Hostname: page-component-7c8c6479df-r7xzm Total loading time: 0 Render date: 2024-03-27T22:19:53.982Z Has data issue: false hasContentIssue false

Firm Innovation in Emerging Markets: The Role of Finance, Governance, and Competition

Published online by Cambridge University Press:  01 June 2011

Meghana Ayyagari
Affiliation:
School of Business, George Washington University, 2201 G Street NW, Washington, DC 20052. ayyagari@gwu.edu
Asli Demirgüç-Kunt
Affiliation:
World Bank, 1818 H Street, NW, Washington, DC 20433. ademirguckunt@worldbank.org
Vojislav Maksimovic
Affiliation:
Smith School of Business, University of Maryland, Van Munching Hall, College Park, MD 20742. vmaksimovic@rhsmith.umd.edu
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We investigate the firm characteristics associated with innovation in over 19,000 firms across 47 developing economies. While existing finance literature on innovation is limited to large public firms in developed markets such as the United States, our database includes public and private firms, and small and medium-sized enterprises. We define innovation broadly to include introduction of new products and technologies, knowledge transfers, and new production processes. We find that access to external financing is associated with greater firm innovation. Further, having highly educated managers, ownership by families, individuals, or managers, and exposure to foreign competition is associated with greater firm innovation.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

References

Acemoglu, D.; Aghion, P.; and Zilibotti, F.. “Distance to Frontier, Selection, and Economic Growth.” Journal of the European Economic Association, 4 (2006), 3774.CrossRefGoogle Scholar
Acemoglu, D., and Johnson, S.. “Unbundling Institutions.” Journal of Political Economy, 113 (2005), 949995.CrossRefGoogle Scholar
Acs, Z. J., and Audretsch, D. B.. “Innovation, Market Structure and Firm Size.” Review of Economics and Statistics, 69 (1987), 567574.CrossRefGoogle Scholar
Aghion, P.; Blundell, R.; Griffith, R.; Howitt, P.; and Prantl, S.. “The Effects of Entry on Incumbent Innovation and Productivity.” Review of Economics and Statistics, 91 (2009), 2032.CrossRefGoogle Scholar
Aghion, P., and Durlauf, S. N., eds. Handbook of Economic Growth. Amsterdam: North-Holland Elsevier Publishers (2005).Google Scholar
Aghion, P.; Howitt, P.; and Mayer-Foulkes, D.. “The Effect of Financial Development on Convergence: Theory and Evidence.” Quarterly Journal of Economics, 120 (2005), 173222.Google Scholar
Aitken, B., and Harrison, A. E.. “Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela.” American Economic Review, 89 (1999): 605618.CrossRefGoogle Scholar
Alchian, A. A. “Uncertainty, Evolution and Economic Theory.” Journal of Political Economy, 58 (1950), 211221.CrossRefGoogle Scholar
Allen, F., and Gale, D.. “Corporate Governance and Competition.” In Corporate Governance: Theoretical and Empirical Perspectives, Vives, X., ed. Cambridge, UK: Cambridge University Press, (2000).Google Scholar
Anderson, R. C., and Reeb, D. M.. “Founding-Family Ownership and Firm Performance: Evidence from the S&P 500.” Journal of Finance, 58 (2003), 13011328.CrossRefGoogle Scholar
Atanassov, J.; Nanda, V. K.; and Seru, A.. “Finance and Innovation: The Case of Publicly Traded Firms.” Working Paper, University of Michigan (2009).Google Scholar
Audretsch, D. B. Entrepreneurship, Innovation and Economic Growth. Cheltenham, UK: Edward Elgar Publishing (2006).CrossRefGoogle Scholar
Ayyagari, M.; Beck, T.; and Demirgüç-Kunt, A.. “Small and Medium Enterprises across the Globe.” Small Business Economics, 29 (2007), 415434.CrossRefGoogle Scholar
