Innovation activity and exports by destination

ABSTRACT

This article examines the effect of innovation activity on exports by destination using firm-level data from two India surveys collected by the World Bank. Both OLS regressions and IV estimations using innovation-reason indicators as the exogenous variation in innovation activity show the following findings. Firms with spending on R&D activity increase exports to richer destinations and consequently increase total exports than those without. This suggests that firms in lower-middle-income countries like India need to engage in R&D activity to satisfy the quality requirement in richer countries and increase exports. However, there is no consistent evidence that firms with a new process/product have such a causal effect. The contrast may reflect that, in poorer countries like India, instead of introducing new processes/products, spending on formal R&D activity is one more appropriate measure of innovation activity for the international market.https://datahelpdesk.worldbank.org/knowledgebase/articles/906519

KEYWORDS:

• R&D
• process innovation
• product innovation
• export destination

JEL CLASSIFICATION:

• D21
• F14
• O3
• L25

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Only using data from the India 2014 Enterprise Survey, Véganzonès-Varoudakis and Plane (2019) reports some evidence that firm’s innovation activity has a positive effect on export intensity.

² The definition of a country by the income level is from the World Bank’s country classifications.

³ The income-based quality-choice hypothesis presents the reverse causality that firms’ selling higher-quality products to richer countries tend to employ higher skilled workers and higher wages and even higher-quality inputs (Verhoogen 2008; Brambilla, Lederman, and Porto 2012; Bastos, Silva, and Verhoogen 2018).

⁴ Section 6.3.8 in Cameron and Trivedi (2009) provides the description of the IV method.

⁵ As shown in Lachenmaier and Wößmann (2006) and Blyde, Iberti, and Mussini (2018), treating innovation as exogenous generates large-downward-biased estimates for the effect of innovation on export intensity or export sales.