Innovation Strategy and Economic Development

53 Pages Posted: 27 Aug 2021 Last revised: 28 Aug 2021

See all articles by Matías Braun

Matías Braun

ESE Business School, Universidad de los Andes

Luis Felipe Céspedes

affiliation not provided to SSRN

Sebastián Bustos

affiliation not provided to SSRN

Date Written: August 24, 2021

Abstract

Productivity differentials have been documented as the main determinant of the variation of income per capita across countries. In this paper, we investigate whether the implementation of innovation-intensive or adoption-intensive business strategies by firms can explain differences in productivity levels and productivity growth across industries and countries. We compute a novel innovation-intensity strategy index for firms, based on textual analysis of financial reports issued in the US by firms from developed and developing countries and from a wide range of industries. We show that the index captures dimensions of the innovation process implemented by firms that go beyond R&D efforts. Our empirical results indicate that firms that pursue an innovation-based strategy exhibit higher productivity levels compared to firms that follow an adoption-based strategy. Nonetheless, the optimal business strategy depends on the distance to the world technology frontier. Firms far from the frontier grow faster when implementing an adoption-based strategy, but an innovation-based strategy better suits firms closer to the technological frontier. We provide evidence indicating that a country’s financial market sophistication, competition policy and innovation capabilities –such as educational level, availability of scientists and engineers, and intellectual property protection– are key determinants of the strategy implemented by firms. The empirical evidence suggests that middle-income traps may occur if competition policy, innovation capabilities and financial market sophistication are not enhanced as a country moves closer to the technology frontier.

Suggested Citation

Braun, Matias and Céspedes, Luis Felipe and Bustos, Sebastián, Innovation Strategy and Economic Development (August 24, 2021). Available at SSRN: https://ssrn.com/abstract=3911534 or http://dx.doi.org/10.2139/ssrn.3911534

Matias Braun (Contact Author)

ESE Business School, Universidad de los Andes ( email )

Av. La Plaza 1905
San Carlos de Apoquindo, Las Condes
Santiago
Chile

Luis Felipe Céspedes

affiliation not provided to SSRN

No Address Available

Sebastián Bustos

affiliation not provided to SSRN

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