How to increase R&D in transition economies?: Evidence from Slovenia

The recent initiative of the European Union Lisbon Agenda to increase levels of R&D investment is addressed by studying the determinants of R&D investment in one of the recent EU entrants, Slovenia. Previous empirical literature-mainly cross-sectional in nature-has tested the demand-pull hypothesis and found that overall R&D expenses may be driven by output demand. We use a panel of more than 150 of the largest Slovene firms over the period 1996-2000, modeling firms' R&D behavior within an error-correction framework and estimating it in a system GMM specification. While we find that sales have a significant role in inducing R&D expenditures, we also show that the availability of internal funds and wage bargaining represent important factors determining R&D expenses. Moreover, firms owned by insiders (workers and/or managers) and/or firms with dispersed ownership (small shareholders) display higher R&D investments than firms owned by privatization investment funds or by other firms.