|Dummy of process innovation > sect. avg.?||-0.0858||-0.0755|
|---|---|---|---|---|
|(Yes=1)||(0.115)||(0.135)|
|(Process innovation spillover) x (Dummy of||0.450**||0.277|
|process innovation > sect. avg.?)||(0.195)||(0.214)|
|N|2,607|2,607|2,609|2,607|
|***p<0.01,**p<0.05,*p<0.1. Ordinary least s|quares. Bootstr|apped standard e|rrors in parenth|eses|

# 3.4 What factors facilitate higher returns?

Innovation does not happen in a vacuum but hinges on the availability and the adequacy of a broad range of factors. Cirera and Maloney (2017) note that supply,<sup>11</sup> demand<sup>12</sup> as well as accumulation and allocation<sup>13</sup> factors play an important role in the diffusion and adoption of innovation. We thus want to understand which of these complementary factors play a more significant role and whether any differential effect emerges for innovative versus non-innovative firms.<sup>14</sup> To this end, we rely on the general to specific (GETS) method (Hendry and Krolzig, 2004, and Hoover and Perez, 1999) to identify which factors are associated with productivity. The idea is to first consider a large set of variables and then select the explanatory variables through a series of statistical tests, based on the relevance and power of these variables to explain the dependent variable. Hoover and Perez (1999) show that this technique performs well in recovering the true data-generating process in Monte Carlo simulations. We believe this could be a fruitful approach to identify complementary factors -theoretically, a large number of factors can support the innovation-productivity relationship; hence we allow for statistical models to pin down the most relevant for East Asian economies.

We consider the following set of variables<sup>15</sup> :

- i. **Firm choices:** whether at least 10% of a firm belongs to a foreign company, % of firm owned by the largest owner(s), whether a firm provides internal training to its employees, average years of education of typical worker, whether at least 10% of its total sales are from firm’s direct exports, whether a firm uses foreign production technology, whether the firm owns or shares a generator, whether the firm has an ISO quality certification, whether the firm is externally audited, and whether the firm uses a webpage to communicate with clients.

- ii. **Policy variables:** whether a firm has access to a credit line, % of total manager’s time spent dealing with bureaucracy, whether a firm dealt with informal competitors last year, % of sales spent on informal payments to govt officials, the average number of days to get electricity connection, whether the firm experienced power outages during the last year, whether the firm experienced

> 11 Supply factors considered by Cirera and Maloney (2017) include: human capital, support to firm capability upgrading, domestic science and technology system, and international NIS.

> 12 Demand factors considered by Cirera and Maloney (2017) include: incentives to accumulate (macro context, competitive structure, trade regime and international networks) and firm capabilities (core competencies, production systems, and technological absorption and production).

> 13 Cirera and Maloney (2017) distinguish between barriers to all accumulation (credit, entry/exit barriers, business and regulatory climate, rule of the law) and barriers to knowledge accumulation (rigidities for example in the labor market, seed and venture capital, innovation externalities).

> 14 Firms are considered innovative if they have introduced a new or significantly improved product, service or process.

> 15 The selection of the variables considered is influenced by data availability (number of missing values in measures that are omitted above).

13