Annotation. This paper explores complementarities among innovation strategies in transition economies. Specifically, on the basis of data from the fifth round of Business Environment and Enterprise Performance Survey (BEEPS V), we have investigated the existence of possible complementarities between various types of innovation modes (product, process and non-technological (marketing and/or organizational) innovations) in their impact on the firm’s productivity. The study reveals complementarity between the following two combinations of innovations: product/process and process/non-technological innovations. Further, the results of the study show that only those combinations of innovation modes that assume all the types of innovations and/or the combination of process and non-technological innovations have positive and statistically significant impact on the firm’s productivity. In the paper, we account for the simultaneous occurrence of different types of innovation inputs - in-house knowledge generation and out-house knowledge acquisition activities - and estimate their joint effects on various modes of innovation. The study results suggest that implementation of internal research and development (R&D) strategy can stimulate not only technological innovations but non-technological innovative activity as well. However, we find that external knowledge acquisition strategy has positive and statistically significant effect on innovation output only when the firm’s innovation mix incorporates non-technological novelties.

Keywords: R&D, external knowledge acquisition, innovation, productivity, complementarity, transition economies. 

A growing number of academic literature acknowledges innovation as the main driver of a productivity growth. The relationship between the firm’s innovative activity and its productivity performance has gained attention of scholars since the seminal research of Griliches (1979) and Pakes and Griliches (1980). In these studies, aimed at estimating returns to research and development (R&D) investments, the authors have modified the traditional Cobb-Douglass production framework by the introduction of a ‘knowledge production function’. The main assumption of this approach is that past and current knowledge (R&D investments) are necessary for generating a new knowledge (innovation), which in turn affects the firm’s output growth. This line of research has been further extended by Crepon, Duguet, and Mairesse (1998). The model, henceforth referred as CDM, distinguishes innovation input (R&D) and innovation output (knowledge). Employing structural recursive model, CDM explains productivity by the knowledge or innovation output and innovation output by R&D. Applying this model to the sample of French manufacturing firms, Crepon et al. (1998) find that R&D intensity has positive and significant impact on innovation output and that innovation output, in turn, is an important predictor of the productivity of the firm. Recent studies of the link between R&D, innovation and the firm’s productivity, based on the CDM model, generally has proved the main findings of Crepon et al. (1998) for the developed countries (Loof et al. 2003; Janz et al. 2004; Mairesse et al. 2005; Griffith et al. 2006; Loof and Heshmati 2006; Hall and Mairesse 2006).

In transition economies, European Bank for Reconstruction and Development (EBRD) and the World Bank Group (the WB) has conducted a comprehensive study of the link between the innovation and firm’s performance (EBRD 2014). On the basis of data on more than 15,000 enterprises from the fifth round of Business Environment and Enterprise Performance Survey (BEEPS V), and using CDM model, the study reveals the significant impact of product, process and non-technological innovation on the firm’s productivity. R&D is found to be an important determinant of innovation output along with other factors such as the firm’s size and age, foreign ownership, education level of employees, usage of communications and access to finance.

Other CDM-based studies of innovation-productivity link in transition economies explore: the possible effect of technological innovation on firm’s productivity in Estonia (Masso and Vahter 2008); the strength of innovation-productivity relationship across various sub-branches of the services sector in Estonia (Masso and Vahter 2012); the impact of the government support on the manufacturing firm’s R&D expenditures, innovations and productivity in Ukraine (Vakhitova and Pavlenko 2010); the relationship of firm-level productivity to innovation and competition (Friesenbichler and Peneder 2016); the impact of the various types of innovation inputs (internal R&D and external knowledge acquisition) on the different non-exclusive[1] forms of innovation outputs (product, process and non-technological innovations) (Berulava and Gogokhia 2016b).

At the same time, some important issues related to the functioning of R&D-innovation-productivity link in catching-up economies still require further attention of academicians. In particular, the way that various types of innovation strategies (technological and non-technological innovations) interact with each other while effecting the firm’s performance is not well studied.  Besides, existing researches while formulating ‘knowledge production function’ rely solely on in-house R&D activity as an innovation input variable. The role of out-house knowledge acquisition in promoting the firm’s innovative activity remains relatively unstudied as well.

