Evaluating business innovation policies in developing countries: the case of Mexico

Developing countries have recently been emulating innovation policies implemented by developed countries with the firm conviction that it will improve their economic development prospects. Nevertheless, the specificities and conditions of the former group differ from the latter. Technological as well as absorptive and innovation capacities are key factors determining these differences. According to the literature on evaluating innovation policy, these key issues have been overlooked by current evaluation practices in developing countries. Another literature, dealing with global value chains, claims that upgrading firms functionally and inter-sectorally may allow developing countries to escape the negative effects of globalisation highlighted by dependency theory and the law of uneven development. However, there is a gap between these two literatures. To date, no empirical evaluation framework for the evaluation of innovation policies in developing countries explicitly considers either the importance of technological and absorptive capacity building, or the likelihood of firms to upgrade functionally and inter-sectorally in global value chains. This thesis fills that gap by developing and validating an evaluation framework of innovation policies in developing countries which explicitly considers these important factors. Evaluation of business innovation policies implemented in Mexico from 2006 to 2009 served as a laboratory to test this methodological framework. A unique dataset, gathered via telephone survey, was populated with a collected sample of 477 observations; these included information on firm performance and innovation activities of 164 successful applicants for government support for business innovation, as well as a control group of 313 firms. Through a self-assessment exercise, recipients acknowledged the benefits of government support for business innovation. These benefits include crowding-in effects and positive behavioural additionalities, principally enlarging the research scope of firms and augmenting their cognitive capacities. When compared with the control group, the results suggest that recipients outperformed non-recipients in six types of innovation. In addition, successful applicants performed well when compared to the control group in terms of turnover and productivity, though employment has been found to be statistically not significant. (This result suggests that recipients may focus on capital-intensive process innovations.) An innovation production model has been estimated and the application of a 2-step Heckman (1979) bias model indicated that government support for business innovation positively affects firm performance in terms of labour productivity growth, even when controlling for selection effects. Methodologically, this study makes a novel and timely contribution to the existing research by estimating the likelihood of firms in developing countries to achieve functional and/or inter-sectoral upgrading overlooked to date by the evaluation community. In addition, the algorithm developed to identify ‘high-potential innovative firms’ has important policy implications. The evaluation framework developed here makes a solid and novel contribution to two strands of the literature: evaluation of business innovation in developing countries and upgrading of firms in global value chains. It also provides insights to policymakers with regards to the identification of ‘high potential innovative firms’ through a predictive algorithm. This evaluation framework was tested in the Mexican context, and has the potential to be replicated for developing countries with similar characteristics; there are transferable lessons to be learnt regardless of the country context.