All in all, there are large differences in labour productivity across both firms and countries in the transition region. Every transition country has firms with high and low labour productivity. However, in less developed transition countries the percentage of firms with poor productivity is higher.
How can firms boost their productivity? Analysis suggests that all types of innovation – product, process, marketing and organisational innovation – play an important role. Moreover, even if they do not advance the technological frontier, innovations which are new to an individual firm can still result in large productivity dividends. Returns to innovation are particularly high in low-tech manufacturing sectors, where innovation is less common.
Another important source of labour productivity gains is improvements in the quality of management. In less developed transition countries, where the quality of management is generally poor, returns to improvements in management are high, while returns to process innovation are generally low.This suggests that management practices need to be improved before new processes can lead to sizeable productivity gains. In contrast, in the CEB and SEE regions, where management practices tend to be better, returns to the introduction of new processes exceed returns to further improvements in management.
Cross-country analysis of the exports of various industries suggests that industries involving higher levels of innovation are able to grow faster, thereby driving overall economic growth – provided that the business environment is accommodative. These estimates also imply that the quality of the business environment is particularly important for the development of innovation-intensive industries. The results suggest that improvements in the quality of economic institutions are associated with increases in the innovation intensity of exports and output over time as innovation-intensive industries grow faster and their relative contribution to the country’s exports rises. Chapter 3 examines the relationship between the quality of the business environment and firm-level innovation in more detail.