Linking Innovation Systems, International Integration, and Investment Climate to Firm Productivity in Developing Countries

This paper analyzes the importance of investment climate (IC), international integration (II), and innovation system (IS) variables on firm productivity. These variables are measured at the firm, sector, and country levels. It also investigates the interaction effects among them. Multilevel-mixed effect analysis is conducted using the World Bank Enterprise Survey data for 20 developing countries in 21 sectors. Results indicate that firm-level variables tend to be more robust than sector- or country-level variables and that more II variables are shown be significant than either IC or IS variables. Specifically, sector-level II variables are significant, whereas sector-level IC variables and sector-level R&D variables are insignificant. Sector-level IC and IS variables become significant only when they interact with firm-level variables. The results underscore the importance of firm-level capabilities, which can be enhanced by II (e.g., firm-level learning by exporting and Foreign Direct Investment [FDI] arrangement) and IS (e.g., firm-level education and training) as well as by spillover from sector-level II and human capital. Results also reveal the channels through which IC may affect firm productivity. IC exhibits an effect on firm productivity when it interacts with firm-level capabilities and activities.