Innovation Premium and the Survival of Entrepreneurial firms

In this study we analyse the determinants of firms’ survival probability by combining firm level and industry level features. We examine the role of innovation within the firm in shaping its survival probability, and contrast this effect across different technological environments; specifically we compare innovative and non-innovative firms in high- and low-tech industries. In addition, we control for the characteristics of the firm, size and age, which are generally pointed to in the literature as being important. Thus, we distinguish between entrepreneurial and established firms in an industry. The empirical analysis combines economic and demographic data from the Business Register of all firms active in the Netherlands with data on innovation derived from the second Community Innovation Survey (CIS-2). Integration of these two datasets produced a sample of 3,275 firms for which information on innovation, number of employees, date of entry, date of exit and industrial sector were available. The survival probability of a firm was estimated using an approach based on Transition Probability Matrices. We then statistically tested for the significance of differences in survival probability between different categories of firms. Our results show that, as expected, entrepreneurial firms are more exposed to the risk of failure than established firms, confirming earlier results of the effects of firm age and size on the likelihood of survival. However, entrepreneurial firms benefit relatively more than established firms from a technology rich environment, which in general favours survival. Also, in low-tech industries entrepreneurial firms that innovate have significantly higher (58%) chances of survival than non-innovative firms. In other words, the innovation premium for survival is highest for entrepreneurial firms in low-tech industries.