Our study aims at filling this gap by deepening the understanding of the performance of R&D-innovation-productivity link in transition economies. Specifically, this paper explores the existing interrelationships between innovation activities and productivity performance of firms as well as complementarities between innovation strategies in transition economies. On the basis of the data from the BEEPS V survey, we research some issues that remained relatively unexplored to the moment. First, we study complementarities between various types of exclusive[2] innovation modes (product, process, marketing and organizational innovations) in their impact on the firm’s productivity. Second, we extend traditional CDM model by incorporating external knowledge acquisition (EKA) - an innovation input strategy alternative/complement to internal R&D investments; and by analyzing the joint impact of both input strategies on innovation output. In compliance with the results of the previous studies, we have found that CDM model properly describes the existing interrelations between the firm’s innovation activity and its productivity performance in transition economies. The detailed description of the study results is reported in the following papers (Berulava and Gogokhia 2016a; Berulava and Gogokhia 2018).

The important contribution of this study is that it tests for complementarity between innovation strategies of firms in transition economies. Our tests reveal complementarity between the following two combinations of innovations: product/process and process/non-technological innovations. These results, generally, resemble the findings for developed (UK and France) markets (Ballot et al. 2011). The only difference is that for UK sample complementarity was proved for product and organizational innovation strategies, while in this paper complements are process and non-technological innovations. Following Ballot et al. (2011), we call the first pair of complementary innovations as ‘technological strategy’ while the second one as ‘restructuring strategy’. Similar to the Ballot et al. (2011), the key policy implication of our findings is that while performing all the three innovation modes jointly has a positive impact on the firm’s performance, economically preferred options are: either to choose pure technological innovation strategy (product&process mode) or to perform organization restructuring oriented strategy (process/non-technological mode).

Concerning the links of various modes of innovation output to the firm’s productivity performance, our results show that only the combinations that assume all the types of innovations and process and non-technological innovation have positive and statistically significant impact on the firm’s productivity. Though these results generally support the existing empirical evidence (Polder et al. 2009), we have found no significant impact of non-technological innovation on productivity when it’s conducted in isolation. Another vital point of this analysis is that conducting either product or process innovation in isolation will result in a negative productivity performance.

The findings of the study also suggest the firm’s decisions on in-house and out-house knowledge development processes are highly interdependent and generally share the same determinants. Both strategies of knowledge generation/acquisition require the availability of finance which can be ensured through: an easy access to financial markets; subsidies from a government or international donors; foreign direct investments. The latter may represent not only the important financial source but the source of advanced knowledge and know-how transfer as well. However, the primary supplier of finance necessary for stimulating innovations is the firm itself. We find that large firms substantially outperform small and medium enterprises in terms of innovation activity. According to Schumpeter, such an advantage of large firms in knowledge development process can be explained first of all by their capabilities to mobilize necessary financial resources. We think that main policy implication stemming from these study results is that providing ease access to financial resources is a crucial prerequisite necessary for promoting knowledge development activity in transition economies. In support of the existing findings, we reveal that internal R&D activity is highly dependent on the patent protection. Thus, the enhancement of the legal framework and establishing the rule of law that secure the property rights, can be considered as important ways for stimulating firm’s R&D investment decisions.

Further, the study results show that the implementation of internal R&D strategy can stimulate not only technological innovations but non-technological innovative activity as well. Also, we have found that EKA strategy has the positive and statistically significant effect on the innovation output only when the firm’s innovation mix incorporates non-technological novelties.

This study provides some new insights on the functioning of the extended CDM model and on the complementarity between innovation strategies in transition economies. Still, cross-sectional nature of the dataset used in this study limits understanding of some important issues, such as: the impact of the firm specific factors on its innovation and productivity performance; dynamic relationships between R&D, innovations and the firm’s performance. We think that the appliance of panel data sets will allow scholars to clarify these issues. 

References

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