We analyze the effect of applied research institutions on regional innovation activity. Exploiting a policy reform that creates tertiary education institutions conducting applied research, the Universities of Applied Sciences (UASs) in Switzerland, we apply difference-indifferences estimations to investigate the effect on innovation quantity and quality. Findings show a 7.7 to 13 percent increase in regional patenting activity (i.e., quantity), and a 1.3 to 11 percent increase in patent family size, and the number of granted patents, claims, and citations per patent (i.e., quality). Findings are robust to various model specifications, suggesting that applied research taught in UASs boosts regional innovation.

, seminar participants at the University of Zurich, participants of the 21 st Colloquium on Personnel Economics in Munich, participants of the annual meeting of the Bildungsökonomischer Ausschuss des Vereins für Socialpolitik in Bern, participants of the 18 th International Labour and Employment Relations Association World Congress in Seoul, participants of the 3 rd Centre for Vocational Education Research Conference in London, and participants of the Conference on VET Research in Lausanne for helpful comments. We also thank Natalie Reid for language consulting and the Swiss Federal Statistical Office for data provision of the Swiss Earnings Structure Survey (contract number 160683 Ref. 431.10-1), the Business Census (contract number 180096 Ref. 511.0-1, used in the Online Appendix), and the Survey of Higher Education Graduates (contract number 160410 Ref. 662.410-1, used in the Online Appendix). Furthermore, this paper benefited from very helpful comments by the editor at Labour Economics, Michele Pellizzari, and two anonymous reviewers. This study is partly funded by the State Secretariat for Education, Research and Innovation (SERI) through its Leading House on the Economics of Education, Firm Behavior and Training Policies.

The literature on the economics of science and technology shows that academic universities—institutions focusing on basic research—positively affect innovation activities in regional economies. Less is known about the innovation effects of universities of applied sciences (UASs)—bachelor-granting three-year colleges teaching and conducting applied research. Furthermore, the evidence for positive innovation effects is predominantly based on average effects, while heterogeneity in innovation effects due to the economic environment is far less considered. By exploiting a public policy development in Switzerland that led to the quasi-random establishment of UASs, we investigate the regional heterogeneity in innovation effects of these UASs. We rely on patent and business census data and analyze the influence and importance of three economic preconditions—labor market size, labor market density and high tech intensity—on innovation effects of UASs. Our results show that only regions with a large or a dense enough labor market or with an above average high tech intensity experience significant innovation effects of UASs. Comparing the relative importance of the three economic preconditions, we find that labor market size is the most important factor that drives heterogeneity in innovation effects of UASs.