What do firms know? What do they
produce? A new look at the relationship
between patenting profiles and patterns
of product diversification
Giovanni Dosi∗
Institute of Economics, Scuola Superiore Sant’Anna
Marco Grazzi†
Department of Economics, University of Bologna
Daniele Moschella‡
Institute of Economics, Scuola Superiore Sant’Anna
September 14, 2014
1
Motivation
Innovation activity is a crucial input for firms to increase their productivity and boost
their sales, both on domestic and international markets (for empirical evidence see, among
others, Hall and Mairesse, 1995; Wakelin, 1998; Dosi et al., 2014). Product innovation
is one of the main forms of such innovative efforts: introducing a new good may benefit
the innovating firm in terms of market shares and also spread throughout the economy
new cost-saving production techniques when the new product is an intermediate good.
Moreover, by producing new goods, the firm can diversify its product portfolio and thus
∗
Piazza Martiri della Libertà, 33 56127, Pisa, Italy, tel: +39 050883343, email: [email protected]
Piazza Scaravilli 2, 40126 Bologna, Italy. tel: +39 0512098130, email: [email protected]
‡
Piazza Martiri della Libertà, 33 56127, Pisa, Italy, tel:
+39 050883290, email:
[email protected]
†
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exploit economies of scope and insure itself against demand shocks (Hirsch and Lev, 1971;
Montgomery, 1994). By innovating and producing, firms also cumulate capabilities and
skills (Dosi, 1988): it turns out that both technological and product diversification are
important features of firms in capitalist economies (Piscitello, 2004).
However, the relationship between technological diversification and corporate diversification is not a simple one-to-one relationship. Patel and Pavitt (1997) first showed
that for very large firms technological reach as proxied by patenting activity is greater
than product reach. Theoretically, there can be different reasons why this happens. For
example, Brusoni et al. (2001) show that in complex products like aircraft engines, firms
know more than they need for what they make in order to deal both with unpredictable
product-level interdependencies and with imbalances in component performance
In this paper, we aim to give a new perspective about the relationship between technological diversification and product diversification at the firm level. Following a well
established tradition in the literature, we proxy firms’ technological capabilities with the
stock of their patents. By exploiting a new matching between patent applications and
firms, we intend first of all to characterize the patenting profiles of the population of
Italian firms.
Second, and more important, we link the patenting profiles of Italian firms to their
product diversification patterns. In order to do so, we use a recently developed algorithm
(Lybbert and Zolas, 2014) which delivers a concordance between IPC classes and standard
industry classifications.
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Data and Methodology
Data on the production activities of Italian firms come from two firm-level datasets collected by the Italian statistical office (ISTAT), namely the Business Register known
as “Archivio Statistico Imprese Attive” (ASIA) and Statistiche del Commercio Estero
(COE). ASIA is the register of all active Italian businesses. It covers the period 19982006 and contains information on firms’ operations including the number of employees,
total turnover,1 geographic location of the firm and firm’s age, defined as the year of
incorporation. The COE dataset consists of all cross-border transactions performed by
Italian firms and it covers the period 2000-2007. COE includes the annual value and
quantity of export transactions by the firm at the product level. A product is defined as a
six digit category in the Harmonized System (HS6). The product level classification gives
a very detailed view of corporate diversification under the assumption (not unreasonable)
that firms export what they produce. Using the unique identification code of the firm,
we link the firm-level export data from COE to ISTAT’s archive of active firms. Notice
that the resulting dataset is not a sample but rather it covers the universe of Italian
1
Information on total turnover is available only in 2000 and 2003.
2
active firms and all international trade transactions of Italian firms over the period. The
data collection and building process of the integrated database are described at lenght in
Grazzi et al. (2013).
We take information on Italian firms’ patent applications from Amadeus database.
The available information refers to the publication date, the success of the application
(whether the patent has been granted), the IPC classification, the application number,
and the priority number. Using the tax code, we link the patent data to COE and ISTAT’s
dataset.
Finally, we resort to Micro.3 to have information on a set of firm’s performance indicators. Micro.3 is a databank developed within a collaboration between the Italian
Statistical Office (ISTAT) and members of the Laboratory of Economics and Management (LEM) of Scuola Superiore Sant’Anna in Pisa.2 It is based on the census of Italian
firms conducted yearly by ISTAT and contains information on firms with more than 20
employees in all sectors of the economy for the period 1989-2006. Starting in 1998 the
census of the whole population of firms only concerns companies with more than 100
employees, whether in the range of employment 20-99, ISTAT directly monitors only a
rotating sample which varies every five years. Hence, in order to complete the coverage of
firms in that range from 1998 onward, Micro.3 resorts to data from the financial statement
that limited liability firms have to disclose, in accordance to Italian law.3
The main problem in analyzing the relationship between technological diversification
and product diversification is that the existing IPC-industry concordances are far from
being satisfactory. In particular, they do not allow us to go further than using a 2digits (in some cases 3-digits) classification of industrial activities of the firm. We use
the probabilistic algorithm developed by Lybbert and Zolas (2014) in order to exploit the
richer information of our product-level classification. In this way, we are able to build a
correspondence between technological activities of the firm and its production activities
at a much more disaggregated level.
2
The database has been made available for work after careful censorship of individual information.
More detailed information on the database Micro.3 is in Grazzi et al. (2013).
3
Limited liability companies (società di capitali) have to provide a copy of their financial statement
to the Register of Firms at the local Chamber of Commerce.
3
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