Innovative Firms or Innovative Owners?Determinants of Innovation in Micro,Small, and Medium Enterprises

Innovation is key to technology adoption and creation, and to explaining the vast differencesin productivity across and within countries. Despite the central role of the entrepreneur in theinnovation process, data limitations have restricted standard analysis of the determinants ofinnovation to consideration of the role of firm characteristics. We develop a model ofinnovation which incorporates the role of both owner and firm characteristics, and use this todetermine how product, process, marketing and organizational innovations should vary withfirm size and competition. We then use a new large representative survey from Sri Lanka totest this model and to examine whether and how owner characteristics matter for innovation.The survey also allows analysis of the incidence of innovation in micro and small firms, whichhave traditionally been overlooked in the study of innovation, despite these firms comprisingthe majority of firms in developing countries. More than one quarter of microenterprises arefound to be engaging in innovation, with marketing innovations the most common. Aspredicted by our model, firm size is found to have a stronger positive effect, and competitiona stronger negative effect, on process and organizational innovations than on productinnovations. Owner ability, personality traits, and ethnicity are found to have a significant andsubstantial impact on the likelihood of a firm innovating, confirming the importance of theentrepreneur in the innovation process....