Your browser does not support the PubReader view.
Go to this page to see a list of supporting browsers.
Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 35, No. 4, pp.317-358
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2022
Received 28 Oct 2022 Accepted 31 Oct 2022
DOI: https://doi.org/10.22904/sje.2022.35.4.001

Linking Innovation Systems, International Integration, and Investment Climate to Firm Productivity in Developing Countries

Mahyar Adibi ; Keun Lee
Mahyar Adibi, Independent Researcher, Ph. D. in Economics, Seoul National University, Seoul, Korea mahyar.adibi@gmail.com
Keun Lee, Corresponding author, Distinguished Professor, Department of Economics, Seoul National University, Seoul, Korea kenneth@snu.ac.kr
Visiting Professor, College of Business and Economics, University of Johannesburg, Johannesburg, South Africa

JEL Classification: O100; O290; O300; O570.

Abstract

This paper analyzes the importance of investment climate (IC), international integration (II), and innovation system (IS) variables on firm productivity. These variables are measured at the firm, sector, and country levels. It also investigates the interaction effects among them. Multilevel-mixed effect analysis is conducted using the World Bank Enterprise Survey data for 20 developing countries in 21 sectors. Results indicate that firm-level variables tend to be more robust than sector- or country-level variables and that more II variables are shown be significant than either IC or IS variables. Specifically, sector-level II variables are significant, whereas sector-level IC variables and sector-level R&D variables are insignificant. Sector-level IC and IS variables become significant only when they interact with firm-level variables. The results underscore the importance of firm-level capabilities, which can be enhanced by II (e.g., firm-level learning by exporting and Foreign Direct Investment [FDI] arrangement) and IS (e.g., firm-level education and training) as well as by spillover from sector-level II and human capital. Results also reveal the channels through which IC may affect firm productivity. IC exhibits an effect on firm productivity when it interacts with firm-level capabilities and activities.

Keywords:

Firm productivity, Innovation systems, Investment climate, International integration, Multilevel analysis, Developing country

Acknowledgments

Earlier versions of this paper have been presented in several occasions, including the 2016 Globelics conference in Bandung and the New Structural Economics conference held in Beijing in 2014. The first author acknowledges the financial support from the Center of New Structural Economics at Peking University, and the second author, the National Research Foundation of South Africa (Grant Number: 118873) via the DSI/NRF/Newton Fund Trilateral Chair in Transformative Innovation, the 4IR and Sustainable Development.

