Innovation Strategy and Economic Development

Matias Braun, Sebastián Bustos and Luis Cespedes
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Sebastián Bustos: Growth Lab

No 590, Working Papers from Center for Global Development

Abstract: Productivity differentials have been documented as the main determinant of the variation of income per capita across countries. In this paper, we investigate whether the implementation of innovation-intensive or adoption-intensive business strategies by firms can explain differences in productivity levels and productivity growth across industries and countries. We compute a novel innovation-intensity strategy index for firms, based on textual analysis of financial reports issued in the US by firms from developed and developing countries and from a wide range of industries. We show that the index captures dimensions of the innovation process implemented by firms that go beyond R&D efforts. Our empirical results indicate that firms that pursue an innovation-based strategy exhibit higher productivity levels compared to firms that follow an adoption-based strategy. Nonetheless, the optimal business strategy depends on the distance to the world technology frontier. Firms far from the frontier grow faster when implementing an adoption-based strategy, but an innovation-based strategy better suits firms closer to the technological frontier. We provide evidence indicating that a country’s financial market sophistication, competition policy, and innovation capabilities—such as educational level, availability of scientists and engineers, and intellectual property protection—are key determinants of the strategy implemented by firms. The empirical evidence suggests that middle-income traps may occur if competition policy, innovation capabilities, and financial market sophistication are not enhanced as a country moves closer to the technology frontier.

Keywords: Economic Development; Business Administration; Business Economics; Management of Technological Innovation and R&D; Empirical Studies of Economic Growth; Institutions and Growth (search for similar items in EconPapers)
JEL-codes: F63 M1 M2 O32 O43 O47 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2021-08-24
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Working Paper: Innovation Strategy and Economic Development (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:cgd:wpaper:590

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