 asks if political risk as external threat influences firm technology and innovation strategies. We find that time horizons of political risk play an important role and analyse why mid-and long term threats positively influence the development of technology and innovation strategies. The dissertation makes several important contributions. First, it contributes to our understanding of innovation and technology strategy within a natural resource based industry. Second, the idea that finite natural resources with their exhaustible nature are different than the "usual" resources investigated by RBV is novel. Third, the analysis also shows how RBV applies to natural resources extracting industries, and how RBV would gain in explicatory power if it was able to integrate factors like "geophysical constraints" and 'exposure to political risk' into the approach. Fourth, the thesis applies RBV and capability approaches to the specific context of primary industries, which is important as it helps to extend the frameworks' usefulness. Fifth, the current thesis combines political risk theory and research on innovation and technology management, and answers why political risk influences firm strategies, differentiation, and entry into new fields. ______________________________ 1 I am going to use the personal pronoun "we" to refer to first person's actions or opinions in this paper. I do so because I want to acknowledge the contributory effort of all who provided ideas and support. Nevertheless, any errors and omissions are completely my own responsibility.

EPFL2009

The sources of process innovation in user firms

Marcellus Bogers

EPFL2009

Technological innovation strategy in natural resource based industries

Bettina Lynda Bastian

EPFL2009

Du savetier au financier: la famille Borel, de Neuchâtel à San Francisco

EPFL1999