‘Enabling Innovation and Productivity Growth in

Low Income Countries’ (EIP-LIC)

Research project ‘Co-ordinated Country Case Studies: Innovation and Growth, Raising Productivity in

Developing Countries’ (PO 5639)

Funded by the UK’s Department for International Development (DFID),

Growth Research Team, Research and Evidence Division

Policy Implications Matrix

Tilburg School of Economics and

Management (TiSEM), Tilburg University

The policy implications matrix summarises all principal research outcomes from the working papers and

qualitative studies of ‘Enabling Innovation and Productivity Growth in Low Income Countries’ (EIP-LIC)

detailing the countries of study to which the findings directly apply. It serves as a quick reference guide to

explore the programme outcomes.

Disclaimer:

This material has been funded by UK aid from the UK government; however the views expressed do not

necessarily reflect the UK government’s official policies.

INNOVATION SYSTEMS

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Imported input and

product innovation

The number of newly imported intermediate inputs has a significant

positive impact on product innovations. x x x x

The effect comes from access to better quality imports.

Human capital and

innovation

Employee schooling is a relatively unimportant factor for innovation

within SMEs.

x x x Strong relationship between formal company training and the probability

of producing innovative output

Giving slack time to its employees has a higher probability of producing

innovative output

Institutional voids

and informal

institutions

As a response to regulatory institutional voids, entrepreneurs take recourse

to a range of normative and cognitive institutions to support their

innovation efforts.

x

The entrepreneurs apply family and personal reference frameworks and

local cultural values, and mirror international quality standards to fill the

regulatory institutional void with regard to their innovation ambitions,

motivation and learning process.

Behaving independently while avoiding government interactions and

keeping innovations hidden replaces trust in a government that is

facilitating and supporting SMEs in terms of legal, tax and administrative

issues.

Knowledge sources

and innovation

The impact of internal knowledge (ignoring external knowledge) on

product innovation is greater than the impact of external knowledge

(ignoring internal knowledge).

x

The main source of internal knowledge in Tanzanian firms is firm

spending on internal research and development.

The purchase of equipment, machinery or software is the main external

source of knowledge.

The development of an internal knowledge base is better undertaken by

investing in internal research and development than by acquiring external

business and codified knowledge. The latter is only effective once an

adequate internal knowledge base is already developed.

Institutions and

innovation

Firms situated in an environment with a low degree of institutional quality

have a lower likelihood of conducting and benefitting from R&D.

x x x A firm with well-educated employees is likely to be more innovative in an

environment with a high degree of regional institutional quality.

The effect of quality certification on innovation is reinforced by a high

degree of regional institutional quality.

Export and

innovation

Exporting firms are significantly more introducing product innovation.

x

The link between exports and process innovation is much weaker or absent

all together.

The question remains whether innovation stimulates firms to export, or

whether it is the other way around.

R&D and foreign

technology

Internal R&D significantly decreases technical efficiency of a firm.

x x x

The adoption of foreign technology has a positive, but not statistically

significant effect on technical efficiency.

The combination of internal R&D and the adoption of foreign technology

is found to significantly decrease technical efficiency.

Engagement and

commercialization in

innovation activities

Availability of equipment is a critical factor in engaging in innovation

activities in Tanzanian SMEs.

x

The access to technology is perceived as an important limitation, which

hampers SMEs to innovate.

Locally produced technology is hardly available and of insufficient quality

Limited firm funding of external research and development hinder many

firms especially small and medium ones from doing so.

Cooperation with domestic firms has a significant impact on

commercialization.

TPF spill-overs No indirect effect through interfirm spill-overs from trade liberalizations

x

There is a direct positive effect of input and output tariffs on firm-level

TFP.

Export and

innovation

the relationship between innovation and subsequent exporting is positive

and significant,

x x x x

Non-significant relationship between exporting and subsequent innovation.

technology push and supply-driven mechanisms account for the

relationship between innovation and subsequent exporting

The customer feedback mediates the effect of exporting on subsequent

innovation

Knowledge sources

and innovation

The impact of internal knowledge (ignoring external knowledge) on

product innovation is greater than the impact of external knowledge

(ignoring internal knowledge).

x

The main source of internal knowledge in Tanzanian firms is firm

spending on internal research and development.

The purchase of equipment, machinery or software is the main external

source of knowledge.

The development of an internal knowledge base is better undertaken by

investing in internal research and development than by acquiring external

business and codified knowledge. The latter is only effective once an

adequate internal knowledge base is already developed.

Gender diversity and

innovation

Gender diversity at all levels in the organization has a positive effect on

innovation

x x x x x x

A country’s level of women’s economic opportunity plays an important

role in the relationship between gender diversity and innovation

The positive effect of gender diversity on firms’ innovation likelihood is

amplified with increasingly equal opportunities for women.

