A multilevel study of country development factors

and firm innovation and the moderating role of outsourcing and employee training

28 June 2016

Master Thesis

Master Business Administration

Strategy and Organization

Dr. O.R. Mihalache

Daniël Veen

2558970

d.veen@student.vu.nl

1

The copyright rests with the author. The author is solely responsible for the content of the

paper, including mistakes. S&O cannot be held liable for the content of the author’s thesis.

2

ABSTRACT

Numerous academics have studied firm innovation to improve firm performance or gain a

competitive advantage. The globalization and following internationalization led firms to

develop activities in unfamiliar emerging markets and possibly experience various

environmental effects on innovation. However, most innovation studies remained focused on

the firm level and did not consider environmental influences on firm innovation. This

hampered understanding is in this study overcome by using multilevel modeling and firm

level data of 27 countries in the ECA-region to test the relationship between financial market

development and firm innovation and between higher education system development and firm

innovation. Moreover, the moderating effect of outsourcing and employee training were also

tested for a more complex understanding. The outcomes imply that financial market

development has an insignificant influence on firm innovation but higher education

development has a positive and significant influence on firm innovation. Moreover,

outsourcing negatively and significantly influences the effect financial market development

and higher education development have on firm innovation. Employee training has an

insignificant influence on the effect financial market development has on firm innovation but

has a significant influence on the effect higher education development has on firm innovation.

This study‟s findings contribute to a more complex insight of multilevel factors‟ effect on

firm innovation and can lead to a better decision process for multinational foreign subsidiary

innovation decisions.

3

TABLE OF CONTENTS

1 INTRODUCTION ................................................................................................................... 5

2 THEORETICAL FRAMEWORK .......................................................................................... 7

2.1 FIRM INNOVATION ...................................................................................................... 7

2.2 EMERGING ECONOMIES ............................................................................................. 8

2.3 NATIONAL SYSTEMS OF INNOVATION .................................................................. 9

2.4 DEVELOPMENT FACTORS ........................................................................................ 10

2.5 HYPOTHESES DEVELOPMENT ................................................................................ 11

2.5.1 Financial Market Development and Firm Innovativeness ....................................... 11

2.5.2 Higher Education and Firm Innovativeness ............................................................. 12

2.5.3 The Moderating Role of Outsourcing ...................................................................... 13

2.5.4 The Moderating Role of Employee Training ........................................................... 17

3 METHODOLOGY ................................................................................................................ 20

3.1 RESEARCH SETTING AND DATA COLLECTION .................................................. 20

3.2 MEASURES ................................................................................................................... 20

3.2.1 Firm Innovativeness ................................................................................................. 20

3.2.2 Development Factors ............................................................................................... 21

3.2.3 Moderators ............................................................................................................... 22

3.2.4 Control Variables ..................................................................................................... 22

4 ANALYSIS AND RESULTS ............................................................................................... 24

5 DISCUSSION AND CONCLUSION ................................................................................... 28

5.1 THEORETICAL CONTRIBUTIONS ........................................................................... 28

5.2 MANAGERIAL IMPLICATIONS ................................................................................ 30

5.3 LIMITATIONS AND DIRECTIONS FOR FUTURE RESEARCH ............................. 31

REFERENCES ......................................................................................................................... 32

APPENDIX .............................................................................................................................. 38

4

LIST OF TABLES AND FIGURES

List of Tables

Table 4.1 Descriptive statistics and correlations p. 25

Table 4.2 Results of the multilevel analysis for firm innovativeness p. 26

List of Figures

Figure 2.1 Conceptual Model p. 11

Figure 4.2 The moderating effect of outsourcing on hypothesis 1 p. 26

Figure 4.3 The moderating effect of outsourcing on hypothesis 2 p. 27

5

1 INTRODUCTION

Numerous academics study firm innovation to determine its antecedents (Calantone,

Harmanancioglu & Droge, 2010; Rubera & Kirca, 2012), understand the way it influences

firm performance and to get a grip on competitive advantage (Crossan & Apaydin, 2010;

Damanpour, 1991). However, understanding firm innovation becomes more complex since

globalization and internationalization are increasingly important (Yuan, Qian & Pangarkar,

2015) and lead firms to develop business processes in unfamiliar emerging markets

(Ciravegna, Lopez & Kundu, 2015). Despite these developments, firm innovation studies are

mainly conducted on a single level and thus do not consider the important effects these

environments might have on firm innovation (Coriat & Weinstein, 2002).

This singular approach to firm innovation research leads to a hampered understanding of firm

innovation and can be improved by incorporating multiple macro, meso and micro level

effects in firm innovation research (Crossan & Apaydin, 2010; Gupta, Tesluk & Taylor, 2007;

Alexiev, Volberda & Van den Bosch, 2016; Coriat & Weinstein, 2002; Jackson & Deeg,

2008). Practically, the shortsighted view can be improved by considering the National

Systems of Innovation framework (NSI; Lundvall, Johnson, Andersen & Dalum, 2002). The

NSI states that, among others, the financial development and higher education system can

lead to more innovation in society and therefore also might influence firm innovation.

Therefore the NSI is used to test the relationship between financial development, higher

education and firm innovation. Further on, information dissemination also plays an important

role (Lundvall et al., 2002) and thus the moderating role of outsourcing and employee training

are tested. Therefore the overall aim of this study is to answer the following: What is the effect

of development factors on firm innovation in emerging economies and how are these relations

moderated by outsourcing and employee training?

This study tests the relationship between the macro development factors financial market

development and higher education development and firm innovation in emerging economies

in Eastern Europe and Central Asia. This multilevel research into firm innovation, is not

entirely new as some scholars already tested the relationship between financial market

development and innovation (Ayyagari, Demirgüç-Kunt & Maksimovic, 2012; Benfratello,

Schiantarelli & Sembenlli, 2008; Meierrieks, 2014) while others have contributed to a more

general understanding of how a firm its environment can influence firm innovation (Garcia-

Morales, Ruiz-Moreno and Llorens-Montes, 2007; Teece, 2000). However, the study its first

contribution to the literature is that it encapsulates two environmental factors simultaneously

6

and tests these relationships on firm innovation. Thereby a contribution is made to multilevel

firm innovation research in emerging economies and thus increases understanding in the

hampered field of multilevel firm innovation research (Crossan & Apaydin, 2010; Gupta,

Tesluk & Taylor, 2007; Alexiev, Volberda & Van den Bosch, 2016; Coriat & Weinstein,

2002; Jackson & Deeg, 2008).

The second contribution of this study is to include meso and micro factors in the model. From

the NSI it is known that general information dissemination might be important to innovation

as information dissemination enhances the exchange of ideas which can lead to innovation

(Lundvall et al., 2002). This means that a firm‟s absorptive capacity (Cohen and Levinthal,

1994) can play an essential role in firm innovation. To assess the absorptive capacity‟s effect

on firm innovation, two moderators are used to reflect two situations where absorptive

capacity is (1) lost due to outsourcing and (2) is gained due to employee training. Thus, the

moderating effect of outsourcing and employee training are incorporated and expected to

influence the relationship between the macro factors and firm innovation. Thereby, the second

contribution is made to multilevel firm innovation research by creating more insight in the

complex multilevel process (Crossan & Apaydin, 2010; Gupta, Tesluk & Taylor, 2007;

Alexiev, Volberda & Van den Bosch, 2016; Coriat & Weinstein, 2002; Jackson & Deeg,

2008).

The report continuous as follows. In the second chapter is elaborated on the most important

and relevant information about firm innovation, emerging economies, the development factors

and the NSI. In the third chapter is highlighted which analysis tool and data are used and how

the variables are measured. The fourth chapter presents the results of the analyses and the last

chapter discusses these results, elaborates on theoretical and practical contributions of the

report and discusses the limitations and potential future research avenues.

