Reviving demand-pull perspectives: The effect of demand uncertainty and stagnancy on R&D strategy

This paper looks at the effects of demand uncertainty and stagnancy on firms’ decisions to engage in R&D activities and the amount of financial effort devoted to such activities. In so doing, the paper makes a number of contributions to the innovation literature: first, it adds to the recently revived debate on demand-pull perspectives in innovation studies by examining demand-related (lack of) incentives to invest in innovation. Second, it complements the emerging literature on barriers to innovation by focusing on demand-related obstacles rather than on the more frequently explored financial barriers. Third, it analyses whether experiencing uncertainty or lack of demand is a sector-specific feature. Firms active in high- or low-tech manufacturing or in knowledge intensive or low-tech services might be more or less dependent on demand conditions when deciding to perform R&D. We find that uncertain demand and lack of demand are perceived as two quite distinct barriers. While demand uncertainty does not seem to constrain R&D efforts, the perception of a lack of demand has a marked impact on not only the amount of investment in R&D but also the likelihood of firms engaging in R&D activities. We interpret this evidence in terms of the specific phase in the innovation cycle in which decisions to invest in R&D are taken. Sectoral affiliation does not seem to be a factor in demand conditions, supporting the conjecture that positive expectations regarding market demand are structural and necessary conditions that have to be satisfied for all firms prior to their investing in R&D.