Innovation activities and firm performance : empirical evidence from transition economies

The aim of this paper is to investigate the determinants of innovation activities and their impact on firm performance. For the empirical analysis of the study we employ Business Environment Enterprise Performance Surveys (BEEPS) firm-level data conducted by the World Bank and the European Bank for Reconstruction and Development (EBRD) in 2002, 2005 and 2009. To examine the relationship between innovation activities, ownership structure and firm performance we apply instrumental variable (IV) technique, which enables us to control for the endogeneity between innovation activities undertaken by firms and their performance. Our findings suggest that firm's size, R&D intensity, foreign ownership, competition, skilled workers and export activity have a positive and significant impact on their incentive to undertake innovation activities. Considering the determinants of productivity, we find evidence that firms that have undertaken innovation activities (instrumented variable) and owned by foreign ownership, having a higher degree of skilled workers and that European Union member country firms perform better.