Innovation, productivity, exports and the investment climate: A study based on Indian manufacturing firm-level data

We study the interactions between firm-level innovation, productivity and exports in the case of the Indian manufacturing sector. To differentiate the incentives to innovate from the ability to innovate, we distinguish the inputs of innovation (R&D and training), from the outputs. Our findings highlight a virtuous circle between the three components of innovation, as well as between firm-level R&D, innovation and exports. The results suggest a positive effect of R&D on innovation (product innovation in particular), of innovation on exports (product and marketing innovation especially), and of exports on R&D. Furthermore, it seems that training and R&D reinforce each other in the Indian firm-level innovation process: doing R&D incites firms to train their workforce, and training stimulates R&D in return. Productivity of the Indian manufacturing firms seems to benefit from that dynamics, as exporting and innovating would improve firm-level TFP. As for the investment climate, our results suggest that the differences in the Indian firm-level environment participate in the firms' performance gaps. These results are all the more important in the context of the Make in India campaign and the business environment deficiencies.