On the dynamics of product and process innovations - A bivariate random effects probit model

Based on a stochastic dynamic model of a firm’s optimal innovativebehavior we derive a simultaneous equation system for product andprocess innovations with intertemporal spillover effects. We estimatevarious versions of the model with dichotomous innovation data at thefirm level by using a bivariate dynamic random effects probit model. Thedata set, provided by the Ifo-Institute, covers the period between 1981and 1989 and includes 586 firms of the West German manufacturing sector.It turns out that the firms probabilities of product and processinnovations depend positively on dynamic spillover effects even if onecontrols for firm size, market concentration, demand expectations, laborcost, unobserved heterogeneity and potential endogeneity of theexplanatory variables.