References

  • Abramovitz, M. “Catching Up, Forging Ahead, and Falling Behind.” The Journal of Economic History 46(No.2 1986): 385–406. [https://doi.org/10.1017/S0022050700046209]
  • Acemoglu, D., Johnson, S., & Robinson, J. A. “The Colonial Origins of Comparative Development: An Empirical Investigation.” The American Economic Review, 91(No.5 2001): 1369–1401. [https://doi.org/10.1257/aer.91.5.1369]
  • Aghion, P., Howitt, P., Brant-Collett, M., & García-Peñalosa, C. Endogenous Growth Theory. Cambridge: MIT Press, 1998
  • Anokhin, S., & Schulze, W. S. “Entrepreneurship, Innovation, and Corruption.” Journal of Business Venturing 24(No.5 2009): 465– 476. [https://doi.org/10.1016/j.jbusvent.2008.06.001]
  • Bah, E. M., & Fang, L. “Impact of the Business Environment on Output and Productivity in Africa.” Journal of Development Economics 114(2011): 159–171. [https://doi.org/10.1016/j.jdeveco.2015.01.001]
  • Barasa, L., & Voeten, J., Institutions, Resources and Innovation in Developing Countries: A Firm Level Approach. Working Paper, Tilburg University, Tilburg, 2015.
  • Barney, J. “Firm Resources and Sustained Competitive Advantage.” Journal of Management 17(No.1 1991): 99–120. [https://doi.org/10.1177/014920639101700108]
  • Bell, M., & Pavitt, K. “Technological Accumulation and Industrial Growth: Contrasts Between Developed and Developing Countries.” Technology, Globalisation and Economic Performance(No.83137 1997): 83–137.
  • Blomstrom, M., & Kokko, A. Regional Integration and Foreign Direct Investment. Working Paper No. 6019, National Bureau of Economic Research, Cambridge, 1997. [https://doi.org/10.3386/w6019]
  • Chung, M. Y., & Lee, K. “How Absorptive Capacity is Formed in a Latecomer Economy: Different Roles of Foreign Patent and Know-how Licensing in Korea.” World Development 66(2015): 678–694. [https://doi.org/10.1016/j.worlddev.2014.09.010]
  • Clerides, S. K., Lach, S., & Tybout, J. R. “Is Learning by Exporting Important? Micro-dynamic Evidence from Colombia, Mexico, and Morocco.” Quarterly Journal of Economics 113(No.3 1998): 903– 947. [https://doi.org/10.1162/003355398555784]
  • Coe, D. T., & Helpman, E. “International R&D Spillovers.” European Economic Review 39(No.5 1995): 859–887. [https://doi.org/10.1016/0014-2921(94)00100-E]
  • Cohen, W. M., & Levinthal, D. A. “Absorptive capacity: a new perspective on learning and innovation.” Administrative Science Quarterly(1990): 128–152. [https://doi.org/10.2307/2393553]
  • Démurger, S. (2001). Infrastructure Development and Economic Growth: An Explanation for Regional Disparities in China?. Journal of Comparative Economics, 29, 95–117. [https://doi.org/10.1006/jcec.2000.1693]
  • Dethier, J. J., Hirn, M., & Straub, S. “Explaining Enterprise Performance in Developing Countries with Business Climate Survey Data.” World Bank Research Observer 26(2011): 258–309. [https://doi.org/10.1093/wbro/lkq007]
  • Dollar, D., Hallward-Driemeier, M., & Mengistae, T. “Investment Climate and Firm Performance in Developing Economies.” Economic Development and Cultural Change 54(2005): 1–31. [https://doi.org/10.1086/431262]
  • Dollar, D., Iarossi, G., & Mengistae, T. Investment Climate and Economic Performance: Some Firm Level Evidence from India. Working Paper No. 143, Stanford University, 2002.
  • Dosi, G. “Technological Paradigms and Technological Trajectories: A Suggested Interpretation of the Determinants and Directions of Technical Change.” Research Policy, 11(No.3 1982): 147–162. [https://doi.org/10.1016/0048-7333(82)90016-6]
  • Dyke, L. S., Fischer, E. M., & Reuber, A. R. “An Inter-Industry Examination of the Impact of Owner Experience on Firm Performance.” Journal of Small Business Management, 30(No.4 1992): 72.
  • Easterby-Smith, M., Graça, M., Antonacopoulou, E., & Ferdinand, J. “Absorptive Capacity: A Process Perspective.” Management Learning 39(No.5 2008): 483–501. [https://doi.org/10.1177/1350507608096037]
  • Easterly, W., Kremer, M., Pritchett, L., & Summers, L. H. “Good Policy or Good Luck?” Journal of Monetary Economics, 32(No,3 1993): 459–483. [https://doi.org/10.1016/0304-3932(93)90026-C]
  • Edquist, C. Systems of Innovation: Technologies, Institutions, and Organizations. Oxfordshire: Psychology Press, 1997.
