An Analytical Framework for Innovation Determinants and Their Impact on Business Performance

Abstract

Innovation plays a pivotal role in the progress and goodwill of an organization, and its ability to thrive. Consequently, the impact analysis of innovation on the performance of an organization holds great importance. This paper presents a two-stage analytical framework to examine the impact of business innovation on a firm’s performance, especially firms from the manufacturing sector. The prime objective is to identify the factors that have an impact on firm-level innovation, and to examine the impact of firm-level innovation on business performance. The framework and its analysis are based on the latest World Bank enterprise survey, with a sample size of 696 manufacturing firms. The first stage of the proposed framework establishes the analytical results through Bivariate Probit, which indicates that research and development (R&D) has a significantly positive impact on the product, process, marketing, and organizational innovations. It thus highlights the important role of the allocation of lump-sum amounts for R&D activities. The statistical analysis shows that innovation does not depend on the size of the firms. Moreover, the older firms are found to be wiser at conducting R&D than newer firms that are reluctant to take risks. The second stage of the proposed framework separately analyzes the impacts of the product and organizational innovation, and the process and marketing innovation on the firm performance, and finds them to be statistically significant and insignificant, respectively.