Innovation and growth of firms in East Africa

Abstract

Empirical evidence has shown that innovation is a major determinant of firm growth in developed and developing countries. However, little is known about the impact of innovation on firm growth in LICs like those in the East African region. This study attempts to fill this gap in the literature using a modified Crepon-Duguet-Mairesse (CDM) structure model to analyze data from the World Bank Enterprise Survey of 2754 firms in Burundi, Kenya, Rwanda, Tanzania and Uganda. The study examines the role of product and process innovation in explaining firm growth. Furthermore, it investigates how innovation interacts with firm-level resources to explain firm growth in East Africa. Proxies for firm growth used are sales, employment and productivity growth. We hypothesize that product and process innovation positively and independently affect firm growth and also exhibit complementarity effects. In addition, we hypothesize that innovation moderates the effect of firm-level resources on firm growth. The set hypotheses are tested using a Two Stage Least Squares estimation strategy. Overall, the results suggest that product and process innovation positively and significantly affect the three proxies of firm growth. The results also reveal evidence of complementarity effects of product and process innovation on sales, employment and productivity growth. In addition, results show that product and process innovation positively moderate the effect of firm-level resources on firm growth.