Gender diversity in the ownership structure and in the overall workforce

can have a negative effect on a firm’s likelihood to innovate if the firm is

operating in a country with very little economic opportunity for women.

Labour flexibility and

innovation

Downsizing a firm’s workforce negatively impacts process innovation in

SMEs in emerging nations.

x x x x x x

Labour flexibility can be a way for firms to overcome the innovation

challenges associated with downsizing.

Both numerical flexibility, namely the use of temporary employment, as

well as functional flexibility such as employee training, can alleviate the

negative impact of downsizing on innovation.

Wage and reward flexibility in terms of performance bonuses for managers

and employees positively impact innovation

Internal,

collaborative and

regional knowledge

sources

Knowledge sources from internal R&D have a positive influence on

product innovation.

x

The stronger a firm’s collaborative knowledge gained from inside the

supply chain, the higher the likelihood of product innovation. It might be

specific to developing countries that firms need to create a network with

customers, suppliers and competitors to enhance product innovation.

There is no significant relationship between collaboration with universities

or research institutes and innovation. One explanation as to why regional

knowledge sources are not effective in Vietnam is that national

knowledge-producing organisations and State agencies are slow and

reluctant to exchange information and knowledge.

Scanning capabilities

of firms

Scanning capabilities are considered as a crucial step in aligning firms’

strategies with their external environment

x x x

Informal competition hampers the development of formal firm capabilities.

Governments should strengthen their efforts to formalise the informal

enterprise sector.

Highly unstable environments characterised by high levels of dynamism

(large fluctuations in the level of sales within an industry) have a

paralysing effect on the development of scanning capabilities.

FINANCE FOR PRODUCTIVITY GROWTH

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Finance and demand

for skill

The extent to which micro and small businesses expand skilled

employment, as their sales and profits increase, depends significantly on

access to external funding.

x

Firms with positive performance and a bank loan hire more trained and

experienced employees.

Growing and profitable small businesses create more jobs for trained and

experienced workers - which is interpreted as demand for skill - if they have

access to external finance.

Financially constrained firms save their excess resources instead of

investing in a more sophisticated and skilled workforce.

Informality and

access to finance

Financial outreach - measured in the research as branch penetration - helps

to reduce formality barriers and thus increases the number of formal firms.

x

Financial deepening increases the productivity of formal sector and

reduces informality.

Given the importance of geographic proximity in lending relationships

especially of smaller firms, small firms stand to benefit more from financial

outreach than large firms.

There is no significant effect on productivity for branch penetration.

Mobile money and

trade credit

There is a positive relation between the use of mobile money ‘M-Pesa’, as

a payment method when purchasing inputs from suppliers, and the access

to trade credit.

x

Having a trade credit relationship with suppliers exhibits a strong positive

relation with enterprises’ M-Pesa use as well.

Mobile phone technologies help foster economic and financial relationships

between enterprises in developing countries.

Bank finance and trade credit are substitutes. x

Trade credit and

access to finance

In locations with lesser access to formal bank finance, the use of trade

credit is higher

The extension of trade credit by suppliers generates a credible signal to

banks with regard to the customers’ creditworthiness.

Receiving a bank credit increases the creditworthiness of informal firms and

motivates their suppliers to extend them trade credit. For formal firms,

however, having more bank loans is not a significant explanatory factor of

the use of trade credit.

Income variability

Cognitive performance in financially stressful situations is not affected by

absolute poverty in terms of wealth or income

x

The subjective feeling of poverty together with the variability of income

creates cognitive stress; being exposed to very low or very high income

variability can be detrimental for cognitive capacity.

It is best to avoid cognitive functioning being unintentionally harmed as a

result of financial, fiscal or income generating policies and programmes.

The effectiveness of policy and programmes that focus on the beneficiaries’

lack of financial resources, for instance, could be increased if income

variability is also given careful consideration.

Goal setting

There is a significant positive effect of goal-setting on productivity. Firms

trained in goal-setting increase their productivity by 50% relative to those

trained in production measurement only.

x

The effect is particularly significant for male employers and employers

who are less well- educated, with less experience in goal-setting, with

smaller firms, and who are more impatient and more risk-averse set higher

goals.

Workers systematically underachieve their daily production targets to a

moderate extent, which suggests that goals are kept rather high as a

motivational device.

Goal setting can be an effective and inexpensive tool to increase

productivity amongst small informal enterprises

in non-western cultures.

Business aspirations

Retail shop owners in Jakarta, the average business has strong short- and

long-term aspirations for growth in shop size, number of employees,

number of customers, and sales.

x

There is pronounced heterogeneity with more than half the businesses

reporting no aspirations for growth in the next 12 months, and 16 percent

failing to imagine an ideal business over the long-term.