7

2 THEORETICAL FRAMEWORK

This chapter elaborates on the paper‟s theoretical outlines. Firstly, there is a short overview of

relevant firm innovation knowledge. Secondly, it is explained what is understood by emerging

economies. Thirdly it is stated which development factors are chosen and what they represent.

Finally, the groundwork for the hypotheses is stated, the NSI is explained and the hypotheses

are developed.

2.1 FIRM INNOVATION

The term „innovation‟ has, in a strict sense, a different meaning than invention. Invention

means that new solutions and technical resources are necessary for firms to solve problems

while innovation resembles the implementation of these new solutions (Schumpeter, 1934).

However, this distinction between invention and innovation is not made here as it might also

be interesting to know the environmental and moderating effects on firm innovation.

Therefore Crossan and Apaydin (2010) their definition of innovation is the most appropriate:

‘The production or adoption, assimilation, and exploitation of value-added novelty in

economics and social spheres; renewal and enlargement of products, services and

markets; developments of new methods of production; and establishment of new

management systems; it is both process and an outcome (Crossan & Apaydin, 2010;

2)’

Strategy literature firm innovation studies mainly take a firm level approach (Crossan &

Apaydin, 2010) and can be classified according to two main streams. The first stream has

similarities to the Resource-Based-View (Barney, 1991) and focuses on the internal aspects

that affect firm innovation while the second stream has more similarities to the Five-Forces

Model (Porter, 1985) and focuses on the external aspects that affect firm innovation. Thus,

current firm innovation studies are mainly written from the internal aspect and study topics

such as the relationship between R&D-expenditure and innovation (Greve, 2003) or the

effects different types of organizational structure have on innovation (Chang & Harrington,

1998). Some studies also focus on the external view and study the relationships between, for

example, industry size, industry turbulence (Alexiev, Volberda & Van den Bosch, 2016) and

firm innovation. However, this last stream is less developed and especially not applied to

emerging economies.

8

The literature that considers the environment of importance to firm innovation can be divided

in the top-down view and the bottom-up view (Gupta, Tesluk & Taylor, 2007). On the one

hand, the top-down view argues that innovations are externally sourced, which means that

firm innovation is mainly created by external forces. On the other hand, the bottom-up argues

that firms create their own innovation and that this affects the firm‟s environment. Although

both views could co-exist, the current focus is on the top-down approach as the study is

particularly interested the environmental effects can have on firms.

2.2 EMERGING ECONOMIES

Emerging economies are economies of countries with on average a low-income but rapid

economic growth and are primarily based on economic liberalization (Hoskisson, Eden, Lau

& Wright, 2000). These emerging economies can be divided in two groups: the developing

countries (Asia, Latin America, Africa and the Middle East) and the transition countries

(former Soviet-Union states and China). This leads to the following definition of emerging

economies: economies of countries with a low-income but rapid economic growth which exist

out of developing and transition countries.

A study about emerging economies might lead to theoretical difficulties as some theories

might be less applicable in these environments. Similarly, this could also be thought to be a

problem for the main theory of this study (the NSI). Some authors have noticed this issue

(Lundvall et al., 2002) as they state that the NSI was initially created for developed countries.

However, Lundvall et al. (2002) later stated that the framework is applicable in less developed

countries. Moreover, doubts have also arisen about the usefulness of, for example, the

institutional theory (which has many resemblances with the NSI). In a similar way these

doubts have been disputed by several authors (Hoskisson, Eden, Lau & Wright, 2000;

Shenkar & Glinow, 1994), who argue the theory to be specifically useful in explaining firm

behavior in the early stages of market emergence (as institutions, compared to markets, still

have a considerable amount of power over firms). As criticasters‟ concerns about the proper

application of the NSI and Institutional Theory in developing countries have been disputed by

several authors, the NSI can be considered an appropriate theoretical framework for studying

innovation in emerging economies.

9

2.3 NATIONAL SYSTEMS OF INNOVATION

The National Systems of Innovation (Freeman, 1995) provides the groundwork for the

expected relationship between the development factors and firm innovation. The NSI is

defined by Lundvall (2010) in two manners:

„The narrow definition would include organizations and institutions involved in

searching and exploring – such as R&D-departments, technological institutes and

universities. The broad definition …… includes all parts and aspects of the economic

structure and the institutional set up affecting learning as well as searching and

exploring – the production system, the marketing system and the system of finance

present themselves as sub-system in which learning takes place. (Lundvall, 2010: 13)‟

The first (narrow) definition is too narrow for this study because other important institutions

are not included in the definition. For example, it can be expected that firm innovation is not

only influenced by R&D-departments or official technology institutes but also by

development factors such as higher education. Therefore, the second (broad) definition is used

to define the NSI in this study.

The NSI originates in the works of List (1841) and Lundvall (1992) but was fully developed

by Freeman (1995). Freeman (1995) developed the system in order to fulfill the necessity of

relationships on a national and local level to innovate. Practically this means that the system

was developed in such a way that it could explain that innovation not only resulted from

micro business processes but result from the nexus between environment and business

processes.

Thus, a coherent NSI was developed although Freeman (1995) was not the first to consider

the external influence on innovation. During the 1970‟s and 1980‟s, academics found that

R&D-investments were not the only important aspects of innovation but found that innovation

depended on a wide variety of other influences (Freeman, 1995). The NSI encapsulated this

new line of thoughts and came up with a new framework that could incorporate all these

influences in a coherent whole (Lundvall et al., 2002). Thus according to the NSI, innovation

should be seen as a process that is created through the interaction of several factors, whether

they are on a micro, meso or macro level (Malerba, 2002).

The appropriateness of the NSI instead of a global system of innovation could be a topic of

discussion. After all, the national borders could be said to play a less important role in

10

innovation. For example, highly educated individuals or technological expertise that is

fundamental to innovation does not necessarily have to be developed nationally but could be

procured from abroad. However, empirical studies keep proving the importance of national

levels for innovation activities (Lundvall et al., 2002).

2.4 DEVELOPMENT FACTORS

The two development factors that are used as macro factors are the financial market

development and the higher education system development. These two development factors

are chosen as they closely resemble the NSI definition of Lundvall (2010) and are

theoretically seen to have an influence on innovation.

Financial market development is important to an economy and innovations as it enables the

allocation of resources to the most promising entrepreneurial activities, assess risk in an

insightful manner and makes capital available through banks, securities exchanges and

venture capital (Schwab & Sala-i-Martin, 2011; King & Levine, 1993). As these functions

improve the efficiency and total availability of credit for firms, firm innovation can also

prosper (King & Levine, 1993).

The second development factor, the higher education system, is also important as it represents

the learning function in the NSI (Lundvall, 2010) and was already included in the earliest

concepts of what is now called the NSI (List, 1841). A higher education system creates a

„push effect‟ of available knowledge through the training of scientists and the development of

a skilled workforce (Griliches, 1990; Acs, Anselin & Varga, 2002; Varsakelis, 2006) but also

creates a „pull effect‟ whereby the sophistication of the educated population and entrepreneurs

leads to a demand for similarly sophisticated products (Furman, Porter & Stern, 2002).

Thus, financial market development as well as a higher education system development are

both macro-level factors that influence entrepreneurs, firms, employees and the population

and thus could be expected to play a significant role in the ability of a firm to innovate.

11

2.5 HYPOTHESES DEVELOPMENT

This last section of the theoretical framework elaborates on the development of the

hypotheses (Figure 2.1 provides an overview of the developed and discussed hypotheses).

Figure 2.1. Conceptual model of the expected relationships

2.5.1 Financial Market Development and Firm Innovativeness

Financial market development is expected to have an influence on firm innovation. In general,

this relationship can be expected to be positive as it creates abilities for firms to attract funds,

start a business and thereby innovate (King & Levine, 1993).