  • Escribano, A., Guasch, J. L., & Pena, J. Assessing the Impact of Infrastructure Quality on Firm Productivity in Africa: Cross-country Comparisons Based on Investment Climate Surveys from 1999 to 2005. Policy Research Working Paper 5191, Washington DC: The World Bank, 2010. [https://doi.org/10.1596/1813-9450-5191]
  • Evenson, R. E., & Westphal, L. E., Technological Change and Technology Strategy. In Handbook of Development Economics (Vol. 3, Part A, pp. 2209–2299). Amsterdam: Elsevier, 1995. [https://doi.org/10.1016/S1573-4471(05)80009-9]
  • Fagerberg, J., The Oxford Handbook of Innovation. Oxford: Oxford University Press, 2005. [https://doi.org/10.1093/oxfordhb/9780199286805.001.0001]
  • Fagerberg, J., Mowery, D. C., & Richard R Nelson. The Oxford Handbook of Innovation. Oxford: Oxford University Press, 2004.
  • Feenstra, R. C., & Markusen, J. R. “Accounting for Growth with New Inputs.” International Economic Review(1994): 429–447. [https://doi.org/10.2307/2527062]
  • Granstrand, O., Corporate innovation systems: a comparative study of multi-technology corporations in Japan, Sweden and the USA, Chalmers University, Gothenburg, 2000.
  • Germidis, D. A., Transfer of Technology by Multinational Corporations. Paris: Development Centre of the Organisation for Economic Cooperation and Development, 1977.
  • Glans, N., Chinese OFDI and Private Companies in Ethiopia. Master’s Thesis. Department of Political Science,Lund University, 2014.
  • Glass, A. J., & Saggi, K. “Multinational Firms and Technology Transfer.” The Scandinavian Journal of Economics 104(No.4 2002): 495–513. [https://doi.org/10.1111/1467-9442.00298]
  • Goedhuys, M., & Srholec, M. “Technological Capabilities, Institutions and Firm Productivity: A Multilevel Study.” The European Journal of Development Research 27(No.1 2015): 122–139. [https://doi.org/10.1057/ejdr.2014.32]
  • González-Pernía, J. L., & Peña-Legazkue, I. “Export-oriented Entrepreneurship and Regional Economic Growth.” Small Business Economics 45(No.3 2015): 505–522. [https://doi.org/10.1007/s11187-015-9657-x]
  • Grossman, G. M., & Helpman, E. “Trade, Knowledge Spillovers, and Growth.” European Economic Review 35(No.2–3 1991): 517–526. [https://doi.org/10.1016/0014-2921(91)90153-A]
  • Haddad, M., & Harrison, A. “Are There Positive Spillovers from Direct Foreign Investment?: Evidence from Panel Data for Morocco.” Journal of Development Economics 42(No.1 1993): 51–74. [https://doi.org/10.1016/0304-3878(93)90072-U]
  • Hall, R. E., & Jones, C. I. “Why Do Some Countries Produce So Much More Output Per Worker Than Others?.” The Quarterly Journal of Economics 114(No.1 1999): 83–116. [https://doi.org/10.1162/003355399555954]
  • Hallward-Driemeier, M., Iarossi, G., & Sokoloff, K. L. Exports and Manufacturing Productivity in East Asia: A Comparative Analysis with Firm-level Data. Working Paper No. 8894, National Bureau of Economic Research, Cambridge, 2002. [https://doi.org/10.3386/w8894]
  • Hallward-Driemeier, M., Wallsten, S., & Xu, L. C. “Ownership, Investment Climate and Firm Performance.” Economics of Transition 14(No.4 2006): 629–647. [https://doi.org/10.1111/j.1468-0351.2006.00267.x]
  • Hox, J. Multilevel Analysis: Techniques and Applications. New York: Routledge, 2010. [https://doi.org/10.4324/9780203852279]
  • Jensen, M. B., Johnson, B., Lorenz, E., & Lundvall, B. Å. “Forms of Knowledge and Modes of Innovation.” Research Policy 36(No.5 2007): 680–693. [https://doi.org/10.1016/j.respol.2007.01.006]
  • Kaiser, U. “Measuring Knowledge Spillovers in Manufacturing and Services: An Empirical Assessment of Alternative Approaches.” Research Policy 31(No.1 2002): 125–144. [https://doi.org/10.1016/S0048-7333(00)00159-1]
  • Keller, W. “International Technology Diffusion” Journal of Economic Literature 42(No.3 2004): 752–782. [https://doi.org/10.1257/0022051042177685]
  • Kinda, T. “Investment Climate and FDI in Developing Countries: Firm-Level Evidence.” World Development 38(No.4 2010), 498–513. [https://doi.org/10.1016/j.worlddev.2009.12.001]
  • Kinda, T., Plane, P., & Véganzonès-Varoudakis, M. A. “Firm Productivity and Investment Climate in Developing Countries: How Does Middle East and North Africa Manufacturing Perform?.” Developing Economies 49(2011): 429–462. [https://doi.org/10.1111/j.1746-1049.2011.00146.x]
