Innovate or Die? A critical review of the literature on innovation and performance

This chapter critically reviews the wide, yet remarkably scattered literature that aims at measuring and explaining the relationship between innovation and performance. The starting point of this chapter is that the country- and sectoral-level evidence is dubious because of both data issues and theoretical problems. On the data side, most studies try to develop indicators that are aggregations of micro-level indicators (e.g. patent counts, R&D expenditure, human capital investments). The robustness of such method is questionable, if only for an issue of cross-sectoral compensation effects. On the theoretical side, some argue that the answer lies in shifting the analysis from the sectoral and country level, to the world level. This view emphasises the ‘free good’ nature of knowledge. Since innovation processes generate knowledge that is at least partially public in nature, externalities and spillovers become the key engine through which new knowledge is circulated. However, the effects of such processes should be sought without being constrained by national borders. This approach would have the advantage to provide a solid quantitative evaluation of the effect of innovation on GDP growth. Others argue that innovation should be analysed in terms not only of the adoption of new and better ‘techniques’, but rather as a co-evolutionary process of technologies and organisations. However, such co-evolutionary process is likely to be extremely sector- and firm-specific. Hence, the need to shift the analysis from the macro- to the micro-level. The latter observation brings about the main theoretical issue this chapter builds upon. Firm-level heterogeneity plays a key role in explaining innovation. Thus, sectoral- or country-level aggregations might obfuscate the role played by one of the key engines of innovation. This approach is preferred by those who argue that innovation is the outcome of deliberate investments and strategic efforts.