More specifically, four theoretical mechanisms enable a financial market to influence firm

innovation (King & Levine, (1993) based on Schumpeter (1934)). Firstly, financial

intermediaries choose the most promising venture to allocate funds to and thus enhance

chances for entrepreneurs to start a venture. Secondly, a financial system allows flexible

resource allocation and thus enables easier fund attraction. Thirdly, financial intermediaries

allow risk diversification, which is especially useful when risky innovations are involved and

therefore enable innovation investments. Finally, financial intermediaries make the large

profits of innovation investments noticeable to investors and in this way promote investments.

12

The relationship between financial market development and firm innovation has been tested

previously and is found to increase firm innovation as financial systems reduce transaction

costs and facilitate risky innovation investments (Meierrieks, 2014). More specifically, a well-

developed financial system could lead to more firm innovation in developed (Benfratello,

Schiantarelli & Sembenlli, 2008) and developing countries (Demirgüç-Kunt & Maksimovic,

2012). Contrarily, a previous study (Aghion, Howitt & Mayer-Foulkes, 2004) found that firms

in poor countries are prone to weak financial systems as it limits available credit and thus has

a negative effect on firm innovation. Although a few studies in developing countries implied

the effect of financial systems on innovation, studying this relationship is still relevant as a

different time setting and sample might lead to different results. Moreover, this study also

simultaneously tests the effect of higher education on firm innovation.

Thus, findings from previous theoretical and practical findings imply that financial market

development is positively related to firm innovation. This leads to the following hypothesis:

Hypothesis 1: Financial market development will have a positive relationship with firm

innovativeness.

2.5.2 Higher Education and Firm Innovativeness

The original studies that developed the NSI (List, (1841) in Lundvall et al. (2002)) already

noted the importance of learning and education to improve innovation. When the NSI was

further developed, several authors confirmed the statements by List (1841) when they

highlighted the importance of learning for the NSI (Lundvall et al., 2002) and as an essential

resource for firms (Thornhill, 2006).

Practically seen, education plays an important role in firm innovation due to several reasons.

Firstly, education leads to trained scientists who can contribute to knowledge production and

therefore can lead to innovation when employed by firms (Griliches, 1990; Acs, Anselin &

Varga, 2002). Secondly, a country‟s workforce skills are created by the educational facilities

and thus could enhance firm innovation (Varsakelis, 2006). Thirdly, education increases the

number of active entrepreneurs and leads to a demand for innovation as entrepreneurs want to

improve their businesses (Varsakelis, 2006). Finally, well-educated customers are more likely

to demand sophisticated products which lead to an enhancement of firm innovation through

customer demand (Furman, Porter & Stern, 2002).

13

Thus, educationally created knowledge can diffuse through society and lead to innovation.

For example, high levels of knowledge can occur when different companies‟ educated

individuals formally or informally exchange information and ideas (Feldman, 1996). This

leads to an easier knowledge accumulation and dissemination due to the high concentration of

the knowledge in a particular area (Gössin & Rutten, 2007). Ultimately, firms that are situated

in a region with an educated workforce are easier able to innovate (Teece, 2000).

The importance of education for innovation has also been empirically tested. For example, the

relationship between countries their education investments and national innovations are found

to have a positive relationship (Varsakelis, 2006; Furman, Porter & Stern, 2002). Further on,

education investment and education attainment are also found to be positively related to

innovation (Makkonen & Inkinen, 2013). Thus, education investments and attainment can be

considered to have a positive influence on national innovation. Although the relationship

between higher education and national innovation has been tested, no studies were found that

tested the relationship between higher education and firm innovation. Therefore testing this

relationship is of importance.

From the previous it can be expected that education enhances the knowledge, skills and

demand in a society and therefore lead to firm innovation. This leads to the following

hypothesis:

Hypothesis 2: Higher education will have a positive relationship with firm innovativeness.

2.5.3 The Moderating Role of Outsourcing

Outsourcing can be understood as a procurement of products or services from outside the firm

(Gilley & Rasheed, 2000). Outsourcing is conducted for several reasons but the most

important reason is from a cost saving perspective. When services are outsourced, employees

are replaced by cheaper contractors and thus money is saved on the operating costs (Breunig

& Bakhtiari, 2013).

Although the advantage of outsourcing is saving costs on operations, the disadvantage is a

loss in absorptive capacity. Absorptive capacity is the ability of a company to recognize the

value of new information, assimilate it and apply it to commercial ends (Cohen & Levinthal,

1994). Employees are the main source of absorptive capacity as they possess the knowledge

to give meaning to external information and apply it to a commercial end. Absorptive capacity

14

can increase when employees are well-educated, are experienced in their jobs, read literature

in their expertise area or have specifically accumulated manufacturing experience (Cohen

&Levinthal, 1994; Mangematin & Nesta, 1999). However, job positions are lost due to

outsourcing, the total absorptive capacity declines and thus also the ability of a company to

innovate.

Outsourcing, financial market development, and firm innovativeness

Outsourcing is expected to negatively influence the relationship between financial market

development and firm innovativeness. There are two mechanisms which are activated by the

outsourcing of activities and which have an effect on the previous mentioned relationship.

The first mechanism occurs when firms lose knowledge and skills due to outsourcing of

employees, thus lose absorptive capacity, are less likely to be scouted by financial

intermediaries as promising investment R&D-projects and ultimately lose firm innovation.

The second mechanism occurs differently for firms in low and high development financial

markets. The outsourced funds can be used in low financial developed markets as down

payment and therefore to attract funds to innovate. The outsourced funds can also be used in

high financial developed markets as down payment to attract funds but is unnecessary and

therefore the funds are unlikely to add to firm innovation in these environments.

The first aspect of the financial system that enables innovation is the ability of financial

intermediaries to allocate funds to the most promising ventures (King & Levine, 1993).

However, firms who outsource activities are likely to lose the relevant personnel, lose insight

into business processes and thus lose absorptive capacity (Cohen &Levinthal, 1994;

Mangematin & Nesta, 1999). Due to the loss of employee skills and knowledge, firms are less

able to innovate and therefore are less likely to be seen as „promising ventures‟ by financial

intermediaries. Moreover, firms that are planning to innovate and try to attract funds may end

up disenchanted as they do not possess sufficient skills and knowledge to abolish the

information asymmetry (Hall, 2002) between them and the financial intermediary. Therefore,

outsourcing seen from this first mechanism is expected to have a (general) negative effect on

the relationship between financial market development and firm innovation.

The second mechanisms by which outsourcing influences the relationship between financial

market development and firm innovation is through cost savings realized by outsourcing.

Outsourcing leads to the repelling of particular activities to external parties, resulting in the

repelling of particular employees to the subcontractor and thus being able to save on costs

15

(Breunig & Bakhtiari, 2013). These saved costs have a direct effect on the second aspect of

the financial system that enables innovation, namely the ability of such a system to enable

flexible resource allocation and thus an easier attraction of funds (King & Levine, 1993).

Resources are not easy allocated to R&D-projects as these projects are inherently risky (Hsu,

Tian & Xu, 2014).The saved costs can make resource allocation easier in low developed

financial markets as funds are available for down payments. Low developed financial markets

cannot profit from equity funds (who require no down payments before investments (Brown,

Fazzari & Petersen, 2009) and often have difficulties overcoming information asymmetry

(leading to high amounts of required down payments; Berger & Udell, 1990; Brown, Fazzari

& Petersen, 2009). However, the saved costs do not change resource allocation in high

developed financial markets as information asymmetry is easier overcome and equity funds

are available. Therefore, on the one hand funds that are freed up due to outsourcing make a

down payment possible in low developed financial markets and thus lead to an easier

attraction of funds. On the other hand, funds that are freed up due to outsourcing do not lead

to the attraction of extra funds in developed financial systems.

