R&D, innovations, and firms’ productivity in Ethiopia

Abstract

Evidence of how R&D, innovation and productivity are intertwined in African countries like Ethiopia is quite limited. This study provides empirical evidence on the relationship between R&D, innovations, and productivity for Ethiopian firms using two rounds of the World Bank’s Enterprise Survey dataset of year 2011 and 2015. We estimate firm-level productivity using a control function method, and the link between R&D, innovations, and productivity is estimated using the General Structural Equation Model (GSEM). We estimated for product and process innovations separately and jointly. The results show that innovations have a strong and positive impact on a firm’s productivity in all estimation methods. Thus, innovative firms are more productive than their counterparts. However, the effect of R&D on innovations is positive and significant in GSEM estimation but not in other estimation methods. The findings also show that skilled labour and financial accessibility are key driving forces behind firms’ engagement in R&D and innovative activities. Thus, there is a need to find a mechanism to promote firms’ engagement in knowledge production, and design appropriate policies to enhance firm-level innovation initiatives. This study contributes to developing countries’ empirical literature in terms of modelling the relationship between R&D, innovations, and firm productivity.