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The governance environment and innovative SMEs

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Abstract

This paper examines the impact of the governance environment on SME performance, concentrating on differences between innovators and non-innovators. A poor environment is related to lower profits and sales for SME innovators than non-innovators. Using a complementary indicator, SME innovators tend to have higher sales and profits when courts are perceived to be strong. On the other hand, the governance environment does not impact large innovative and non-innovative firm performance differently. Latin America and the Caribbean is a region with many entrepreneurs but few innovators. The region also has a larger proportion of smaller firms compared to other regions. In this context, lessons on SME constraints related to governance are important for developing enabling policies.

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Notes

  1. Based on a set of panel firms from 14 LAC countries in 2006 and 2010.

  2. Firms are innovators if they have created new or significantly modified products in the last 3 years. This is an objective measure in the Enterprise Surveys.

  3. See Fisman and Svensson (2007), Francisco and Pontara (2007), Hallward-Driemeier et al. (2006), Honorati and Mengistae (2005), Bastos and Nasir (2004), Beck et al. (2005a, b), Carlin et al. (2006) and Gaviria (2002).

  4. See Aterido et al. (2010), Aterido et al. (2011), Asiedu and Freeman (2009), Bastos and Nasir (2004), Beck et al. (2005a, b), Dollar et al. (2005, 2006), Escribano and Guasch (2005); Hallward-Driemeier et al. (2006), Seker and Yang (2014) and Bhaumik and Estrin (2007); see Dethier et al. 2010 review of Enterprise Surveys literature.

  5. Just to cite a few: Carpenter and Petersen (2002), Beck and Demirguc-Kunt (2006) and Hutchinson and Xavier (2006).

  6. See World Bank (2004), Pande and Udry (2005), Durlauf et al. (2008) and Dethier et al. (2010).

  7. See Belitski et al. (2016), Mauro (1995), Kaufmann et al. (2004), Mo (2001), Wei (2000), Lambsdorff (2003), Johnson et al. (2011), Djankov et al. (2002), Shleifer and Vishny (1993) and Seligson 2006.

  8. See Geroski et al. (1993), Leiponen (2000), Cefis and Ciccarelli (2005) and Love et al. (2009).

  9. See Svennson (2003), Ayyagari et al. (2010), Anokhin and Schulze (2009) and Murphy et al. (1993).

  10. A data point is considered to be an outlier if it lies three standard deviations away from the mean. Outliers are examined over the distribution of panel firms.

  11. I use the term “closely” since I exclude the firm’s own perception response from the average. For firms who did not respond to these questions, I impute the average from their cluster. These instances are rare since obstacle questions are required and there are few instances when a firm chose “don’t know”.

  12. See Dethier et al. (2010), Escribano and Guasch (2005), Şeker and Yang (2014), Dollar et al. (2005, 2006) and Hallward-Driemeier et al. (2006).

  13. The cluster level used in the estimation is country-stratification region-sector. Other clusters at country-region-size are also used for robustness checking.

  14. Ayyagari et al. (2011) find that having external financing, borrowing in a foreign currency, having highly educated managers, internal ownership and exposure to foreign competition are positively related with higher levels of firm innovation. The quality of the financial sector is important for innovation determination. However, I do not find the interaction between access to finance and innovation to significantly predict profits. In Australia, Bhattacharya and Bloch (2004) find firm size, R&D intensity, market structure, and trade shares to predict innovation levels.

  15. Furthermore, the regression includes only firms who are in groups where the average business climate was averaged across at least 25 firms. Recall this was done to ensure that average business climate measures were computed with enough firms. This is not a strict restriction since governance questions are not allowed to be skipped in the survey and averages are calculated from the full sample of firms. However, there are some cases where a location has very small number of firms and these cases are excluded.

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Acknowledgments

The author would like to thank Mohammad Amin for helpful comments, and participants at the 2014 Doing Business: Past, Present and Future of Business Regulation conference. All errors are my own.

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    Judy S. Yang

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Correspondence to Judy S. Yang.

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The findings, interpretations, and conclusions expressed in this paper are entirely those of the author. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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Yang, J.S. The governance environment and innovative SMEs. Small Bus Econ 48, 525–541 (2017). https://doi.org/10.1007/s11187-016-9802-1

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