In conclusion, through the first mechanism outsourcing leads to a decline in absorptive

capacity, therefore a decline in potential as „promising venture‟ and therefore a decline in

ability to gain funds to innovate at all financial market development levels. Through the

second mechanism, outsourcing leads to saved costs and thus freed up funds and therefore the

ability for firms in low developed financial markets to attract more funds to innovate while

the ability for firms in high developed financial market to attract funds remains relatively

similar. Thus, in sum, firms in high developed financial markets only lose innovation capacity

while firms in low developed financial markets lose some innovation capacity but regain

much innovation capacity by having the ability to attract funds and innovate. Therefore the

general effect of outsourcing leads to the following hypothesis:

Hypothesis 1a: Outsourcing will have a negative moderating effect on the relationship

between financial market development and firm innovativeness.

Outsourcing, higher education, and firm innovativeness

Outsourcing is expected to negatively affect the relationship between the higher education

system and firm innovativeness. This effect occurs through two mechanisms which are

activated by the outsourcing of activities. The first mechanism occurs when particular

16

activities are subcontracted and there are less job positions available in the firm. This means

that a firm cannot use the trained scientists of the higher education system and thus lose

absorptive capacity and ultimately firm innovation. The second mechanism occurs when a

firms choses what it wants to do with the freed up funds of outsourcing. The freed up funds

are likelier to be invested in innovation in low developed higher education systems and the

funds are likelier to be invested in other activities in high developed higher education systems.

The first two aspects of the higher education system which enable firm innovation are the

availability of scientists for employment and the general workforce skill development. The

higher education system leads to a particular absorptive capacity in firms as employed

educated scientists and workers have the knowledge to give meaning to external information

and apply this to a commercial end (Cohen &Levinthal, 1994). Thus the employees and their

corresponding knowledge and skills are also of crucial importance to R&D-projects (Katz &

Allen, 1991; Sawang & Unsworth, 2011). However, the outsourcing of particular activities

would lead to a decrease in job positions and therefore fewer possibilities for firms to profit

from the scientists and skilled workforce of the higher education system. This would lead to a

decrease in knowledge, skills and absorptive capacity of the firm and ultimately to decreased

innovative activity for firms in low and high developed education systems.

The first two aspects of the higher education system than enable firm innovation also play a

role in the second mechanism. The second moderating mechanism occurs when the freed up

funds of outsourcing are spend or are saved. Outsourcing means that particular activities are

subcontracted and often lead to a saving of costs due to the replacement of cheaper

contractors (Breunig & Bakhtiari, 2013). On the one hand, these saved costs are likely to be

spend on innovation in low developed higher education environments where firms do not

have easy access to educated individuals. On the other hand, the saved costs are likely to be

used for other purposes in environments of high developed higher education systems as firms

have easy access to the educated individuals. Therefore outsourcing leads to a better use of

available scientists and skills of workforce in low developed higher education environment

than in high developed higher education environments. Thus, through the second

mechanisms, outsourcing influences firm innovation positively in low developed higher

education environment and does not have an influence on firm innovation in high developed

higher education environment.

In sum, through the first mechanism outsourcing leads to a decline in available job positions,

a decline in use of educated personnel and thus a general decline in firm innovation in higher

education systems. Further on, through the second mechanism, the freed up funds of

17

outsourcing are used to attract educated individuals in low developed higher education

environments and are used for other purposes in high developed higher education

environments. Thus, in sum, firms in high developed higher education environments only lose

firm innovation capacity while firms in low developed higher education environments lose

innovative capacity but also gain innovative capacity due to their re-investments. This leads to

the following hypothesis:

Hypothesis 1b: Outsourcing will have a negative moderating effect on the relationship

between higher education development and firm innovativeness.

2.5.4 The Moderating Role of Employee Training

Employee training is of interest to the business and economic literature due to its resulting

increase in productivity and economic growth (Pfeifer, 2016). Besides increasing productivity

and economic growth, employee training might also contribute to innovation due to its

possibilities to reduce information asymmetry between investor and firm. Moreover,

employee training could also enhance firm innovation as employees are better educated, know

more about their area of expertise and therefore increase absorptive capacity (Cohen and

Levinthal, 1990).

Information asymmetry is a market failure which can orchestrate in financial systems.

Information asymmetry means that investors are not well-informed about a particular

investment to make an adequate judgment and thus might hesitate to invest (Hall, 2002). This

market failure can be weakened by several factors such as a well-developed financial system

(King & Levine, 1993). A decrease in information asymmetry means that investors are better

informed, more likely to invest and thus create more possibilities to innovate.

Employee training could also facilitate firm innovation as employees are better able to

recognize valuable knowledge, assimilate it and apply it to commercial ends (Cohen &

Levinthal, 1990). Firms‟ absorptive capacity can be increased by hiring employees that are

well-educated, experienced in their jobs, read literature in their area of expertise or have

specifically accumulated manufacturing experience (Cohen &Levinthal, 1994; Mangematin &

Nesta, 1999).

The knowledge absorption capacity is especially important when new knowledge (such as

training) enters a firm and is not directly understandable for employees. Compared to internal

18

knowledge, external knowledge creates difficulties in interpretation and application and can

slow down the innovation process (Bierly & Gopalakrishnan, 2000). This difficulty in

interpretation and integration is arduous due to different frames of reference, language and

codes in which the external knowledge is encapsulated. Further on, these difficulties in

interpretation and integration of external knowledge can slow down the innovation process

due to difficulties in frames of reference, language and codes (Chakrabarti, 1996).

Employee training, financial market development, and firm innovativeness

The extent of employee training is expected to positively moderate the relationship between

financial market development and firm innovativeness. The first mechanism by which a

financial system can lead to more firm innovation is by allocating funds to the most promising

venture (King & Levine, 1993). However, when there is a high amount of information

asymmetry, allocating resource becomes difficult and thus could lead to investor

demotivation. Trained employees can reduce asymmetry as they have knowledge of the

product or service and thus can inform an investor better.

Information asymmetry remains problematic in markets and especially for R&D-investments

compared to physical asset investments (Czarnitzki, 2006). Entrepreneurial innovative

activities are often risky and therefore require an extensive period of research (Meierrieks,

2014) and eventually could lead to investor demotivation and thus a loss of innovations.

Therefore, any information that could reduce this gap would strengthen the possibilities for

these risky R&D-investments.

As information asymmetry is a large problem for innovation investments, it is expected that

employee training could reduce information asymmetry, increase fund allocation and thus

increase firm‟s innovation activities. For example, a skillful and product knowledgeable

employee is more likely not only to conceive an innovative idea but also have the skills and

knowledge to transfer these insights to an investor. Thus, it can be expected that a high extent

of trained employees could lead to an information asymmetry decrease and thus an increase in

firm innovation. This leads to the following hypothesis:

Hypothesis 2a: Employee training will have a positive moderating effect on the relationship

between financial market development and firm innovativeness.

19

Employee training, higher education, and firm innovativeness

The extent of trained employees is expected to positively moderate the relationship between

higher education and firm innovativeness. Employee training increases the possibilities of

firms to use external knowledge to innovate but is more beneficial in high developed higher

education systems than in low developed higher education systems.

Basically, learning (education and training) increases employee competencies and thus

increases the ability of firms to innovate (Caolghirou, Kastelli & Tsakanikas, 2004).

However, external information is often more difficult to absorb than internal information due

to different frames of reference, language and codes in which the information is encapsulated

(Kessler, Bierly & Gopalakrishnan, 2000). Therefore it can be expected that especially low

educated personnel might have difficulties with the absorption of this new external knowledge

than higher educated personnel.

Firms‟ educated personnel‟s quality and education is dependent on the higher education

system development. A well-developed higher education system leads to trained scientists and

skillful employees (Griliches, 1990; Acs, Anselin & Varga, 2002; Varsakelis, 2006). Thus, on

the one hand, firms that operate in a high developed higher education system are more likely

to employ qualitative educated personnel, have a large absorptive capacity, have more

abilities to integrate external knowledge via employee training and thus have more abilities to

innovate. On the other hand, firms that operate in a low developed higher education system

are less likely to employ qualitative educated personnel, have a small absorptive capacity,

have fewer abilities to integrate external knowledge via employee trainings and thus have

fewer abilities to innovate. Moreover, a non-qualitative and small workforce could even be

expected to slow down the innovation process due to the large differences in frames of

reference, language and codes (Bierly and Chakrabarti, 1996). This leads to the following

hypothesis:

Hypothesis 2b: Employee training will have a positive moderating effect on the relationship

between higher education and firm innovativeness in such a way that the relationship will be

stronger when the extent of employees trained is higher.

