INTRODUCTION

The topic of innovation has garnered the interest of a select group of economists from Schumpeter (1942) to Nelson and Winter (1982), who have stressed that it is the key to economic growth. However, until the advent of panel data sets, there was little empirical evidence to link the innovation stance of firms and their performance. Recent work that links dynamic panel data sets on the performance of firms and special surveys on the strategies that are being pursued by firms has demonstrated the importance of innovation to growth. Baldwin, Chandler et al. (1994) demonstrate that in small and medium-sized Canadian firms, a measure of success that is based on growth, profitability, and productivity is strongly related to the emphasis that firms place on innovation. Baldwin and Johnson (1998a) use a sample of entrants to show that growth in new firms is related to whether the firm innovates. Crépon, Duguet, and Mairesse (1998) find that innovation in French firms is associated with increases in productivity.

While we have evidence, therefore, on the connection between success and innovation, there is less evidence on the factors that condition whether a firm adopts an innovation policy. Not all firms innovate despite the benefits of doing so. Research has, therefore, been aimed at understanding the conditions that are associated with being innovative. A number of questions have been posed in this literature — the extent to which the intellectual property regime stimulates innovation; whether the exclusive emphasis that is given to R&D ignores the importance of other inputs; the effect of firm size and market structure on the intensity of innovation; and the extent to which multinational firms are more innovative. […]