Business environment reforms, innovation and firm productivity in transition economies

This paper explores the role of business environment reforms in enhancing innovation and the productivity performance of individual firms in transition economies. Using a large sample of firm-level data from the Business Environment and Enterprise Performance Survey (BEEPS V round) across 28 transition economies, this paper examines the link between business environment reforms and firm R&D and innovation and productivity performance within a unified structural model. In this paper, we utilize a novel approach to measure business environment reforms. As a basis for constructing a business environment reforms (BER) index, we use subjective valuations of the constraints facing firms for doing businesses vis-à-vis various dimensions of the business environment. The index is calculated as a difference between the aggregated mean scores for innovator and non-innovator firms (by country and size of locality). The lower the difference, the better the business environment is in terms of providing firms with more stimulus to invest in innovations. The estimates of the structural model proved our hypothesis on the impact of business environment reforms on the relationships between R&D investments, innovation and labor productivity. We found strong support for the impact of the BER index on the intensity of R&D and innovation as well as on labor productivity. This paper supports the early findings that R&D is an important determinant of innovation and that innovation is a driver of labor productivity. However, our outcomes show that the patterns of the influence on a firm’s performance differ across the various dimensions of the business environment.