Technological innovation and productivity in late-transition Estonia: econometric evidence from innovation surveys

Abstract

There is growing interest in modelling the relationship between innovation and productivity in developing and transition economies due to their attempts to establish knowledge-based economies and to increase business R&D. Our paper investigates whether there is a significant relationship between technological innovation and productivity in the manufacturing sector of Estonia. We use firm-level data for the analysis from two waves of Community Innovation Surveys (CIS3 and CIS4) from 1998–2000 and 2002–2004, which is then combined with lead financial data about firms from the Estonian Business Register in order to study the effect of innovation on future performance. We apply a structural model that involves a system of equations on innovation expenditure, innovation outcome and productivity. Our results show that during 1998–2000 only product innovation increased productivity, while in 2002–2004 only process innovation had a positive effect on productivity. This can probably be explained by the different macroeconomic conditions in the two periods.