Impact of Innovation on Direct and Indirect Export Propensity

This article analyzes the determinants of the direct and indirect export propensity of firms operating in countries from different income groups, focusing on the role of innovation. For this purpose, firm-level data from the World Bank Enterprise Survey are utilized. In the literature, there are several papers examining the link between innovation activities and export performance of the firms. Some of them also consider endogeneity of innovation in this link. The findings of the study indicate the endogeneity of innovation in the relationship between export propensity and innovation activities. When this endogeneity is controlled, product and process innovation activities of the firms increase their probability of exporting directly and indirectly. This impact is higher on direct exports. In addition, product innovation increases the export propensity more compared to process innovation. These results call for firms that decide to export to focus on their innovation activities. On the other hand, the results of the study show that larger and foreign-owned firms are more likely to export, R&D expenditures increase the probability of innovation rather than export propensity. Moreover, firm age does not affect the export propensity but has a positive effect on product innovation and a negative effect on process innovation. Finally, the experience of top manager increases the probability of the firm to export directly, but does not affect the indirect export propensity.