20

3 METHODOLOGY

3.1 RESEARCH SETTING AND DATA COLLECTION

The data used in the empirical analysis is gathered from the Global Competitiveness Report

(GCR) of 2010-2011 (Schwab & Sala-i-Martin, 2010), 2011-2012 (Schwab & Sala-i-Martin,

2011) and 2012-2013 (Schwab, Sala-i-Martin & Brende, 2012) and from the World Bank

enterprise survey database (World Bank, 2013). The GCR‟s of these three years are chosen as

firm innovation is measured in the World Bank Enterprise Survey of 2013 as a percentage of

sales contributed to innovations in the previous three years. Meso and micro level data are

gathered form the Eastern Europe and Central Asia database of the enterprise survey database

(World Bank, 2013), which consists of firm level data of 15,883 firms in 30 emerging

countries. The GCR consists of data on 139 countries (including 27 of the countries in the

former dataset) and more than 100 underlying indicators. Because of a mismatch between

countries in the two datasets, the total sample includes 27 countries. (the included countries

can be found in Appendix A).

The firms that are included in the sample have an average firm age of 14.82 years (standard

deviation (s.d.) = 11.59). The size of the firms in the sample is categorized into four divisions

(micro 1-5 employees, small 5-19 employees, medium 20-99 employees and large 99+

employees). Only 3.5% of the sample consisted of micro-firms, 49.2% of the companies were

small firms, 35.5% were medium firms and 11.9% were large firms. The firms operated in

several industries such as retail (22.8%), wholesale (15.4%), construction (8.3%), food (7%)

and many other industries of which most could be related to the manufacturing sector (see

Appendix B for an overview of the included industries).

3.2 MEASURES

The following part explicates the used measurements for firm innovativeness, development

factors, the moderators and the control variables.

3.2.1 Firm Innovativeness

Firm innovation can be measured in multiple manners. For example, patent data can be used

or the number of new products introduced can be retrieved. However, this study uses the

percentage of sales that is accounted for by new or significantly improved products that were

introduced over the last three years. (Leiponen & Helfat, 2010). This type of measurement

(mean = 27.82, s.d. = 25.09) fits to the chosen definition of Crossan and Apaydin (2010)

which is focused on commercialization of innovations.

21

3.2.2 Development Factors

The development factors that are used in this study originate from the twelve determinants of

the GCR. Originally, the development factors are used in the GCR to assess the

competitiveness of nations but are here used as representatives of the country level factors

„financial market development‟ and „higher education system‟ that are expected to influence

firm innovation.

Although the World Economic Forum (the organization responsible for the GCR) can be

considered reliable, the items that measure the development factors were assessed in SPSS

(Statistical Package for the Social Sciences) 21.0 on reliability and validity. The validity

analyses were carried out with principal component exploratory factory analysis while using

direct oblimin instead of orthogonal rotation. Direct oblimin rotation is chosen as preferred

method as it is expected that the development factors correlated as their aggregated purpose

was to measure country development. Further on, some of the items that are used to measure

the development factors were normalized on a min-max scale of 0-100 in order to increase the

reliability of the constructs.

The construct „financial market development‟ is measured in the GCR using eight items.

However, the principal component exploratory factor analysis showed that item eight loaded

on a different component (Eigenvalue > 1). Further on, the consistency measurement showed

that the eight factors together were not reliable (α = 0.65). Therefore, the eight item (legal

rights index) is excluded from the construct; which resulted in a sufficient reliability level (α

= 0.9. The used items for all development factors can be found in Appendix C.

The construct „higher education’ is originally measured together with the construct „training‟

but is deconstructed due to a high factor loading (> 0.5) on a separate construct (e.g. training).

This separation of education and training also fits Lundvall (2010) his definition of the NSI,

whereby universities and R&D were mentioned but not specifically training. Thus, the first

six items of the original development factor are used to measure higher education. Further on,

some of the items were normalized on a 0-100 scale in order to improve reliability. The

resulting reliability of the six item scale is sufficient (α = 0.82) and the validity of the

resulting construct had an Eigenvalue > 1.

22

3.2.3 Moderators

Outsourcing is measured with the item „outsourcing‟ of the enterprise survey. Respondent

were asked the following: Over the last three years, has this establishment introduced any

new or significantly improved organizational methods for the first time in outsourcing or

subcontracting of business activities in production, procurement, distribution, recruiting or

ancillary services? This item was developed by the OECD (2005) and is primarily intended to

measure if firms have organized their external relations in a different manner. This

measurement was also used in the study of Mothe, Yen and Thi (2002). The firms are able to

answer the question as a yes (2) or no (1) and the question is later recoded to yes (1) and no

(0).

Employee training is measured with the item „formal training‟ from the enterprise survey.

Firms were asked the following: What percentage of full-time permanent production

employees received formal training? The answer could range from 0% to the full 100% of the

production workforce. The measurement of „formal employee training’ is not new as it is

previously used by several authors (Barron, Black & Loewenstein, 1987; Frazis &

Loewenstein, 2005).

3.2.4 Control Variables

In order to limit the effect other variables might have on the model, micro and macro control

variables have been incorporated in the analysis. The micro factors exist of firm size, firm age,

industry and R&D-intensity. Firm size is noted to be positively related to firm innovation as

well as negatively related in other studies (Camisón-Zornoza, Lapiedra-Alcamí, Segarra-

Ciprés & Boronat-Navarro, 2004). Firm size is measured according to the four categories

presented in section 3.1. Firm age is also included as control variables as firm age is thought

to influence firm innovation negatively as firms gain experience and develop routines (Coad,

Segarra & Teruel, 2016). Further on, the different types of industries that are represented in

the sample are also taken into consideration by the control variable „industry‟ (Bantel &

Jackson, 1989; Kochhar & David, 1996). The industries which are entailed by this variable

can be found in Appendix C.

The macro control variables that are included in the analysis are economic openness, country

size, GNI per capita and national R&D-expenditure. Economic openness is expected to affect

innovation as it involves the information dissemination among countries (Anokhin &

Wincent, 2012). Economic openness is defined and measured as the total trade compared to

23

the GDP of a country (Anokhin & Wincent, 2012). The data of this and other control

variables are retrieved from the World Bank database (World Bank, 2016). Further on,

country‟s size likely affects innovation as larger countries exchange more resources, apply for

more patents, have more R&D-investments and have a larger share of high-technology export

(Dakhli & De Clercq, 2004; Anokhin & Wincent, 2012).Country size is defined and measured

as the total population. The third control variable is GNI per capita (Efrat, 2014). GNI per

capita possibly affects firm innovation as a larger income means more resource are available

and exchanged and thus affect the innovation capacity. GNI per capita is measured by

dividing the total national income by the population size. The last included control variable is

the „national R&D-expenditure‟ (Efrat, 2014; Dakhli & De Clercq, 2004). This factor is

measured as the expenditure on R&D compared to the gross domestic product. National

R&D-expenditure likely affects innovation as it acts as an indicator for the technology rate

development.

24

4 ANALYSIS AND RESULTS

Table one shows the results of the descriptive statistics of the model variables and table two

shows the results of the hierarchical regression analysis of the hypotheses. The analysis tool,

hierarchical linear modeling, was chosen because it can analyze the interaction between

multiple level variables while simultaneously accounting for their different source of variance

(Yeo & Neal, 2004). During the analysis, random slope and random intercept are applied in

order to account for individual country effects.