Ayyagari, M.; Demirgüç-Kunt, A.; and Maksimovic, V.. “How Important Are Financing Constraints? The Role of Finance in the Business Environment.” World Bank Economic Review, 22 (2008), 483516.CrossRefGoogle Scholar
Ayyagari, M.; Demirgüç-Kunt, A.; and Maksimovic, V.. “Are Innovating Firms Victims or Perpetrators? Tax Evasion, Bribe Payments, and the Role of External Finance in Developing Countries.” World Bank Working Paper Series (2010a).CrossRefGoogle Scholar
Ayyagari, M.; Demirgüç-Kunt, A.; and Maksimovic, V.. “Formal versus Informal Finance: Evidence from China.” Review of Financial Studies, 23 (2010b), 30483097.CrossRefGoogle Scholar
Ayyagari, M.; Demirgüç-Kunt, A.; and Maksimovic, V.. “Small vs. Young Firms across the World.” World Bank Working Paper Series (2011).Google Scholar
Barker, V. L. III, and Muller, G. C.. “CEO Characteristics and Firm R&D Spending.” Management Science, 48 (2002), 782801.CrossRefGoogle Scholar
Barth, J. R.; Lin, C.; Lin, P.; and Song, F. M.. “Corruption in Bank Lending to Firms: Cross-Country Micro Evidence on the Beneficial Role of Competition and Information Sharing.” Journal of Financial Economics, 91 (2009), 361388.CrossRefGoogle Scholar
Baumohl, B. The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities. Upper Saddle River, NJ: Prentice Hall (2008).Google Scholar
Baumol, W. J. The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism. Princeton, NJ: Princeton University Press (2002).CrossRefGoogle Scholar
Beck, T.; Demirgüç-Kunt, A.; and Levine, R.. “SMEs, Growth, and Poverty: Cross Country Evidence.” Journal of Economic Growth, 10 (2005), 197229.CrossRefGoogle Scholar
Beck, T.; Demirgüç-Kunt, A.; and Maksimovic, V.. “Financial and Legal Constraints to Firm Growth: Does Firm Size Matter?Journal of Finance, 60 (2005), 137177.CrossRefGoogle Scholar
Beck, T.; Demirgüç-Kunt, A.; and Maksimovic, V.. “Financing Patterns around the World: Are Small Firms Different?Journal of Financial Economics, 89 (2008), 467487.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; and Lundblad, C.. “Emerging Equity Markets and Economic Development.” Journal of Development Economics, 66 (2001), 465504.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; and Lundblad, C.. “Does Financial Liberalization Spur Growth?Journal of Financial Economics, 77 (2005), 355.CrossRefGoogle Scholar
Belliveau, M. A.; O’Reilly, C. A. III; and Wade, J. B.. “Social Capital at the Top: Effects of Social Similarity and Status on CEO Compensation.” Academy of Management Journal, 39 (1996), 15681593.CrossRefGoogle Scholar
Benfratello, L.; Schiantarelli, F.; and Sembenelli, A.. “Banks and Innovation: Microeconometric Evidence on Italian Firms.” Journal of Financial Economics, 90 (2008), 197217.CrossRefGoogle Scholar
Bernard, A. B., and Jensen, J. B.. “Exporters, Jobs, and Wages in U.S. Manufacturing, 1976–1987.” Brookings Papers on Economic Activity, 1995 (1995), 67119.CrossRefGoogle Scholar
Bernard, A. B., and Jensen, J. B.. “Exporters, Skill Upgrading, and the Wage Gap.” Journal of International Economics, 42 (1997), 331.CrossRefGoogle Scholar
Bernard, A. B., and Jensen, J. B.. “Exceptional Exporter Performance: Cause, Effect, or Both?Journal of International Economics, 47 (1999), 125.CrossRefGoogle Scholar
Bertrand, M., and Schoar, A.. “Managing with Style: The Effect of Managers on Firm Policies.” Quarterly Journal of Economics, 118 (2003), 11691208.CrossRefGoogle Scholar
Bertrand, M., and Schoar, A.. “The Role of Family in Family Firms.” Journal of Economic Perspectives, 20 (2006), 7396.CrossRefGoogle Scholar
Black, B.The Corporate Governance Behavior and Market Value of Russian Firms.” Emerging Markets Review, 2 (2001), 89108.CrossRefGoogle Scholar
