Exploring the nexus between innovation and firm performance: new evidences from manufacturing innovation survey of Pakistan

Abstract

ABSTRACT In this article, we examine the innovative behaviour of private manufacturing firms using a unique Innovation Follow-up Survey (2015) first time conducted by the World Bank for the Pakistan economy. To model the structural relationship between R&D, innovation, firm performance, and export we specify an extended version of CDM model proposed by Crepon et al. (1998. Research, innovation and productivi [Ty: An econometric analysis at the firm level. Economics of Innovation and New Technology, 7(2), 115–158), modified by (Griffith, R., Huergo, E., Mairesse, J., & Peters, B. [2006]. Innovation and productivity across four European countries. Oxford Review of Economic Policy, 22(4), 483–498; Hall, B. H., Lotti, F., & Mairesse, J. [2009]. Innovation and productivity in SMEs: empirical evidence for Italy. Small Business Economics, 33(1), 13–33) and further extended by this study via introducing propensity to export stage. Our econometric results show that technological innovations (product and process innovation) have significantly positive impacts on firm performance which plays a key role in the firm’s decision to engage in exporting activities. The elasticity of labour productivity with respect to process is slightly higher than the product innovation. Robustness analysis reports that, except for organisational innovation, the predicted research intensity has a positive impact on innovation output no matter which proxy is used for the firm-level innovation. Moreover, non-technological innovations (marketing and organisational innovation) have no impact on firm performance for all the alternative econometrical specifications and are mostly in line with the existing literature. The findings have practical implications for policymakers with respect to firm productivity and export propensity, and highlight the significance of innovation in empowering firms to increase economic performance and catch up.