(iii) During the last fiscal year, did this establishment spend on research and development activities, either in-house or contracted with other companies, excluding market research surveys?

The answers to these questions, coded as binary indicators, measure a firm’s engagement in innovation with respect to products, processes, and R&D, respectively. As defined in the questionnaire, these innovations can be more advanced inventions or production processes, or small improvements to existing processes and products.<sup>9</sup> To address the potential subjectivity of responses to these questions, WBES data are collected by interviewers guided by detailed instructions on what does or does not count as a “new or improved” product or process and as “R&D”.<sup>10</sup> Firms responding positively to questions (i) or (ii) were asked to describe the new or improved product or process in detail. (In case of multiple innovations by a firm, the respondent was asked about the product or process considered to be most significant as identified by the value of sales for product innovations and impact on operations for process innovations.) Further, firms responding positively to question (i) were asked whether the new or improved product (good or service) was also new for the establishment’s main market.

These questions should prompt respondents to exercise care in providing responses. In view of the above, as well as the general quality control measures adopted in collecting WBES data, the innovation information in WBES is deemed to be reliable. Indeed, it has been used in several peer-reviewed papers that study firm innovation in developing countries (Ayyagari, et al., 2011; Paunov, 2016; and Paunov and Rollo, 2016).<sup>11</sup> To examine how urban agglomeration affects firm propensity to undertake innovation-related activities, it is crucial to know the location of firms, ideally measured in a consistent way across countries. Publicly available WBES provide information on the geographic units where each firm is located. However, the scope of the geographic units varies by country and these units do not necessarily correspond to a well-defined urban area. For example, the Kazakhstan data indicate only the region (e.g., north or south) to which surveyed firms belong, while the Indian data reveal only the state where a firm is located. Even if the geographic unit refer to cities, as is the case for some countries, they are not comparable since the official definitions of cities differ greatly across countries (UN 2018). Fortunately, the WBES conducted since 2012 contain the

> 9 Examples of relatively minor product innovations include a shoe manufacturing firm in Bandung, Indonesia introducing shoes made out of nubuck leather with anti-slip and oil resistant soles, or a plastic bag printing firm in Port Moresby, Papua New Guinea printing bags to carry food. Examples of process innovations include a manufacturing firm in Yangon, Myanmar offering a door-to-door sales service or a repair shop running an ad campaign on Facebook. There are more advanced product innovations in the sample as well, including a firm in Ho Chi Minh starting to weld optical fibers for Viettel, a telecom multinational. For process innovation, an example is an auto repair company in Yangon adopting laser-based technology.

> 10 See pages 16-20 of “World Bank Group’s Enterprise Survey: Understanding the Questionnaire”, 2019, World Bank.

> 11 Robustness tests use as dependent variables an indicator of whether the new or improved product or service was also new for the establishment’s main market and an indicator of whether the establishment reported either a product innovation or process innovation. The latter allows for mistaken categorization of innovation as a product or process innovation by respondents. See Section 4.2 for more detail.

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