Firm-Level Innovations in an Emerging Economy: Do Perceived Policy Instability and Legal Institutional Conditions Matter?

Abstract

Innovation has become a key factor of production, driving and sustaining firms’ productivity and competitiveness. Despite the growing importance attached to innovations, existing studies have produced different results on the factors driving firm-level innovations. This study investigates the factors driving innovations in the service and manufacturing sector firms in Thailand. The study tests proposed hypotheses using cross-sectional data on a sample of 613 firms from the World Bank enterprise survey of 2016. Our empirical results show that specific aspects of the business environment, such as policy instability, legal institutions, corruption, and informal competition, negatively influence non-technological innovations. Contrarily, we find that formal training, foreign technology licenses, research and development have marginal and additionality effects that positively enhance both technological and non-technological innovations. We provide practical implications for firm managers and policymakers in Thailand on adaptive measures to improve the business environment to make it conducive for firm-level innovations.

The relationship between perceived institutional conditions and firm-level innovations in emerging markets: Moderating effects of firm ownerships

“…The comprehensive nature of this survey makes it one of the best datasets for firm-level innovations and institutional condition analysis. Usage of the WBES dataset has soared among researchers, and it has been widely used for several institutional conditions and firm-level innovation analyses (see, [ 40 ]). In total, 34,598 firms from 42 African countries were included in the observed sample.…”

“…Innovative firms are considerably influenced by the activities of informal sector firms, and this has been established by the literature (see, for instance, [ 40 ]). Informal competition refers to the unwholesome competitive practises of informal firms that can restrict new product and process innovation development of innovative formal sector businesses [ 41 ].…”

“…The linkage between the legal systems’ influences on firms’ innovation is gaining scholarly attention in recent times (see, for instance, [ 40 ]). The judicial system could simultaneously be a facilitator as well as a hindrance to firms’ innovation outcomes.…”

“…Their combinations create uncertainties, increase risk, and undermine firms’ incentives to invest in and sustain new product development. For instance, unstable policies, coupled with weak judicial system as well as unfair competition from informal sector firms could plunge firms’ incentives to innovate their products [ 40 ]. These conditions raise uncertainties rendering the business environment unstable, hence could compel firms to divert scare resources intended for innovations into short-term goals which could help survive the negative impacts of these institutional conditions.…”

“…This is because a strong and effective legal system can counterbalance the deleterious impacts of policy instability on product innovation. An effective legal environment provides a greater guarantee that innovations will be safeguarded, even amidst perceived policy changes [ 40 ]. As a result, firms may be more eager to face off against informal competition because they have the assurance of their ability to protect their intellectual property rights through the legal system [ 52 ].…”