Does Innovation Explain the Performance Gap Between Privatized and Private Firms?

Abstract

In this study, using a unique firm-level survey database, I investigate innovation for privatized former state-owned enterprises (SOEs) versus originally private (de novo) firms in 30 Eastern European and Central Asian countries. I also examine how innovation related activities and practices affect firm growth in these transition economies. Besides using an invention-based narrow definition of innovation, I use an imitation and adaptation-based broad definition of innovation. I find that innovative firms grow faster than non-innovative firms. The main results suggest that privatized former SOEs in transition economies are less innovative than originally private firms. My results hold after controlling for a country’s economic development, governance quality, EU membership, and former USSR membership. The findings may provide a possible explanation for the underperformance of privatized firms in comparing to private firms.

Keywords: Firm Innovation, Privatization, Firm Growth, Transition Economies

JEL Classification: L25, L33, O31, O32