<!-- Start of picture text --> Figure B2.1. Average marginal probability to innovate given the use of innovation inputs across developing East Asian<br>countries<br>35.0% 32.2%<br>30.0%<br>26.3%<br>25.0%<br>21.7%<br>20.0% 19.2%18.4%<br>16.2%<br>14.9%<br>13.7%<br>15.0%<br>11.0%<br>10.1% 9.7%<br>10.0%<br>6.0%<br>4.8%<br>5.0%<br>0.0%<br>Product OR Product Process Organizational Marketing<br>process<br>R&D Trainning Technology license<br>Source: Own elaboration using ES data<br>Note: average marginal effect results from a probit model estimating the probability of introducing all types of<br>innovation (product or process; product; process; organizational; and marketing) conditional on whether the firm:<br>perform R&D activities, offer training for innovative activities, and acquire technology license (all of them<br>introduced simultaneously in the regression). Controls for firm age, size, sector, ownership, export status, city<br>size plus country fixed effects are also included as regressors. The graph shows only the coefficients/effects that<br>are statistically significant. For innovation of product or process, and product innovation, the effect of technology<br>license was not statistically significant.<br><!-- End of picture text -->

# **_3.1. Managerial capabilities as a (complementary, but key) innovation input_**

Besides R&D, training activities and acquisition of technology license, managerial and organizational capabilities represent another key innovation input. As highlighted in Cirera and Maloney (2017), these capabilities are part of core competences and critical inputs for innovation as they determine the way in which knowledge is employed and accumulated, especially for firms that are far from the technological frontier. In this regard, low managerial capabilities are one of the key reasons why firms do not invest more in innovation, since they prevent firms from identifying productive opportunities, evaluating their feasibility, managing their risk, and allocating human resources effectively. Therefore, they should be understood as an innovation input that needs to be accumulated and combined with other complementary inputs to yield innovation outcomes. Recent empirical evidence shows that managerial capabilities is positively correlated with productivity and innovation. Drawing from a broad range of middle-income and developing countries, Bloom and Van Reenen (2010) show average management scores to be highly correlated with aggregate labor productivity. More recently, Cirera (2017) finds evidence that good management practices have a dual positive effect on productivity: it enables more efficient use of resources and increases the probability to innovate. Using Mexican micro data, Iacovone and Pereira-Lopez (2017) provide micro-level evidence on the complementarity between managerial practices and R&D efforts in Mexico by showing that better managerial practices increase the impact of R&D activities leading to innovation activities.

The World Management Survey (WMS) is used to assess the status of managerial practices in developing East Asia; only two developing East Asian countries are included in the survey: China and Vietnam. The WMS is a globally comparable survey of management practices that permits benchmarking countries by management practices. As per the methodology presented originally 17