The independent variables are mean centered in order to prevent multicollinearity (Field,

2013). However, the extent of multicollinearity is difficult to assess in SPSS as it does not

include bias assessment functions (Scott, Simonoff & Marx, 2013). Concerning table 4.2,

model one state the control variables, model two ads the moderators, model three includes the

independent variables and model four comprises all the variables and the interaction terms.

The fourth model‟s outcomes are discussed.

The analysis outcomes show that hypothesis one is not supported because of the insignificant

positive linear relationship between financial market development and firm innovation (β =

39.99, P < 0.1). However, hypothesis two, the relationship between higher education and firm

innovation, is supported as the outcome is positive and significant (β = 36.14, P < 0.05). This

means that an increase in development of the higher education system leads to a greater extent

of firm innovation.

Hypothesis 1a, the moderating effect of outsourcing on the relationship between financial

market development and firm innovation, is supported as the outcome describes a negative

significant effect (β = -27.66, P < 0.05). Hypothesis 1b, the moderating effect of employee

training on the relationship between financial market development and firm innovation, is not

supported as the interaction outcome is negative and insignificant (β = 0.02, P > 0.1). Further

on, hypothesis 2a, the moderating effect of outsourcing on the relationship between the higher

education system and firm innovation, is supported as the outcome is negative and significant

(β = -21.09, P < 0.05). Hypothesis 2b, the moderating effect of employee training on the

relationship between the higher education system and firm innovation, is not supported as the

interaction effect is slightly positive but insignificant (β = 0.25, P < 0.1).

25

26

The interaction effects are plotted in a 2-dimensional graph to improve interpretability (Field,

2013). The results of hypothesis 1a (Figure 4.2) show that (as expected) outsourcing

negatively moderates the relationship between financial market development and firm

innovation. This means that outsourcing contributes positively to firm innovation in low

financial developed markets and negatively high financial developed markets.

27

The plotted results of hypothesis 2a (Figure 4.3) show that (as expected) outsourcing

negatively moderates the relationship between the higher education system and firm

innovation. Outsourcing contributes positively to firm innovation in a low developed higher

education system but contributes negatively to firm innovation in a high developed higher

education system.

28

5 DISCUSSION AND CONCLUSION

Firm innovation studies on multiple levels have recently attracted more attention of academics

(Crossan & Apaydin, 2010; Gupta, Tesluk & Taylor, 2007; Alexiev, Volberda & Van den

Bosch, 2016; Coriat & Weinstein, 2002; Jackson & Deeg, 2008). However, this only resulted

in a few studies about multilevel firm innovation. Some of these studies chose financial

market development as independent variable and none chose higher education as independent

variable. Therefore, there is currently a limited understanding of multilevel effects. This

hampered understanding can be considered a shortcoming as firm innovation is thought to

have a positive effect on firm performance and competitive advantage (Crossan & Apaydin,

2010; Damanpour, 1991). Therefore, this study contributes to the existing literature by

enabling a multilevel insight into innovation in different environments in emerging

economies. Thereby the study contributes to a better theoretical understanding of firm

innovation but also enhances the practical understanding. For example, the outcomes enable a

multinational enterprise (MNE) with foreign subsidiaries to careful consider the environment

and its outsourcing activities in order to increase firm innovation.

5.1 THEORETICAL CONTRIBUTIONS

The main contribution of this study is the complex, multilevel insight of firm innovation in

emerging economies. The outcomes indicate that firm innovation is strongly influenced by its

environment. Specifically, firm innovation is independently influenced by the state of its

environment but is also influenced via the moderating effect of outsourcing and possibly via

employee training.

Financial market development is in this sample, strictly seen, not related to firm innovation (P

< 0.1) but might have a significant effect on firm innovation in a different sample with

different control variables. Former studies found that the financial system could play an

important role in national innovation (Meierrieks, 2014) as well as firm innovation

(Benfratello, Schiantarelli & Sembenlli, 2008; Demirgüç-Kunt & Maksimovic, 2012) and

therefore the current results are somewhat surprising. The outcomes could be the result of a

low importance of higher education in emerging economies or the possible exclusion of

relevant macro control variables.

29

This study advances the current knowledge of external influences on firm innovation by

contributing to a better understanding of the effect higher education might have on firm

innovation in emerging economies. As the higher education system is found to be

significantly and positively related to firm innovation, a well-developed higher education

system thus leads to more firm innovation. Former studies indicated that education and

education attainment could have a positive effect on national innovation capacity (Varsakelis,

2006; Furman, Porter & Stern, 2002; Makkonen & Inkinen, 2013) but have not tested the

positive relationship between higher education and firm innovation. Therefore the NSI

(Lundvall et al., 2002) might alsobe able to explain firm innovation instead of only national

innovation.

Although the relationship between financial market development and firm innovation is not

found significant in this study, the moderating effect of outsourcing on firm innovation in

different environments. The outcome indicates that outsourcing leads to a severe loss in firm

innovation in high developed financial market environments and a gain in firm innovation in

low developed financial markets. In general, outsourcing could lead to a loss in absorptive

capacity (Cohen & Levinthal, 1990) and thus a loss in firm innovation but can also lead to a

gain in available financial resources (Breunig & Bakhtiari, 2013) and thereby a gain in firm

innovation. For instance, firm in low developed financial markets in the absence of equity

funding (Brown, Fazzari & Petersen, 2009) could use the saved costs to pay the high amounts

of down payments for a loan (Berger & Udell, 1990, Brown, Fazzari & Petersen, 2009) and

thereby overcome the inherent riskiness of R&D-projects (Hsu, Tian & Xu, 2014). The

findings of this study also indicate that firms in high developed financial markets do not

innovate more due to outsourcing; an outcome that could be explained as a lower down

payment is necessary to attract a loan (Berger & Udell, 1990, Brown, Fazzari & Petersen,

2009) and sufficient accessibility to equity funding (Brown, Fazzari & Petersen, 2009) in

these high developed markets.

Outsourcing also influences the relationship between higher education and firm innovation

such that outsourcing contributed negatively to firm innovation in high developed higher

education systems and positively to firm innovation in low developed higher education

systems. Outsourcing generally leads to a decrease in absorptive capacity and thus is expected

to decrease firm innovation in the low and high developed higher education systems (Cohen

& Levinthal, 1990). However, firms in low-developed education systems might have re-invest

the saved costs of outsourcing (Breunig & Bakhtiari, 2013) in innovation and thus made up

for the loss in absorptive capacity. The results could also indicate that firms in high developed

30

education environments might not be aware of their loss in absorptive capacity (as they do not

compensate for this loss) or are confident that their firm is sufficiently innovative and

therefore do not profit from outsourcing as much as firms in low developed education systems

do. These findings advance the current understanding of environmental effects on firm

innovation.

Another striking (but slightly insignificant) finding of the report is the potential interaction

effect of the extent of employee training on the relationship between higher education and

firm innovation. The outcome indicates that employee training might positively influence firm

innovation in a high developed higher education system and negatively in a low developed

higher education system. Firstly, these results underscore the importance of environmental

factors (the higher education system) on absorptive capacity (Cohen & Levinthal, 1990) and

thus firm innovation. Secondly, these results also highlight the importance of understanding

the interaction between environmental influences and internal factors on firm innovation. For

instance, the education system creates a particular absorptive capacity (Cohen &Levinthal,

1994; Mangematin & Nesta, 1999) which can enhance or diminish the integration process of

external knowledge and thereby increase or decrease the pace of the innovation process

(Chakrabarti, 1996). This finding contributes to a deepened understanding of the education

environment on firm innovation (Gupta, Tesluk & Taylor, 2007; Alexiev, Volberda & Van

den Bosch, 2016).