Black, B.; Jang, H.; and Kim, W.. “Does Corporate Governance Predict Firms’ Market Values? Evidence from Korea.” Journal of Law, Economics, and Organization, 22 (2006), 366413.CrossRefGoogle Scholar
Blundell, R.; Griffith, R.; and Van Reenan, J.. “Dynamic Count Data Models of Technological Innovation.” Economic Journal, 105 (1995), 333344.CrossRefGoogle Scholar
Burkart, M.; Panunzi, F.; and Shleifer, A.. “Family Firms.” Journal of Finance, 58 (2003), 21672202.CrossRefGoogle Scholar
Burt, R. S. Structural Holes: The Social Structure of Competition. Cambridge, MA: Harvard University Press (1992).CrossRefGoogle Scholar
Carayannis, E. G., and Provance, M.. “Measuring Firm Innovativeness: Towards a Composite Innovation Index Built on Firm Innovative Posture, Propensity and Performance Attributes.” International Journal of Innovation and Regional Development, 1 (2008), 90107.CrossRefGoogle Scholar
Chevalier, J., and Ellison, G.. “Career Concerns of Mutual Fund Managers.” Quarterly Journal of Economics, 114 (1999), 389432.CrossRefGoogle Scholar
Cosh, A.; Hughes, A.; and Wood, E.. “Innovation in UK SMEs: Causes and Consequences for Firm Failure and Acquisition.” In Entrepreneurship, Small and Medium-Sized Enterprises, and the Macroeconomy, Acs, Z., Carlsson, B., and Karlsson, C., eds. Cambridge, UK: Cambridge University Press (1999).Google Scholar
Cull, R., and Xu, L. C.. “Institutions, Ownership, and Finance: The Determinants of Profit Reinvestment among Chinese Firms.” Journal of Financial Economics, 77 (2005), 117146.CrossRefGoogle Scholar
Dasgupta, P., and Stiglitz, J.. “Industrial Structure and the Nature of Innovative Activity.” Economic Journal, 90 (1980), 266293.CrossRefGoogle Scholar
Demirgüç-Kunt, A.; Love, I.; and Maksimovic, V.. “Business Environment and the Incorporation Decision.” Journal of Banking and Finance, 30 (2006), 29672993.CrossRefGoogle Scholar
Demirgüç-Kunt, A., and Maksimovic, V.. “Law, Finance, and Firm Growth.” Journal of Finance, 53 (1998), 21072137.CrossRefGoogle Scholar
Dewenter, K. L., and Malatesta, P. H.. “Public Offerings of State-Owned and Privately-Owned Enterprises: An International Comparison.” Journal of Finance, 52 (1997), 16591679.Google Scholar
Dewenter, K. L., and Malatesta, P. H.. “State-Owned and Privately-Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity.” American Economic Review, 91 (2001), 320334.CrossRefGoogle Scholar
Djankov, S.; La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “Courts.” Quarterly Journal of Economics, 118 (2003), 453517.CrossRefGoogle Scholar
Doidge, C.; Karolyi, G. A.; and Stulz, R. M.. “Why Are Foreign Firms Listed in the U.S. Worth More?Journal of Financial Economics, 71 (2004), 205238.CrossRefGoogle Scholar
Durnev, A., and Kim, E. H.. “To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation.” Journal of Finance, 60 (2005), 14611493.CrossRefGoogle Scholar
Dutz, M. Unleashing India’s Innovation: Toward Sustainable and Inclusive Growth. Washington, DC: The World Bank (2007).CrossRefGoogle Scholar
Galdón-Sánchez, J. E., and Schmitz, J. A. Jr.Competitive Pressure and Labor Productivity: World Iron-Ore Markets in the 1980’s.” American Economic Review, 92 (2002), 12221235.CrossRefGoogle Scholar
Geroski, P. A. “Innovation, Technological Opportunity, and Market Structure.” Oxford Economic Papers, 42 (1990), 586602.CrossRefGoogle Scholar
Ghosal, V., and Loungani, P.. “Product Market Competition and the Impact of Price Uncertainty of Investment: Some Evidence from U.S. Manufacturing Industries.” Journal of Industrial Economics, 44 (1996), 217228.CrossRefGoogle Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107155.CrossRefGoogle Scholar
