Working Paper 340 - Innovation and Productivity in Developing Economies

We examine the determinants of innovation and its effect on productivity across 52 emerging and developing economies, comparing African firms to their counterparts elsewhere. We use a generalized structural equation model (GSEM) to estimate the causal links while accounting for endogeneity. Our estimates show that access to finance has the strongest effect on firms' decisions to invest in research and development (R&D) in all countries. And while the drivers of innovation are remarkably similar in developed economies, the keys for African firms are access to external knowledge - largely via information and communications technology (ICT)- and skills development via on-the-job training. Only in Africa is the stand-alone effect of ICT adoption on innovation almost as strong as that of R&D; and the combined effect of firms' access to external knowledge through ICT and foreign-technology adoption and training is more than double that of R&D. Regardless of its content, the effect of employee training on innovation in Africa is double that in emerging markets. Finally, innovation is the key determinant of productivity in all countries, but the evidence is much stronger for product innovation by African firms.