Innovation and Firm Growth: Evidence from an Emerging Economy

Innovation is widely recognised as a key driver of firm performance, yet empirical evidence from emerging economies remains limited. This study examines how different forms of innovation affect sales and employment growth among Vietnamese firms using firm-level data from the 2023 World Bank Enterprise Survey. The analysis considers product and process innovation, R&D expenditure, and R&D participation, while controlling for firm characteristics and institutional constraints. Using an instrumental variable (IV) approach with two-stage least squares (2SLS), we find that innovation is significantly associated with improvements in firm performance, with product and process innovations associated with substantial gains in sales growth. In contrast, the impact on employment growth is positive but more moderate, indicating that revenue expansion does not fully translate into job creation. R&D expenditure shows only incremental effects, suggesting limited short-term returns. Export participation is associated with stronger sales growth, whereas legal and regulatory obstacles are associated with lower employment expansion. Overall, the findings highlight that innovation is an important but context-dependent driver of firm growth in Vietnam, with more pronounced effects on revenue than on employment.