  • Knack, S., & Keefer, P. “Institutions and Economic Performance: Cross-country Tests Using Alternative Institutional Measures.” Economics & Politics 7(No.3 1995): 207–227. [https://doi.org/10.1111/j.1468-0343.1995.tb00111.x]
  • Lall, S. “Technological Capabilities and Industrialization.” World Development 20(No.2 1992): 165–186. [https://doi.org/10.1016/0305-750X(92)90097-F]
  • Lall, S., Technological Change and Industrialization in the Asian Newly Industrializing Economies: Achievements and Challenges. In Technology, Learning, & Innovation: Experiences of Newly Industrializing Economies (pp. 13–68). Cambridge: Cambridge University Press, 2000.
  • Lee, K., Marina S. and Zhuqing M., “From Global Value Chains (GVC) to Innovation Systems for Local Value Chains and Knowledge Creation.” European Journal of Development Research 30 (No.3 2018), 424-441. [https://doi.org/10.1057/s41287-017-0111-6]
  • Lee, K. Capability Failure and Industrial Policy to Move Beyond the Middle-income Trap: From Trade-based to Technology-based Specialization. In J. Lin and J. Stieglitz (Ed.), The Industrial Policy Revolution I (pp. 244–272). Berlin: Springer, 2013a. [https://doi.org/10.1057/9781137335173_16]
  • Lee, K., Schumpeterian Analysis of Economic Catch-up: Knowledge, Path-creation, and The Middle-income Trap. Cambridge: Cambridge University Press, 2013b. [https://doi.org/10.1017/CBO9781107337244]
  • Lee, K., & Temesgen, T. “What makes firms grow in developing countries? An extension of the resource-based theory of firm growth and empirical analysis.” International Journal of Technological Learning, Innovation and Development 2(No.3 2009): 139–172. [https://doi.org/10.1504/IJTLID.2009.023026]
  • Lin, J. Y. New Structural Economics: A Framework for Rethinking Develo pment and Policy. Washington DC: World Bank Publications, 2012. [https://doi.org/10.1596/978-0-8213-8955-3]
  • Lin, J. Y., & Monga, C. The Growth Report and New Structural Economics. Policy Research Working Paper Series, Washington DC: The World Bank, 2010.
  • Lindley, D. V, & Novick, M. R. “The Role of Exchangeability in Inference.” The Annals of Statistics 9(No.1 1981): 45–58. [https://doi.org/10.1214/aos/1176345331]
  • Lorenz, E. Social Capital and Enterprise Innovative Performance: A multi-level analysis of developing nations. Working Paper, French National Center for Scientific Research, 2012.
  • Lundvall, B.-Å. National Systems of Innovation: Toward a Theory of Innovation and Interactive Learning. London: Anthem Press, 2010. [https://doi.org/10.7135/UPO9781843318903]
  • Malerba, F., & Orsenigo, L. “Technological Regimes and Sectoral Patterns of Innovative Activities.” Industrial and Corporate Change 6(No.1 1997): 83–118. [https://doi.org/10.1093/icc/6.1.83]
  • Martins, P. S., & Yang, Y. “The Impact of Exporting on Firm Productivity: A Meta-analysis of The Learning-by-exporting Hypothesis.” Review of World Economics 145(No.3 2009): 431–445. [https://doi.org/10.1007/s10290-009-0021-6]
  • Nelson, R. R., & Rosenberg, N., Technical Innovation and National Systems (Vol. 322). Oxford, United Kingdom: Oxford University Press, 1993.
  • Nelson, R. R., & Winter, S. G., An Evolutionary Theory of Economic Change. Massachusetts: Harvard University Press, 1999.
  • Nonaka, I., Toyama, R., & Nagata, A. “A Firm As A Knowledge-creating Entity: A New Perspective on The Theory of The Firm.” Industrial and Corporate Change 9(No.1 2000): 1–20. [https://doi.org/10.1093/icc/9.1.1]
  • Penrose, E. T., The Theory of the Growth of the Firm. Oxford: Oxford University Press, 1995. [https://doi.org/10.1093/0198289774.001.0001]
  • Polanyi, M., The Tacit Dimension. New York: Anchor Books, 1967.
  • Porter, M. E., Warner, A., & Sachs, J., The Global Competitiveness Report 2000 (Vol. 198). Oxford: Oxford University Press, 2000.
  • Raudenbush, S. W., & Bryk, A. S., Hierarchical Linear Models: Applications and Data Analysis Methods. London: SAGE Publications, 2002.
  • Rhee, Y. W., Belot, T., & Mondiale, B., Export Catalysts in Low-income Countries: A Review of Eleven Success Stories. Discussion Papers 72, Washington DC: The World Bank, 1990.
