Lederman, Daniel2012-05-222012-05-222007-08https://hdl.handle.net/10986/6299A model of firm innovation illustrates the effects of the threat of imitation and product varieties on a representative firm's decision to invest in research and development to produce new product varieties. The model motivates two empirical questions: (1) Is research and development partially correlated with firms' propensity to introduce new products or product innovation in developing countries? (2) Do trade policies and the national investment climate affect firms' propensity for product innovation? The econometric evidence suggests that the answers are yes and yes, but the investment climate affects product innovation in a manner that is consistent with the presence of market failures and state capture. National trade-policy distortions appear to reduce the probability of product innovation, and the density of exporting firms at the national level also seems to positively affect the propensity to introduce new products by individual firms. The paper discusses some policy implications.CC BY 3.0 IGOAVAILABILITY OF DATABUSINESS ENVIRONMENTCAPITAL INVESTMENTCOMPETITORCOMPETITORSCONSTANT RETURNSCONSTANT RETURNS TO SCALECOUNTRY CHARACTERISTICSCOUNTRY DUMMIESCOUNTRY EFFECTSCOUNTRY EXPERIENCESCOUNTRY LEVELCOUNTRY LEVEL VARIABLESCOUNTRY-SPECIFIC EFFECTSCREATIVE DESTRUCTIONCROSS-COUNTRY DIFFERENCESDATA DEFINITIONSDEPENDENT VARIABLEDEREGULATIONDESCRIPTIVE STATISTICSDEVELOPED COUNTRIESDEVELOPED ECONOMIESDEVELOPING COUNTRIESDEVELOPMENT ECONOMICSDIVERSIFICATIONDYNAMIC PATHECONOMETRIC ANALYSISECONOMETRICSECONOMIC ACTIVITIESECONOMIC DEVELOPMENTECONOMIC GROWTHECONOMICS RESEARCHELASTICITYEMPIRICAL ANALYSISEMPIRICAL EVIDENCEEMPIRICAL LITERATUREEMPIRICAL MODELEMPIRICAL WORKENTERPRISE SURVEYSENTREPRENEURIAL SKILLSENTREPRENEURSENTREPRENEURSHIPEXOGENOUS FACTORSEXOGENOUS PROBABILITYEXPECTED VALUEEXPLANATORY VARIABLEEXPLANATORY VARIABLESEXPORT SECTOREXPORTSFINANCIAL SUPPORTFIRM GROWTHFIRM PERFORMANCEFIRM SIZEGDPGDP PER CAPITAGROWTH MODELSGROWTH POLICYHETEROSKEDASTICITYHIGH CORRELATIONINCOMEINCOME DIFFERENTIALSINCOMESINDIVIDUAL FIRMINDIVIDUAL FIRMSINNOVATION FUNCTIONINNOVATIONSINNOVATIVE FIRMSINNOVATIVE IDEASINTEREST RATESINVENTIONINVESTMENT CLIMATEKNOWLEDGE SPILLOVERSLABOR FORCELABOR PRODUCTIVITYLAGGED DEPENDENTLICENSINGMANUFACTURINGMANUFACTURING INDUSTRIESMANUFACTURING INDUSTRYMARKET COMPETITIONMARKET DEMANDMARKET PRICESMEASUREMENT ERRORMEASUREMENT ERRORSMEMBER COUNTRIESMISSING DATAMISSING VALUESMULTINATIONALMULTINATIONAL CORPORATIONSNATURAL LOGARITHMNEGATIVE COEFFICIENTNEGATIVE COEFFICIENTSNEGATIVE SIGNNEW PRODUCTNEW PRODUCTSNORMAL DISTRIBUTIONOPPORTUNITY COSTSPATENTSPER CAPITA INCOMEPOLICY IMPLICATIONSPOLICY PERSPECTIVEPOLICY RESEARCHPOLICY VARIABLESPOLITICAL ECONOMYPOLITICAL STABILITYPOOR COUNTRIESPOSITIVE EFFECTPRIVATE AGENTSPRIVATE SECTORPRODUCT DEVELOPMENTPRODUCT INNOVATIONPRODUCT INNOVATIONSPRODUCTION FUNCTIONPRODUCTIVITYPRODUCTIVITY GROWTHPUBLIC SECTORR&DREGRESSION ANALYSESREGRESSION RESULTSREGULATORY ENVIRONMENTREGULATORY POLICYREGULATORY REFORMSRELATIVE PRICESRESULTRESULTSSEARCHESTARIFF BARRIERSTECHNOLOGY DIFFUSIONTELEPHONETELEPHONE LINESTOTAL FACTOR PRODUCTIVITYTRADE LIBERALIZATIONTRADE POLICIESTRADE POLICYUSESVALUE ADDEDWEBWorld Bank10.1596/1813-9450-4319