The Role of Innovation and Management Practices in Determining Firm Productivity in Developing Economies

This paper compares the effects of management practices and innovation on productivity, using data from the fifth round of the EBRD-WB Business Environment and Enterprise Performance Survey, a unique firm-level survey covering 30 mostly developing countries in eastern Europe and Central Asia in the period 2011-14.There are many ways in which firms can increase their productivity and thereby contribute to the improvement of aggregate productivity). However, the most common and most important driver of change within firms, particularly in advanced industrialised countries, is the introduction of new products, new processes or new ways of conducting business – in other words, innovation. It is thus not surprising that governments and policy-makers everywhere, regardless of the country's level of development, are keen to foster innovation. But there might be an even easier strategy for firms in the least developed countries: before they start imitating foreign production processes they can reap large productivity gains by improving their management practices.The working paper shows that both returns to innovation and returns to management practices are important drivers of productivity in developing economies. However, productivity in lower-income economies is affected to a larger extent by management practices than by innovation while the opposite holds in higher-income economies. These results imply that firms operating in less favourable business environments can reap large productivity gains by improving the quality of management practices, before engaging in innovation by imitating and adapting foreign technologies