The purpose of this article is to investigate how national-level characteristics such as country wealth, a floating exchange rate and European Union (EU) membership influence firm-level perceptions of competition and firm-level innovation. Greater understanding of these relationships can promote more effective policymaking as well as add to the existing academic conversation regarding national factors and firm competitiveness.
The authors’ data consist of a panel of 27 countries in Central and Eastern Europe and Central Asia from 2002 to 2009 with a total of nearly 27,000 firms from the World Bank Enterprise Survey. The authors utilize a multinomial logistic regression to estimate firm-level perceptions of both domestic and foreign competition upon decisions to introduce new products and manage new product costs. The authors then estimate the probability of innovation (introduction of a new product/service, obtaining international quality certification) using a logistic regression. The marginal effects of the key explanatory variables for country wealth, floating exchange rate and EU membership are calculated.
While EU membership heightens perceptions of competition, firms in the EU are less likely to introduce new products or services. On the other hand, a firm in an EU member country is more likely to obtain international quality certification than one that is not. Both country wealth and a floating exchange correlate with enhanced perceptions of competition and innovation as expected.
The first finding regarding heightened perceptions of competition yet lower likelihood of introduction of new products/services among EU firms is surprising. Beyond adding to the empirical store of knowledge regarding the relationship of national factors to firm competitiveness, it suggests that more needs to be done with regard to innovation policy. The authors offer a general recommendation to employ more public–private partnerships for innovation among small and medium enterprises, as this has been effective in other parts of the world.
The authors appreciate the insightful feedback given by Piotr Trapczynski, two anonymous reviewers and participants at the Academy of International Business (AIB)-CEE Conference held in Budapest, Hungary in October 2014.
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