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Innovative firms or innovative owners ? determinants of innovation in micro, small, and medium enterprises

  • de Mel, Suresh
  • McKenzie, David
  • Woodruff, Christopher

Innovation is key to technology adoption and creation, and to explaining the vast differences in productivity across and within countries. Despite the central role of the entrepreneur in the innovation process, data limitations have restricted standard analysis of the determinants of innovation to consideration of the role of firm characteristics. The authors develop a model of innovation that incorporates the role of both owner and firm characteristics, and use this to determine how product, process, marketing, and organizational innovations should vary with firm size and competition. They then use a new, large, representative survey from Sri Lanka to test this model and to examine whether and how owner characteristics matter for innovation. The survey also allows analysis of the incidence of innovation in micro and small firms, which have traditionally been overlooked in the study of innovation, despite these firms comprising the majority of firms in developing countries. The analysis finds that more than one-quarter of the microenterprises are engaging in innovation, with marketing innovations the most common. As predicted by the model, firm size has a stronger positive effect, and competition a stronger negative effect, on process and organizational innovations than on product innovations. Owner ability, personality traits, and ethnicity have a significant and substantial impact on the likelihood of a firm innovating, confirming the importance of the entrepreneur in the innovation process.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4934.

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Date of creation: 01 May 2009
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Handle: RePEc:wbk:wbrwps:4934
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  1. Lee, Cassey, 2004. "The Determinants of Innovation in the Malaysian Manufacturing Sector: An Econometric Analysis at the Firm Level," Centre on Regulation and Competition (CRC) Working papers 30670, University of Manchester, Institute for Development Policy and Management (IDPM).
  2. Almeida, Rita & Fernandes, Ana Margarida, 2006. "Openness and technological innovations in developing countries : evidence from firm-level surveys," Policy Research Working Paper Series 3985, The World Bank.
  3. Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
  4. Klette, Tor Jakob & Kortum, Samuel, 2002. "Innovating Firms and Aggregate Innovation," Memorandum 02/2002, Oslo University, Department of Economics.
  5. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  6. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2008. "Who Are the Microenterprise Owners? Evidence from Sri Lanka on Tokman v. de Soto," IZA Discussion Papers 3511, Institute for the Study of Labor (IZA).
  7. Feder, Gershon & Just, Richard E & Zilberman, David, 1985. "Adoption of Agricultural Innovations in Developing Countries: A Survey," Economic Development and Cultural Change, University of Chicago Press, vol. 33(2), pages 255-98, January.
  8. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  9. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
  10. Cohen, Wesley M. & Levin, Richard C., 1989. "Empirical studies of innovation and market structure," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 18, pages 1059-1107 Elsevier.
  11. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
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