Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 199: The Icelandic Economy: a victim of the financial crisis or simply inefficient?

Dong-Hyun Oh , Hans Lööf () and Almas Heshmati
Additional contact information
Dong-Hyun Oh: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Hans Lööf: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Almas Heshmati: Seoul National University, Seoul, Korea

Abstract: Iceland, one of the smallest European economies, was hit severely by the 2008-financial crisis. This paper uses a firm-level Community Innovation Survey (CIS) data set to consider the economy in the period preceding the collapse of its financial system. We examine the linkage between the crisis and innovativeness from the perspective of technical efficiency by means of the Data Envelopment Analysis of 204 randomly selected firms. The results suggest that a substantial fraction of the Icelandic firms can be classified as non-efficient in their production process. The production scale of many manufacturing firms is too small to be considered technically efficient, while services firms typically use excessive resources in their production process. A remarkably weak performance in transforming R&D and labor efforts into successful innovations is observed. Based on the empirical results, suitable policy implications are suggested to remedy the inoptimal production structure and help economic recovery.

Keywords: Technical efficiency; R&D; Innovation; Productivity; Manufacturing; Services; Iceland

JEL-codes: C67; D24; D57; L25; L60; L80

28 pages, September 28, 2009

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