Sources of heterogeneous treatment effects of incorporating public innovation intermediaries for SMEs: evidence from Japan’s Kohsetsushi

ABSTRACT

A series of public administration reforms were implemented in Japan to cope with the secular stagnation since the 1990s, some of which took the form of the incorporation of public organisations. Drawing on the incorporation of Kohsetsushi, public innovation intermediaries for SMEs, this study evaluates its average treatment effect on the treated (ATT) by applying the difference-in-differences (DID) model to panel data (2000–2021). Local governments decided whether and when to incorporate Kohsetsushi, which suggests staggered treatments and heterogeneous treatment effects. Applying the conventional two-way fixed-effects DID model to panel data with staggered treatments may yield biased ATTs due to contaminated comparisons where early-treated units are used as a control group. This study adopted the DID model to correct the bias, which clarified the correlation between the treatment timings and treatment effects on technology diffusion. Kohsetsushi incorporated late enhanced research and inventive activities with geographically broad spillover while reducing technical consultation with localised spillover. Sources of heterogeneity are discussed from the perspectives of agglomeration externalities, industrial knowledge bases, and learning capacity.

KEYWORDS:

• Agglomeration
• average treatment effects on the treated
• difference-in-differences
• innovation intermediaries
• staggered treatment

Acknowledgements

I appreciate comments from three anonymous referees. This paper is a product of the research project Assessment of Japan’s Innovation Capability from an International Perspective, conducted at the Research Institute of Economy, Trade, and Industry (RIETI). I thank participants in the RIETI Discussion Paper Workshop for their comments on the draft. The usual caveats apply.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 As Kohsetsushi plays multiple roles in the regional innovation systems, it is difficult to measure their contributions using a single performance indicator. The assessment committee sets up various numerical goals for incorporated Kohsetsushi to accomplish in the next term. In this performance assessment, technology diffusion is customarily weighted higher than research and inventive activities (Fukugawa, 2022). Then, the assessment committee provides suggestions to be incorporated by LIACs when reformulating their activities in the next mid-term (LIACL, Article 3). Therefore, resource allocation of incorporated Kohsetsushi is determined not only by the incentive system but also by evaluation scheme.

2 SMEs have difficulty in accessing external sources of knowledge due to lack of social capital, search capabilities, and absorptive capacity. This makes spillover suboptimal at the aggregated level and the local business ecosystem less innovative, which causes innovation system failure. To mitigate the systemic failure, many countries established innovation intermediaries for SMEs as part of regional innovation policy (Dodgson & Bessant, 1996; Fukugawa, 2018; Shapira et al., 2011). Examples include the Manufacturing Extension Partnership (MEP) of the US and the Manufacturing Advisory Services (MAS) of the UK. For more detailed examples, see Table 1 of Fukugawa (2024).

3 Given the parallel pre-trend, the ATT in panel analysis is defined as $E[Y_{i,}^{T}t1|D_i=1]-E[Y_{i,}^{C}t1|D_i=1]=E[Y_{i,}^{T}t1-Y_{i,}^{C}t1|D_i=1]$ where T denotes the treatment group, C denotes the control group, and D denotes a binary treatment variable. Suffixes i and t denote individual and time, respectively. t0 denotes the pre-treatment period while t1 denotes the post-treatment period.

4 This marks a clear contrast to the incorporation of national universities in 2004 that led to drastic reduction of block grant and decrease in researchers in full-time equivalent, which is considered to result in Japan’s rapid decline in scientific research after this institutional change (Toyoda, 2019).

5 Knowledge creation and dissemination are complementary to some degree. For instance, obtaining PhD enables technical staff to offer clients solutions based on basic principles and scientific approaches. Moreover, understanding local technological needs is conducive to valuable inventions that are ready for the commercialization by local firms (Fukugawa, 2009). However, as noted above, manufacturing Kohsetsushi staff engage in both activities, which makes it inevitable for them to experience the point at which pursuing the two strategies simultaneously starts to deteriorate technology transfer productivity. As it is not possible from the data to identify the point, this study assumes that the decreasing portion accounts for the most part of the inverse U-shaped curve.

Additional information

Funding

This work was supported by the Japan Society for the Promotion of Science: [Grant Number 21K01458].

Notes on contributors

Nobuya Fukugawa

Nobuya Fukugawa is an Associate Professor at the Graduate School of Engineering, Tohoku University. His research activities revolve around entrepreneurship and innovation, the outcomes of which were published in the International Journal of Industrial Organisation, the Journal of Small Business Management, and the Journal of Technology Transfer, Scientometrics, Small Business Economics, and Technovation. As a Visiting Professor, he has taught entrepreneurship and innovation at École Supérieure des Sciences Commerciales d’Angers (ESSCA), Kyungpook National University, Libera Università Internazionale degli Studi Sociali (LUISS), the University of Duisburg-Essen, and the University of Strasbourg.