Firm performance and innovation in the developing countries: Evidence from firm-level survey

Abstract

This paper investigates the relationship between firm performance and innovation in developing countries using micro data from enterprise surveys. The purpose is to empirically test the importance of firm performance in terms of sales, for a firm’s proneness to innovate specifically in developing countries. A two-stage least squares (2SLS) model is applied to a sample of 2356 firms from the manufacturing and service sectors. Results show that firm performance, defined as sales, is found to be a significant factor contributing to innovation among firms. This relationship holds in manufacturing firms even when distinguished from the services sector. The findings underline the importance of firms’ performance through increased sales. The paper adds to the existing limited research literature on performance and innovation studies in developing countries especially Africa. The paper results differ from previous research studies where focus has been on innovation impact towards performance. As a policy option, developing countries need to improve and promote an increase in firms’ sales that would spur them to introduce a new or substantially improved product or process.