INNOVATION AND FIRM PERFORMANCE IN TRANSITION ECONOMIES, WITH SPECIAL EMPHASIS ON KOSOVO

This thesis aims to investigate the effects of innovation on firm performance in transition economies, measured by sales growth and export intensity. It takes into account the relevance of the novelty of innovation, open innovation methods, business environment factors and the stages of transition, factors not investigated by the previous literature on transition economies.
The research consists of three empirical investigations. First, the process of innovation and its effect on the firm performance in seven transition economies is explored using the CDM model and a firm level dataset drawn from the Eurostat’s Community Innovation Surveys for the years 2004 and 2006 (separately and pooled). Second, the impact of innovation on firms’ export performance is investigated for 28 transition economies, using BEEPS Survey data for the years 2002, 2005 and 2008. Third, the effect of innovation on export performance of firms in Kosovo is studied using primary firm level survey data undertaken by Riinvest Institute, in which the author was directly involved.
The work in this thesis makes a number of original contributions to the literature on transition economies and specifically in Kosovo. The extent of open innovation efforts, measured by the breadth of cooperation, significantly increases the sales of radical innovations (products new to the market), while the internal firm capabilities for innovation influence only incremental innovations (products new to the firm). Product and process innovations in recent past significantly increase the firms’ sales growth. Public subsidies for innovation are generally not efficiently converted into innovation output, but significantly increase the sales growth of firms that have introduced radical innovations.
Furthermore, the firms’ export intensity increases with the degree of product novelty (new products as opposed to significantly improved products) and the effect is higher in more advanced stages of transition. Firms in advanced reforming countries that perceive their domestic market environment as uncertain, are inclined to increase their export intensity, while a weakness of rule of law has a negative effect. Tertiary education of employees facilitates firms’ export intensity in all transition stages, while specialised skills become effective only at the advanced stage of transition. Networking, knowledge spillovers and foreign ownership increase the firm’s export intensity in all stages of transition. Largely, transition reforms moderate the effects of determinants of export performance.
Similar findings are confirmed in the investigation focusing on the firms in Kosovo. In terms of innovation, products introduced as new to the market have the highest positive effect on export intensity of firms. The export intensity also increases with number of newly introduced products, an innovation indicator introduced to the literature for the first time. Uncertain domestic environment encourages firms to increase their exporting activity, similar to the effect of university education and locational factors. Smaller firms indicate for catching-up with larger firms as the same factors show to exercise relatively higher effect on export intensity of micro and small firms.
Overall, the findings suggest that open innovation practices are more likely to induce novel innovations. The higher the degree of novelty the higher the influence on export intensity of firms. In addition, in countries with an uncertain domestic environment, export promotion policies can encourage firms to increase exporting activities and balance risks associated with the domestic market. These effects are moderated by the stage of transition.