Innovation behaviour and firm performance in Uganda

Abstract

Manufacturing firms in many developing countries operate in settings associated with unregulated informal practices, skills and infrastructure constraints, low enforcement of intellectual property rights, and narrow financial markets. In such settings, investment in firm innovation is likely to be constrained. Consequently, firms may invest less in Research and Development (R&D) due to the likelihood of spillovers from introducing an innovation. As a survival strategy, innovating firms may opt to engage in incremental rather than groundbreaking innovation, acquire ready-made innovation, participate in joint endeavors, or imitate existing innovation. The choice of innovation behaviour may limit domestic value addition and is likely to influence the firm’s productivity, long-term competitiveness, international market participation, and performance outcomes. This study examines how Ugandan manufacturing firms address these innovation challenges and whether their innovation behavior explains performance outcomes. Specifically, it (1) examines the effects of competition from the informal sector (CIS) and access to finance on firm innovation behaviour, (2) identifies the determinants of the product innovation strategies manufacturing firms in Uganda adopt, and (3) analyses the effects exerted by the product innovation strategies on firm performance. To guide this analysis, the study draws on five interrelated theoretical frameworks: dual economy, pecking order, institutional theory, and both the resource-based and knowledge-based views. The first objective utilizes World Bank Enterprise Survey data and a multivariate probit model, revealing that exposure to CIS accelerates product innovation and that financing sources shape firm innovation choices. The second objective categorizes product innovation strategy into four groups: product innovation is internally developed “make”, sourced externally “buy”, created through collaboration “ally”, or developed by modifying original innovations “imitate”. It utilizes the Uganda National Innovation Survey (NIS) dataset, and findings show that product innovation strategies are heterogeneous, characterized by the firm's innovation expenditures, innovation obstacles, information sources, as well as short and long-term objectives. Firms that invest in contracted or external R&D and machinery acquisition are more likely to innovate. The analysis of the third objective is based on PLS-SEM. It employs the NIS dataset and reveals that product innovation strategy has no direct effect on firm performance. The results suggest that the firm’s product innovation strategy is mediated by other internal capabilities, including product novelty and internationalization. The study points to the need for improvements in regulatory enforcement, encouraging the formalization of informal businesses while maintaining competition and encouraging product differentiation among formal firms. There is also a need to expand and restructure the sources of financing for firm innovation. Developing affordable, innovation-focused programs and providing low-cost financing options could form part of the solution. Policymakers ought to view external sourcing and product imitation as legitimate early-stage innovation strategies. In the long-run, incremental adaptation of externally sourced technologies and learning through imitation will gradually transform into in-house capabilities for novel product innovation. However, the effectiveness of this initiative relies on having a robust and targeted skills development program for enhancing product design capabilities. Additionally, introducing targeted incentives for exporters to continuously undertake in-house R&D and differentiate their offerings will enhance the firm's international competitiveness. Finally, prioritizing the development of new, differentiated products and providing innovation grants and tax incentives can lead to sustainable business success. Subject key words; Firm performance, Innovation behaviour.