Entrepreneurs with low profits, business skills, and agency beliefs, as well

as those who are older, female, and less educated have significantly lower

aspirations.

Aspirations predict future-oriented behaviours such as savings, credit use,

business expansion, and innovation, even after controlling for business

practices.

Learning from peers

There is a significant increase in the adoption of profitable practices

among retailers through a professionally developed business management

handbook, through business role models, and through individualized

business counselling.

x

While the handbook alone does not lead to significant performance gains,

supplementary role models and business counselling improve sales and

profitability.

The channels of impact differ, with role model recipients learning

practices by observing while counselling recipients learning practices by

doing. These findings show that business growth can be achieved through

innovative and simple channels that are cost effective and scalable.

QUALITATIVE REPORTS

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Innovation

Innovation emerges as incremental adoption and adaptation or of new

combinations of existing technologies. The new products and processes in

the innovative companies were not radical and not new-to-the-world. x x x x x x x x x x

Ideas for new products are mainly acquired from the market: customers

come with requests and suggestions, or the owners talk with clients.

Innovation is therefore mostly demand-driven as opposed to supply-

driven. x x x x x x x x

In factor-driven economies, innovation in manufacturing companies

increases competitiveness based on factor endowments, primarily

unskilled labour and natural resources. x x x x x x

In efficiency-driven economies companies begin to develop more efficient

production processes and increase product quality. x x x x

In most cases, there is integrated combination of several types of

innovation, where one type of innovation triggers or enables another. x x x x x x x x x x

Green inclusive production process and management innovations are

increasingly imposed by international buyers. x

Innovation in many SMEs involves product quality to meet international

and export standards.

x

x x x x

Internal capabilities

Typical fixed employment contracts are only for key and higher educated

staff in several cases. Regular work is subcontracted to middlemen who

come with a pool of workers, often migrants who work under unfavourable

conditions.

x x

Most companies possess technology and machinery that they have had for

a long time. The technology is still able to deliver a certain minimum

product quality, but occasionally, new machinery is bought from profits

and savings.

x x x x

x

The interviewed owners and managers are well-informed about

technological possibilities though the internet or informal contacts, and

have ideas and plans for upgrading and expanding their companies. x x x x x x x x x x

Some companies have a design or R&D department or a specialist

employee with this function. x

x

The labour force is flexibly organised in many of the interviewed

companies. Permanent staff are kept at a minimum. In the event of large

orders, workers are temporarily hired for day jobs. x x x x x x

It is difficult to find skilled craftsmen to do the manual manufacturing.

Most owners mention that the skills and knowledge of workers, gained

through formal education, do not match the company’s requirements.

x x x x x x x x x

Several owners face the difficulties of a high turnover rate of unskilled

production workers. It is difficult to find skilled craftsmen to do the

manual manufacturing. x x x x x x

Only very few interviewed companies provide additional formal training

for the workers, opting instead for on-the-job training. Some owners are

reluctant to provide formal training because they are afraid that workers

will move to other jobs.

x x x

x x

x x

Most SME entrepreneurs find investment money from savings and via

informal loans from family members. x x x x x x

They usually invest incrementally just before or after receiving large

orders. x x x x x

Most of the owners who are engaged in export gained international

exposure by working or studying abroad. x x x x x x x

External business and

institutional context

The interviewed owners and managers perceive a positive business

environment in terms of opportunities, in particular with regard to import

substitution. They see that there are many imported goods on the local

market that could be produced in a more cost-efficient way.

x x x x x

Many SMEs are subject to compliance certification system established by

international buyers

x

Most interviewed enterpreneurs have a negative perceptions government

policies and regulations. x x x x x x

Many ministries and governmental agencies have different and

unpredictable regulations. x x x x x

Corruption, bribery and harassment of government official make their

business environment even more challenging. As a result, most companies

are careful to avoid external exposure and interaction with formal

government institutions.

x x x

Many SMES are part of family group businesses. These enterprises can be

set up more easily than those without family support. x x

Only a very few interviewed companies received any form of support from

the government. The other owners and managers express regret that they

have not received such support, and feel that they have to survive on their

own.

x x x x x x x x

Most SME owners are members of a branch or industry association. x x x x x x x

Interaction with formal technology institutions or university does not

happen x x x x x x x x x x

There is spill-over of technology as a result of cooperation between firms,

subcontracting or other forms of collaboration within value chains,

business clusters or networks.

x

x

Contacts with clients and competitors at trade fairs in the country and

overseas, as well as internet research, provided good sources of

information on new technology and products.

x x x x x

x x x

The policy framework is in conflict with the interests of the local SMEs:

there are certain tax exemptions for imported finished products from

China, but local SMEs importing raw materials or packaged materials

from abroad have to pay full import taxes.

x x x