Productivity Implications of R&D, Innovation, and Capital Accumulation for Incumbents and Entrants: Perspectives from a Catching-up Economy

TL;DR

This study examines how R&D, innovation, and capital accumulation influence productivity in Estonian firms, revealing differences between entrants and incumbents and highlighting unique policy implications for catching-up economies.

Contribution

It provides novel insights into the productivity effects of innovation modes and capital accumulation in a catching-up economy, contrasting with developed economies.

Findings

Innovation output has a higher impact on entrants' productivity.

R&D elasticity of productivity is similar for entrants and incumbents.

Capital accumulation more effectively drives productivity than R&D, especially when combined with R&D.

Abstract

We study the productivity implications of R&D, capital accumulation, and innovation output for entrants and incumbents in Estonia. First, in contrast to developed economies, a small percentage of firm engage in formal R&D, but a much larger percentage innovate. Second, while we find no difference in the R&D elasticity of productivity for the entrants and incumbents, the impact of innovation output - many of which are a result of 'doing, using and interacting' (DUI) mode of innovation - is found to be higher for the entrants. Entrants who innovate are 21% to 30% more productive than entrants who do not; the corresponding figures for the incumbents are 10% to 13%. Third, despite the adverse sectoral composition typical of catching-up economies, Estonian incumbents, who are the primary carriers of 'scientific and technologically-based innovative' (STI) activities, are comparable to their counterparts in developed economies in translating STI activities into productivity gains. Fourth, while embodied technological change through capital accumulation is found to be more effective in generating productivity growth than R&D, the effectiveness is higher for firms engaging in R&D. Finally, our results suggest that certain policy recommendations for spurring productivity growth in technologically advanced economies may not be applicable for catching-up economies.