International Workshop Innovation in Europe Empirical studies on innovation surveys and economic performance Rome, 28 January 2003 Innovation and economic performance in services in Italy 1 A firm level analysis Giulio Cainelli*, Rinaldo Evangelista** and Maria Savona*** Abstract This paper explores the two-ways relationship between innovation and economic performance in services at the firm level. The empirical analysis is based on a unique longitudinal firm-level data set, which matches CIS II data (1993-95) and a set of economic variables provided by the System of the Enterprise Accounts (1993-98). In particular the empirical analysis aims at disentangling: i) the impact of innovation on the economic performance of firms, in terms of productivity and growth; ii) the reverse causal effect, that is the impact of past economic performances on firms’ innovation activities; iii) the presence of a virtuous circle between innovation, economic growth and enhanced competitiveness, which in turn boosts innovation. The results presented show that high levels of productivity and growth boost innovation. Further, innovation has a positive impact both on growth and productivity. In particular, the higher is the level of innovation expenditure in ICTs, the better is the economic performance of firms in terms of productivity. Finally, a self-reinforcing mechanism between productivity and innovation, which further boosts economic performance, occurs. * University of Bari, and ISPRI-CNR, Milan. E-mail: cainelli@idse.mi.cnr.it; ** ISPRI-CNR, Rome and University of Camerino (IT). E-mail: evangeli@isrds.rm.cnr.it; *** SPRU, University of Sussex (UK) and University of Camerino. E-mail: savona@isrds.rm.cnr.it . 1 The firm-level data-set used for the empirical analysis presented in this paper has been made available by the Italian Statistical Office (ISTAT), and in particular by Giulio Perani who is coordinating a research group on “Technological innovation in services”. The authors are the only responsible for the results presented and the views expressed in the paper.