5.2 MANAGERIAL IMPLICATIONS

Firm innovation has become more complex due to globalization, internationalization (Yuan,

Qian & Pangarkar, 2015) and therefore the development of business activities in confronting

unfamiliar emerging markets (Ciravegna, Lopez & Kundu, 2015). This study makes three

practical contributions to the field of innovation research in the business administration

discipline that enables managers to better cope with these various settings. Firstly, managers

of MNE‟s that are involved with foreign subsidiaries can gain more insight into suitable

innovation locations when they consider the development of the financial and higher

education system in an emerging economy. Secondly, managers of firms in emerging

economies or MNE managers can conclude from the results that outsourcing deters

innovation in environments of high developed financial systems and education systems. The

other way around, managers can also make more use of outsourcing in low developed

financial and higher education environments to increase firm innovation. Thirdly, managers in

environments of well-developed financial and higher education systems in emerging

31

economies can make use the insight of the negative effects of outsourcing to consider re-

investing their saved costs and management time in innovation and thus to keep up with the

general innovation pace.

5.3 LIMITATIONS AND DIRECTIONS FOR FUTURE RESEARCH

The first limitation is that only emerging economies are included instead of developed and

emerging economies. Including developed economies in the sample would make it possible to

compare the results and enhance the generalizability of the outcomes. Thus, future studies

should include data of developed and emerging economies in the sample to make a more

general statement about the effect multilevel aspects can have on firm innovation.

The second limitation is the bias in type of industries represented in the sample (see Appendix

B). The primary industries in the sample are manufacturing (several types of different

categories), the retail sector (22.8 %) and the wholesale sector (15.4 %) and thus do not

include data of, for example, the services sector. As the types of industries are not

representative to a regular industry division, the outcomes are only limitedly generalizable.

Future studies should include firms in more diverse industries to find a more generalizable

outcome.

A third limitation is a measurement difficulty in the development factors. Although the

development factors were individually reliable and valid, the joint exploratory factor analysis

showed cross-loading and a measurement of four constructs with an Eigenvalue above 1. The

plotted Eigenvalues showed a steep decline till the third factor and then leveled, indicating

that three constructs were measured while two should be measured. A potential explanation is

that the third construct measures country development as financial market development and

higher education were originally intended to do. Future studies should determine if

development is measured and if this has an adverse effect on the outcomes.

The last limitation is the slight insignificance of the first hypothesis and hypothesis 2b. If both

hypotheses were significant this would create a more extended understanding of the

multilevel effects on firm innovation. Especially hypothesis 2b was slightly insignificant and

thus could provide a future fruitful avenue for research. Therefore, future research could try to

find support for hypothesis 2b as it would be interesting to know if the higher education

system could improve (or deter) absorptive capacity in such a manner that it would enable (or

limit) the interpretation of external knowledge and thus firm innovation.

32

REFERENCES

Acs, Z. J., Anselin, L., & Varga, A. (2002). Patents and innovation counts as measures of

regional production of new knowledge. Research policy, 31(7), 1069-1085.

Aghion, P., Howitt, P., & Mayer-Foulkes, D. (2004). The effect of financial development on

convergence: Theory and evidence (No. w10358). National Bureau of Economic

Research.

Alexiev, A. S., Volberda, H. W., & Van den Bosch, F. A. (2016). Interorganizational

collaboration and firm innovativeness: Unpacking the role of the organizational

environment. Journal of Business Research, 69(2), 974-984.

Anokhin, S., & Wincent, J. (2012). Start-up rates and innovation: A cross-country

examination. Journal of International Business Studies, 43(1), 41-60.

Ayyagari, M., Demirgüç-Kunt, A., & Maksimovic, V. (2012). Firm innovation in emerging

markets: the role of finance, governance, and competition. Journal of Financial and

Quantitative Analysis, 46(06), 1545-1580.

Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of

management, 17(1), 99-120.

Bantel, K. A., & Jackson, S. E. (1989). Top management and innovations in banking: Does

the composition of the top team make a difference?. Strategic Management

Journal, 10(S1), 107-124.

Benfratello, L., Schiantarelli, F., & Sembenelli, A. (2008). Banks and innovation:

Microeconometric evidence on Italian firms. Journal of Financial Economics, 90(2),

197-217.

Berger, A. N., & Udell, G. F. (1990). Collateral, loan quality and bank risk. Journal of

Monetary Economics, 25(1), 21-42.

Bierly, P., & Chakrabarti, A. (1996). Determinants of technology cycle time in the US

pharmaceutical industry‟. R&D Management, 26(2), 115-126.

Breunig V.R. & Bakhtiari, S. (2013). Outsourcing and innovation: An empirical exploration

of the dynamic relationship. The BE Journal of Economic Analysis & Policy, 13(1),

395-418.

33

Brown, J. R., Fazzari, S. M., & Petersen, B. C. (2009). Financing innovation and growth:

Cash flow, external equity, and the 1990s R&D boom. The Journal of Finance, 64(1),

151-185.

Calantone, R. J., Harmancioglu, N., & Droge, C. (2010). Inconclusive Innovation “Returns”:

A Meta‐Analysis of Research on Innovation in New Product Development*. Journal

of Product Innovation Management, 27(7), 1065-1081.

Camisón-Zornoza, C., Lapiedra-Alcamí, R., Segarra-Ciprés, M., & Boronat-Navarro, M.

(2004). A meta-analysis of innovation and organizational size. Organization

Studies, 25(3), 331-361.

Chang, M. H., & Harrington Jr, J. E. (1998). Organizational structure and firm innovation in a

retail chain. Computational & Mathematical Organization Theory, 3(4), 267-288.

Ciravegna, L., Lopez, L. E., & Kundu, S. K. (2015). The internationalization of Latin

American enterprises—Empirical and theoretical perspectives. Journal of Business

Research.

Coad, A., Segarra, A., & Teruel, M. (2016). Innovation and firm growth: Does firm age play a

role?. Research Policy, 45(2), 387-400.

Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on

learning and innovation. Administrative science quarterly, 128-152.Product

Development*. Journal of Product Innovation Management, 27(7), 1065-1081.

Cohen, W. M., & Levinthal, D. A. (1994). Fortune favors the prepared firm. Management

science, 40(2), 227-251.

Coriat, B., & Weinstein, O. (2002). Organizations, firms and institutions in the generation of

innovation. Research policy, 31(2), 273-290.

Crossan, M. M., & Apaydin, M. (2010). A multi‐dimensional framework of organizational

innovation: A systematic review of the literature. Journal of management

studies, 47(6), 1154-1191.

Czarnitzki, D. (2006). Research and development in small and medium‐sized enterprises: The

role of financial constraints and public funding. Scottish journal of political

economy, 53(3), 335-357.

34

Dakhli, M., & De Clercq, D. (2004). Human capital, social capital, and innovation: a multi-

country study. Entrepreneurship & regional development, 16(2), 107-128.

Damanpour, F. (1991). Organizational innovation: A meta-analysis of effects of determinants

and moderators. Academy of management journal, 34(3), 555-590.

Efrat, K. (2014). The direct and indirect impact of culture on innovation. Technovation, 34(1),

12-20.

Field, A. (2013). Discovering statistics using SPSS (4th

ed.). London: Sage Publications.

Furman, J. L., Porter, M. E., & Stern, S. (2002). The determinants of national innovative

capacity. Research policy, 31(6), 899-933.

Freeman, C. (1995). The „National System of Innovation‟ in historical perspective.

Cambridge Journal of economics, 19(1), 5-24.

Garcia-Morales, V. J., Ruiz-Moreno, A., & Llorens-Montes, F. J. (2007). Effects of

technology absorptive capacity and technology proactivity on organizational learning,

innovation and performance: An empirical examination. Technology Analysis &

Strategic Management, 19(4), 527-558.

Greve, H. R. (2003). A behavioral theory of R&D expenditures and innovations: Evidence

from shipbuilding. Academy of Management Journal, 46(6), 685-702.

Griliches, Z. (1990). Patent Statistics as Economic Indicators: A Survey. Journal of Economic

Literature, 28(4), 1661-1707.