Gompers, P.; Kovner, A.; Lerner, J.; and Scharfstein, D.. “Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs.” SSRN Working Paper Series (2006).CrossRefGoogle Scholar
Grossman, G. M., and Helpman, E.. “Quality Ladders in the Theory of Growth.” Review of Economic Studies, 58 (1991), 4361.CrossRefGoogle Scholar
Guner, A. B.; Malmendier, U.; and Tate, G.. “Financial Expertise of Directors.” Journal of Financial Economics, 88 (2008), 323354.CrossRefGoogle Scholar
Hallward-Driemeier, M., and Aterido, R.. “Comparing Apples with … Apples: How to Make (More) Sense of Subjective Rankings of Constraints to Business.” World Bank Policy Research Working Paper Series, 5054 (2009).CrossRefGoogle Scholar
Hart, O. D. “The Market Mechanism as an Incentive Scheme.” Bell Journal of Economics, 14 (1983), 366382.CrossRefGoogle Scholar
Haskel, J. E.; Pereira, S. C.; and Slaughter, M. J.. “Does Inward Foreign Direct Investment Boost Productivity of Domestic Firms?” NBER Working Paper, 8724 (2002).CrossRefGoogle Scholar
Hellmann, T., and Puri, M., “The Interaction between Product Market and Financing Strategy: The Role of Venture Capital.” Review of Financial Studies, 13 (2000), 959984.CrossRefGoogle Scholar
Herrera, A. M., and Minetti, R.. “Informed Finance and Technological Change: Evidence from Credit Relationships.” Journal of Financial Economics, 83 (2007), 223269.CrossRefGoogle Scholar
Javorcik, B. S. “Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages.” American Economic Review, 94 (2004), 605627.CrossRefGoogle Scholar
Khanna, T., and Palepu, K.. “Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups.” Journal of Finance, 55 (2000), 867891.CrossRefGoogle Scholar
King, R. G., and Levine, R.. “Finance and Growth: Schumpeter Might Be Right.” Quarterly Journal of Economics, 108 (1993a), 717737.CrossRefGoogle Scholar
King, R. G., and Levine, R.. “Finance, Entrepreneurship and Growth: Theory and Evidence.” Journal of Monetary Economics, 32 (1993b), 513542.CrossRefGoogle Scholar
Klapper, L. F., and Love, I.. “Corporate Governance, Investor Protection and Performance in Emerging Markets.” Journal of Corporate Finance, 10 (2004), 703728.CrossRefGoogle Scholar
Kortum, S., and Lerner, J.. “Assessing the Contribution of Venture Capital to Innovation.” RAND Journal of Economics, 31 (2000), 674692.CrossRefGoogle Scholar
Kremer, M.The O-Ring Theory of Economic Development.” Quarterly Journal of Economics, 108 (1993), 551575.CrossRefGoogle Scholar
Landes, D. S. The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge, UK: Cambridge University Press (1969).Google Scholar
Lang, M. H.; Lins, K. V.; and Miller, D. P.. “ADRs, Analysts and Accuracy: Does Cross Listing in the United States Improve a Firm’s Information Environment and Increase Market Value?Journal of Accounting Research, 41 (2003), 317345.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “Government Ownership of Banks.” Journal of Finance, 57 (2002), 265301.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Law and Finance.” Journal of Political Economy, 106 (1998), 11131155.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; and Zamarripa, G.. “Related Lending.” Quarterly Journal of Economics, 118 (2003), 231268.CrossRefGoogle Scholar
Levine, R. “Finance and Growth: Theory and Evidence.” In Handbook of Economic Growth, Aghion, P. and Durlauf, S. N., eds. Amsterdam: North-Holland Elsevier Publishers (2005).Google Scholar
Levine, R.; Loayza, N.; and Beck, T.. “Financial Intermediation and Growth: Causality and Causes.” Journal of Monetary Economics, 46 (2000), 3177.CrossRefGoogle Scholar
