"Create" or "Buy" : Internal vs. External Sources of Innovation and Firm Productivity
The role of innovation in improving productivity might vary according to a country's relative position in technology advancement. Frontier countries might benefit more from policies that promote firms' internal innovation (create), while...
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2017
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| Online Access: | http://documents.worldbank.org/curated/en/270861498570809131/Create-or-buy-internal-vs-external-sources-of-innovation-and-firm-productivity http://hdl.handle.net/10986/27624 |
| Summary: | The role of innovation in improving
productivity might vary according to a country's
relative position in technology advancement. Frontier
countries might benefit more from policies that promote
firms' internal innovation (create), while follower
countries would gain more from policies favoring the
adoption of existing technologies through innovation
outsourcing (buy). However, in many countries, the
government policies to promote innovation narrowly focus on
"creating," regardless of considerations of the
level of a country's technological advancement. This
paper investigates the effect of different sources of
innovation on output via productivity with representative
manufacturing firms in Tunisia from 1997 to 2007. It finds
that "buying" has a positive effect on
productivity whereas "creating" does not, which
might imply that Tunisian firms do not invest sufficiently
in "creating," or that "creating" is
more difficult for Tunisian firms because they might be too
far from the technology frontier. Meanwhile, there is no
synergy from using both sources of innovation simultaneously
–- a finding that counters literature suggesting that
"creating" could enhance firms' absorptive
capacity. The paper considers the possibility that
"creating" and "buying" substitute for
each other in Tunisia, where resources are limited, assuming
the effect of innovation is not linear or requires a certain
amount of investment (threshold) to positively affect
productivity. The estimation result using the Tobit model
supports this assumption. The findings suggest that
innovation policy in Tunisia should emphasize adoption and
adaptation, rather that creation and innovation. To
encourage firms' "buying," the government can
promote exports and workers' skills, whereas incentives
that encourage firms to hire more technicians or to acquire
foreign investment might not be efficient ways to encourage
"buying." Moreover, the fact that there is a
minimum requirement (threshold) for innovation investment
suggests that policies that aim to reduce this threshold or
support firms around this threshold could catalyze the
innovation investment. |
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