Gupta, A. K., Tesluk, P. E., & Taylor, M. S. (2007). Innovation at and across multiple levels

of analysis. Organization Science, 18(6), 885-897.

Hall, B. H. (2002). The financing of research and development. Oxford review of economic

policy, 18(1), 35-51.

Hoskisson, R. E., Eden, L., Lau, C. M., & Wright, M. (2000). Strategy in emerging

economies. Academy of management journal, 43(3), 249-267.

Hsu, P. H., Tian, X., & Xu, Y. (2014). Financial development and innovation: Cross-country

evidence. Journal of Financial Economics, 112(1), 116-135.

35

Jackson, G., & Deeg, R. (2008). Comparing capitalisms: Understanding institutional diversity

and its implications for international business. Journal of International Business

Studies, 39(4), 540-561.

Katz, R., & Allen, T. J. (1991). Age, education and the technical ladder. Academy of

management proceedings, 39(3), 352-356.

Kessler, E. H., Bierly, P. E., & Gopalakrishnan, S. (2000). Internal vs. external learning in

new product development: effects on speed, costs and competitive advantage. R&d

Management, 30(3), 213-224.

King, R. G., & Levine, R. (1993). Finance, entrepreneurship and growth. Journal of Monetary

economics, 32(3), 513-542.

Kochhar, R., & David, P. (1996). Institutional investors and firm innovation: A test of

competing hypotheses. Strategic Management Journal, 17(1), 73-84.

Leiponen, A., & Helfat, C. E. (2010). Innovation objectives, knowledge sources, and the

benefits of breadth. Strategic Management Journal, 31(2), 224-236.

List, F. (1841). The National System of Political Economy, English Edition (1904). London,

Longman

Lundvall, B. A. (1992). National systems of innovation: An analytical framework. London:

Pinter.

Lundvall, B. A. (2010). National systems of innovation: Toward a theory of innovation and

interactive learning. Anthem Press, London.

Lundvall, B. Å., Johnson, B., Andersen, E. S., & Dalum, B. (2002). National systems of

production, innovation and competence building. Research policy, 31(2), 213-231.

Makkonen, T., & Inkinen, T. (2013). Innovative capacity, educational attainment and

economic development in the European Union: Causal relations and geographical

variations. European Planning Studies, 21(12), 1958-1976.

Malerba, F. (2002). Sectoral systems of innovation and production. Research policy, 31(2),

247-264.

36

Mangematin, V., & Nesta, L. (1999). What kind of knowledge can a firm absorb?.

International Journal of Technology Management, 18(3-4), 149-172.

Meierrieks, D. (2014). Financial Development and Innovation: Is There Evidence of a

Schumpeterian Finance-Innovation Nexus?. Annals of economics and finance, 15(2),

343-363.

OECD. (2005). Oslo Manual : Guidelines for collecting and interpreting innovation data (3rd

ed.). OECD Publishing, Paris.

Pfeifer, C. (2016). Intra-firm wage compression and coverage of training costs. Industrial &

Labour Relations Review, 69(2), 435-454.

Porter, M. E. (1985). Competitive Advantages: Creating and Sustaining Superior

Performance. The Free Press. New York.

Rubera, G., & Kirca, A. H. (2012). Firm innovativeness and its performance outcomes: A

meta-analytic review and theoretical integration. Journal of Marketing, 76(3), 130-

147.

Sawang, S., & Unsworth, K. L. (2011). Why adopt now? Multiple case studies and survey

studies comparing small, medium and large firms. Technovation, 31(10), 554-559.

Schumpeter, J. A. (1934). The theory of economic development: An inquiry into profits,

capital, credit, interest, and the business cycle (Vol. 55). Transaction publishers.

Schwab, K., & Sala-i-Martin, X. (2010). The Global Competitiveness Report 2010-2011.

Geneva: World Economic Forum

Schwab, K., & Sala-i-Martin, X. (2011). The global competitiveness report 2011-2012.

Geneva: World Economic Forum.

Schwab, K., Sala-i-Martín, X., & Brende, B. (2012). The Global Competitiveness Report

2012-2013 Geneva: World Economic Forum.

Scott, A. M., Simonoff, S. J,. & Marx, D. B. (2013). The SAGE handbook of multilevel

modeling. London: Sage Publications.

37

Shenkar, O., & Von Glinow, M. A. (1994). Paradoxes of organizational theory and research:

Using the case of China to illustrate national contingency. Management

Science, 40(1), 56-71.

Teece, D. J. (2000). Strategies for managing knowledge assets: the role of firm structure and

industrial context. Long range planning, 33(1), 35-54.

Thornhill, S. (2006). Knowledge, innovation and firm performance in high-and low-

technology regimes. Journal of business venturing, 21(5), 687-703.

Varsakelis, N. C. (2006). Education, political institutions and innovative activity: A cross-

country empirical investigation. Research Policy, 35(7), 1083-1090.

World Bank (2013). Enterprise Surveys. Accessed on 20 May 2016 via

http://www.enterprisesurveys.org

World Bank (2016). World Development Indicators Database. Accessed on 12 June 2016 via

http://data.worldbank.org/dutch

Yeo, G. B., & Neal, A. (2004). A multilevel analysis of effort, practice, and performance:

effects; of ability, conscientiousness, and goal orientation. Journal of Applied

Psychology, 89(2), 231.

Yuan, L., Qian, X., & Pangarkar, N. (2015). Market Timing and Internationalization

Decisions: A Contingency Perspective. Journal of Management Studies.

38

APPENDIX

A. Countries included in the sample

Albania Hungary Poland

Armenia Kazakhstan Romania

Azerbaijan Kyrgyz Republic Russian Federation

Bosnia and Herzegovina Latvia Serbia

Bulgaria Lithuania Slovak Republic

Croatia Macedonia Slovenia

Czech Republic Moldova Tajikistan

Estonia Mongolia Turkey

Georgia Montenegro Ukraine

B. Industry distribution

Industry Percentage Percentage

Retail 22.8 Plastic and rubber 1.9

Wholesale 15.4 Supporting transport activities 1.8

Construction 08.3 Electronics 1.5

Food 07.0 IT 1.4

Non metallic mineral products 04.3 Precisions instruments 1.1

Fabricated metal products 04.0 Post and telecommunications 1.0

Hotel and restaurants 03.9 Basic metals 0.5

Garments 03.6 Tanning and leather 0.5

Machinery and equipment 03.4 Paper and paper products 0.4

Services of motor vehicles 02.6 Other transport equipment 0.3

Chemicals 02.5 Motor vehicles 0.3

Publishing, printing and recorded

media

02.4 Recycling 0.2

Furniture 02.1 Tobacco products 0.2

Wood 02.1 Communication equipment 0.2

Transport 02.1 Office machinery 0.1

Textiles 02.0 Coke and refined petroleum 0.1

39

C. Development factors item list

Development Factor and Item Used

Scale

Financial Market Development

Does the financial sector in your country provide a wide variety of financial products and

services to businesses?

1-7

To what extent does competition among providers of financial services in your country

ensure the provision of financial services at affordable prices?

1-7

How easy is it to raise money by issuing shares on the stock market in your country? 1-7

How easy is it to obtain a bank loan in your country with only a good business plan and

no collateral?

1-7

In your country, how easy is it for entrepreneurs with innovative but risky projects to find

venture capital?

1-7

How would you assess the soundness of banks in your country? 1-7

How would you asses the regulation and supervision of securities exchange in your

country?

1-7

Higher Education

Gross secondary education enrollment rate 0-100

Gross tertiary education enrollment rate 0-100

How well does the educational system in your country meet the needs of a competitive

economy?

1-7

How would you assess the quality of the math and science educations in your country‟s

schools?

1-7

How would you assess the quality of the management and business schools in your

country?

1-7

How would you rate the level of access to the internet in schools in your country? 1-7