A Matter of Survival: Development Through Innovation

This paper examines innovation by emphasizing the role of Global value chains (GVCs) and financial development. Using data from 25,690 firms from the World Bank’s Enterprise Surveys (WBES) from 2006 to 2023, extended probit and two-step probit selection models are constructed. The findings show that engaging in GVCs is essential to innovation, with financial development playing a moderating role. Moreover, in addition to participation in GVCs and financial development, human capital is the main driver of innovation. Firm age, top manager experience, firm size, sector of activity, and competition against informal or unregistered firms positively affect a firm’s decision to innovate. However, instrumenting the quality of institutions, business environment, and energy constraints, political instability is a key impediment to innovation even if firms join GVCs and have access to finance.