Fueling firm productivity: the role of institutional quality and innovation in a developing economy

Using micro-data from Pakistani manufacturing firms, this study analyzes the impacts of technological innovations and regional institutional quality on the firms’ productivity. The linkages between R&D, innovation, institutional quality, and firm productivity are modeled sequentially with the help of an extended version of the CDM model. Results show that the R&D intensity has a significantly positive impact on the production of technological innovations i.e. product and process innovations. They also confirm that product innovation boosts productivity, whereas process innovation diminishes it. Regional institutional quality has no direct impact on firm productivity; however, it boosts it when interacting with the firm resources like managerial experience, education levels, and skilled labor. To evaluate the reliability of the findings, we conducted a series of robustness checks, and the majority of these checks produced results consistent with the baseline conclusions. These findings offer valuable insights for policymakers and practitioners, suggesting that targeted improvements in regional institutional quality, along with strategic investments in R&D and innovation, can enhance firm productivity in developing economies like Pakistan.