Innovation and exports in Vietnam's SME sector

Innovation has long been considered an important factor for creating and maintaining the competitiveness of nations and firms. Common knowledge holds that innovation causes an increase in exports. However, contradicting empirical evidence is reported in the literature on the links between innovation and export. In this paper we examine whether innovation by small and medium enterprises (SMEs) enhances their likelihood of exporting in the context of the developing country of Vietnam. Using a uniquely rich Vietnamese SMEs database, we find that innovation as measured directly by 'new products', 'new production process' and 'improvement of existing products' are important determinants of exports by Vietnamese SMEs. We add to the current literature by examining the modification of existing products as an innovation activity. We also find evidence of endogeneity of innovation that may lead to biased estimate of innovation in previous studies, which failed to take this problem into account.