Levitt, T. Ted Levitt on Marketing. Boston, MA: Harvard Business School Publishing (2006).Google Scholar
Maksimovic, V.Capital Structure in Repeated Oligopolies.” Rand Journal of Economics, 19 (1988), 389407.CrossRefGoogle Scholar
Maksimovic, V., and Titman, S.. “Financial Policy and Reputation for Product Quality.” Review of Financial Studies, 4 (1991), 175200.CrossRefGoogle Scholar
Mokyr, J. The Lever of Riches: Technological Creativity and Economic Progress. New York, NY: Oxford University Press (1990).Google Scholar
Morck, R. K.; Stangeland, D. A.; and Yeung, B.. “Inherited Wealth, Corporate Control, and Economic Growth: The Canadian Disease?” In Concentrated Corporate Ownership, Morck, R. K., ed. Chicago, IL: University of Chicago Press (2000), 319369.CrossRefGoogle Scholar
Nickell, S. J. “Competition and Corporate Performance.” Journal of Political Economy, 104 (1996), 724746.CrossRefGoogle Scholar
OECD. Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd ed. Paris: OECD Publishing (2005).Google Scholar
Rajan, R. G., and Zingales, L.. “Financial Dependence and Growth.” American Economic Review, 88 (1998), 559586.Google Scholar
Richardson, D. J., and Rindal, K.. Why Exports Really Matter! Washington, DC: Institute for International Economics and the Manufacturing Institute (National Association of Manufacturers) (1995).Google Scholar
Rosenberg, N. Inside the Black Box: Technology and Economics. Cambridge, UK: Cambridge University Press (1982).Google Scholar
Rothwell, R., and Dodgson, M.. “Innovation and Size of Firm.” In The Handbook of Industrial Innovation. Cheltenham, UK: Edward Elgar (1994).Google Scholar
Scharfstein, D.Product-Market Competition and Managerial Slack.” RAND Journal of Economics, 19 (1988), 147155.CrossRefGoogle Scholar
Scherer, F. M. “Firm Size, Market Structure, Opportunity, and the Output Patented Inventions.” American Economic Review, 55 (1965), 10971125.Google Scholar
Schumpeter, J. A. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. New York and London: McGraw-Hill (1939).Google Scholar
Schumpeter, J. A. Capitalism, Socialism, and Democracy. New York: Harper and Brothers (1942).Google Scholar
Schumpeter, J. A. “The Creative Response in Economic History.” Journal of Economic History, 7 (1947), 149159, reprinted in J. Schumpeter, Essays: On Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism, R. V. Clemence, ed. New Brunswick, NJ: Transaction Publishers (1989).CrossRefGoogle Scholar
Segerstrom, P. S. “Innovation, Imitation, and Economic Growth.” Journal of Political Economy, 99 (1991), 807827.CrossRefGoogle Scholar
Shleifer, A.State versus Private Ownership.” Journal of Economic Perspectives, 12 (1998), 133150.CrossRefGoogle Scholar
Solow, R. M. “Technical Change and the Aggregate Production Function.” Review of Economics and Statistics, 39 (1957), 312320.CrossRefGoogle Scholar
Spence, A. M. “Industrial Organization and Competitive Advantage in Multinational Industries.” American Economic Review, 74 (1984), 356360.Google Scholar
Stigler, G. J. “The Economies of Scale.” Journal of Law and Economics, 1 (1958), 5471.CrossRefGoogle Scholar
UNCTAD. Trade and Development Report: Regional Cooperation for Development. New York: United Nations Publications (2007).Google Scholar
Villalonga, B., and Amit, R.. “How Do Family Ownership, Control and Management Affect Firm Value?Journal of Financial Economics, 80 (2006), 385417.CrossRefGoogle Scholar
Vives, X. “Innovation and Competitive Pressure.” CEPR Discussion Papers, 4369 (2004).Google Scholar
Wooldridge, J. M. Introductory Econometrics: A Modern Approach, 3rd ed. Mason, OH: Thomson South-Western (2006).Google Scholar