The impact of innovation activities on firm performance using a multi-stage model: Evidence from the Community Innovation Survey 4

The impact of innovation on firm performance has been a matter of significant interest to economists and policy makers for decades. Although innovation is generally regarded as a means of improving the competitiveness of firms and their performance, this relationship has not been supported unambiguously by empirical work. This paper presents one of the first attempts to assess the drivers of the innovation process in two different institutional settings: mature market economies of Western Europe and advanced transition economies from Central and Eastern Europe. A multi-stage approach to innovation is applied to the firm level data from the fourth Community Innovation Survey (CIS4), covering some 90,000 firms. The findings reveal a positive relationship between innovation activities and productivity. Firms decide to engage in innovation and on how much to invest under pressure of competition. In making these decisions firms rely on the knowledge accumulated from previously abandoned innovations and cooperation with other firms and institutions and other members of their group. Subsidies lead to additional spending on innovation by firms but do not lead to additional innovation output. The results also show that larger firms are more likely to embark on innovation activities and invest more in innovation but innovation output decreases with firm size. Finally, results reveal several differences in behaviour of firms in two groups of countries.