Productivity impacts of R&D and non-R&D modes of technological change for incumbents and entrants in a catching-up economy

Considering the importance of innovation activities, especially that of young firms, for aggregate productivity growth, the study, using Estonian Community Innovation Survey (CIS) data, compares the productivity implications of R&D, capital accumulation, and innovation output for entrants and incumbents and contrasts the findings to those for Germany, a representative developed economy. First, in contrast to the developed economies, the percentage of innovating firms is much larger than the percentage that invests in R&D, which indicates the prevalence of non-R&D, such as ‘doing, using, and interacting’ (DUI), mode of innovation. Second, contrary to findings for the developed economies, the impact of R&D on productivity for the entrants and incumbents does not differ. However, the impact of innovation output – many of which are a result of DUI mode – on productivity is much higher for the entrants. Third, despite the adverse sectoral composition typical of catching-up economies, Estonian incumbents, who are the primary carriers of ‘scientific and technologically-based innovative’ (STI) activities, are as good as German incumbents in translating R&D into productivity gains. Fourth, while embodied technological change through capital accumulation is found to be more effective than R&D for improving productivity, the effectiveness is higher for R&D performing firms. Our results suggest that certain policy recommendations for spurring productivity growth in developed economies may be unsuitable for catching-up economies.