Linking Innovation to Firm Performance in Developing Countries: the Role of Trade Liberalization

This study set out to analyze the effect of innovation on firm performance in developing economies in the era of trade liberalization. The study uses data from the enterprise survey of the World Bank covering 19 Sub Saharan African countries surveyed between 2014 and 2016, with a total of 8,551 firms included. In order to effectively analyze the effect of innovation on firm performance, the CDM model is adopted to analyze R&D intensity, the effect of domestic R&D on innovation output, and the contribution of innovation to firm performance in the sub region. The study further tests for the effect of foreign technology and the import of products and services on the innovation process. Analysis is done using ordinary least squares. Findings suggest a positive and significant effect of foreign technology on domestic R&D, while imports have a negative effect on domestic R&D. Domestic R&D has positive effect on both product and process innovations among firms in the sub region. Moreover, both product and process innovations have a positive and significant effect on firm performance in the sub region. Meanwhile, the export of innovations is not found to be significant in this study. We therefore recommend that governments in the region should give tax incentives to organizations that import products that are meant specifically for the production of new products and processes. Firms in the sub region should also focus on narrow market segments where they have specialist expertise in, so as to be competitive in the global market.