Introduction

As explained in Chapter 3, it is widely agreed that competitiveness based on low factor cost is short-lived; and the competitive advantage of a nation arises, in the long run, from firm-level capabilities to innovate. Innovation is required, inter alia, to upgrade firms and industrial activities in order to achieve and maintain competitiveness. Further, there is a close correlation between innovation and development (Fagerberg et al. 2009, 40–42). As we have mentioned in the introductory chapter, firms are the centrepiece of economic activities of a country. Upgrading and innovation are not an exception to this general statement; they have to be carried out by the firms, and any related government support and policies should eventually be targeted at the firms.

The literature on innovation is geared basically to the case of established firms of advanced industrial countries. Newcomer firms of developing countries, particularly countries which are at the early stages of development, are not at the same stage of industrialization. Hence innovation takes on a different meaning in the context of these countries. Nevertheless, it is important to explain how established firms in developed countries innovate for two reasons.