  • Robinson, W. S. “Ecological Correlations and the Behavior of Individuals.” International Journal of Epidemiology 38(No.2 2009): 337–341. [https://doi.org/10.1093/ije/dyn357]
  • Rodrik, D., Subramanian, A., & Trebbi, F. “Institutions Rule: the Primacy of Institutions Over Geography and Integration in Economic Development.” Journal of Economic Growth 9(No.2 2004): 131–165. [https://doi.org/10.1023/B:JOEG.0000031425.72248.85]
  • Romer, P. M., Journal, T., Oct, N., & Romer, P. M. “Increasing Returns and Long-Run Growth.” The Journal of Political Economy 94(No.5 2007): 1002–1037. [https://doi.org/10.1086/261420]
  • Romp, W., & De Haan, J. “Public Capital and Economic Growth: A Critical Survey.” Perspektiven Der Wirtschaftspolitik 8(S1 2007): 6–52. [https://doi.org/10.1111/j.1468-2516.2007.00242.x]
  • Rumelt, R. P. “Towards A Strategic Theory of the Firm.” Competitive Strategic Management 26(No.3 1984): 556–570.
  • Scherer, F. M. “Firm Size, Market Structure, Opportunity, and the Output of Patented Inventions.” The American Economic Review 55(No.5 1965): 1097–1125.
  • Senge, P. M., & Sterman, J. D. “Systems Thinking and Organizational Learning: Acting Locally and Thinking Globally in the Organization of the Future.” European Journal of Operational Research 59(No.1 1992): 137–150. [https://doi.org/10.1016/0377-2217(92)90011-W]
  • Sleuwaegen, L., & Goedhuys, M. “Growth of Firms in Developing Countries, Evidence from Côte d’Ivoire.” Journal of Development Economics 68(No.1 2002): 117–135. [https://doi.org/10.1016/S0304-3878(02)00008-1]
  • Spence, M. “Cost Reduction, Competition, and Industry Performance.” Econometrica 52(No.1 1984): 475-518. [https://doi.org/10.2307/1911463]
  • Srholec, M., A Multilevel Analysis of Innovation in Developing Countries. Working Paper Series (ISSN 1211-3298), Czech Republic: Charles University, 2011. [https://doi.org/10.2139/ssrn.1784403]
  • Stern, N. “Towards A Dynamic Public Economics.” Journal of Public Economics 86(No.3 2002): 335–339. [https://doi.org/10.1016/S0047-2727(01)00192-X]
  • Sternberg, R., & Arndt, O. “The Firm or the Region: What Determines the Innovation Behavior of European Firms?” Economic Geography 77(No.4 2001): 364–382. [https://doi.org/10.2307/3594106]
  • Teece, D. J. “Towards An Economic Theory of the Multiproduct Firm.” Journal of Economic Behavior & Organization 3(No.1 1982): 39– 63. [https://doi.org/10.1016/0167-2681(82)90003-8]
  • The World Bank, The World Bank Annual Report. Washington DC: The World Bank, 2003
  • The World Bank, A Better Investment Climate for Everyone,World Development report. Washington DC: The World Bank, 2006
  • The World Bank, Chinese FDI in Ethiopia, World Bank Survey. Washington DC: The World Bank, 2012.
  • UNCTAD, Global Value Chains: Investment and Trade for Development. World investment report. UNCTAD, 2013.
  • Van Biesebroeck, J. “Exporting Raises Productivity in Sub-Saharan African Manufacturing Firms.” Journal of International Economics 67(No.2 2005): 373–391. [https://doi.org/10.1016/j.jinteco.2004.12.002]
  • Verspagen, B. “A New Empirical Approach to Catching Up or Falling Behind.” Structural Change and Economic Dynamics 2(No.2 1991): 359–380. [https://doi.org/10.1016/S0954-349X(05)80008-6]
  • Vohra, R. “Export and Economic Growth: Further Time Series Evidence From Less-developed Countries.” International Advances in Economic Research 7(No.3 2001): 345–350. [https://doi.org/10.1007/BF02295403]
  • Wagner, J. “Exports and Productivity: A Survey of the Evidence from Firm-level Data.” The World Economy 30(No.1 2007): 60–82. [https://doi.org/10.1111/j.1467-9701.2007.00872.x]
  • Wang, J.-Y. “Growth, Technology Transfer, and The Long-run Theory of International Capital Movements.” Journal of International Economics 29(No.3 1990): 255–271. [https://doi.org/10.1016/0022-1996(90)90033-I]
  • Wernerfelt, B. “A Resource-based View of the Firm.” Strategic Management Journal 5(No.2 1984): 171–180. [https://doi.org/10.1002/smj.4250050207]
  • Zahra, S. A., & George, G. “Absorptive Capacity: A Review, Reconceptualization, and Extension.” Academy of Management Review 27(No.2 2002): 185–203. [https://doi.org/10.5465/amr.2002.6587995]