Sectoral Innovation Systems, Complementarities and Productivity in Europe

This paper explores the differences in labour productivity between five firm clusters, distinguished based on firm size, resource capabilities and geographic scope of a firm market (national vs. international), using a k-means clustering approach and panel data for EU Small Medium and Large enterprises. The study is embedded into the framework of sectoral innovation ecosystems, suggesting the importance of complementarities between various pillars of meso-level innovation ecosystems. Our analysis reveals that productivity gains increase jointly with firm scalability and accumulation of organisational and resource capabilities, although individually, firm size is negatively correlated with firm labour productivity. Furthermore, we find a direct positive effect of each of the four pillars of sectoral innovation ecosystems, namely digital, human, innovation and tangible capital capabilities, though statistically, the direct effect of digital capabilities is weaker compared to other pillars. More importantly, via interacting these pillars we find some compelling evidence on complementarities between pairwise sectoral capabilities that have important policy implications for coordination of EU policies, in terms of innovation diffusion, digitalisation and productivity growth in the EU.