# **1. Introduction**

This paper brings enterprise-level empirical evidence to bear on the important policy debate regarding whether innovation-driven growth is inclusive.<sup>1</sup> The conventional view is that the force of economic innovation mainly creates and commercializes sophisticated new-to-theworld frontier products. As such, the benefits of innovation are traditionally perceived to flow disproportionately to the investors in and managers of larger, technically sophisticated corporations; highly skilled workers; stakeholders with control over channels of distribution of inputs and outputs that are needed by technically sophisticated enterprises; and ultimately higherincome households as consumers of innovative products. From this perspective, innovationdriven growth is not inclusive, at least not until that growth generalizes to portions of the economy beyond the sectors involved directly in innovation.

We empirically explore an alternative view that innovation, especially in the context of development, should be recognized as applying to a broader range of non-replicative entrepreneurial accomplishments. Value and productivity-enhancing activities that commercialize ideas embedded in product, process, and organizational and marketing technologies that are new-to-the-firm and possibly new to the local economy, are apt to drive enterprise growth, even if they are not new-to-the-world. Such innovation-driven growth is indeed far more likely to be inclusive, in the sense of providing new employment and consumption opportunities for the segments of the population that are without secure prior participation in the organized developing economy. Local innovation and its consequent inclusive growth are apt to be enabled and spurred by the type of market competition that ensures opportunities for grass-roots entrepreneurs to access essential business services, as well as other required local inputs and distribution outlets. A secure, competitive market environment is especially important for vulnerable young firms, which may well have the most powerful collective potential for fast growth and job creation that is genuinely inclusive.

This paper analyzes key linkages between competition, innovation, productivity and inclusive growth, both conceptually and empirically, using firm-level data across OECD and developing countries. The paper‘s principal empirical finding is that innovation and the resulting increases in productivity do lead, when spurred by a competitive business environment, to more inclusive growth. While much of our policy focus here is on the ramifications for vulnerable young firms of a competitive business environment, we also find empirical indications of the efficacy of the policy agenda in support of innovation that includes encouragement of skills and

> 1 Although the concept of  ̳inclusive growth‘ has received considerable attention in the economics literature, there is no widely accepted definition for it. Because of increasing concerns about rising income inequalities and claims that the poor in many parts of the world have not been benefitting much from economic growth, the term inclusive growth is often used interchangeably with a host of other terms, including  ̳broad-based growth,‘  ̳shared growth,‘ and  ̳pro-poor growth.‘  For some of the pertinent definitional issues see Tang (2008).

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