Technological progress is at the heart of development. But the innovation process that underlies technological progress in developing countries has very different characteristics from that in developed countries. Given the technology gap developing countries are facing, the bulk of technological progress in these countries largely occurs through the absorption and adaptation of pre-existing technologies, rather than the invention of entirely new technologies. These technologies are often sourced from abroad.
What matters most for technological development is the speed with which technology diffuses within a country. Empirical evidence shows an important divergence across developing countries in the speed of diffusion within countries and their role for growth (World Bank, 2008). Many developing countries have a business environment that constrains firm’s absorption of new technologies and performance. Among the macro-factors identified as potential barriers for growth and the adoption of new technologies are heavy regulatory burden, the quality of institutions, severe financial constraints and macroeconomic uncertainty (Bastos and Nasir, 2004, Dollar et al., 2003, Eifert et al., 2005). In addition, technology diffusion depends on the extent to which firms are exposed to and able to efficiently absorb foreign and new vintage technologies – through trade, FDI and migration of human capital.
Firms are the basic mechanism by which technology spreads within an economy. However, what is still lacking in the literature is robust firm level evidence on what effectively drives, or hinders, firms in developing countries to adopt new technologies and effectively absorb them into a better firm performance.
To shed more light on the link between adoption of new technologies, innovation, productivity and firm growth in the context of a catching up economy, this paper analyses micro-evidence from a sample of manufacturing firms from Brazil. In recent years, Brazil has been able to play an increasingly important role in international trade, production and (R&D) investment. While this pattern of emerging success has given rise to a significant amount of research documenting the performance of the economy at the aggregate or sector level, the micro-evidence on the factors that underlie firm success is less abundant.
This paper, using data from the World Bank’s Investment Climate Survey (ICS) data collected in Brazil in 2003, tries to contribute to the literature on technological progress and development in several ways. Taking a micro econometric perspective, it investigates in more detail what drives or impedes firms to introduce new products and processes and how important innovative performance is for firm growth. Our focus on Brazil allows analysing the case of a mid-income country in fast development, where the interplay between diffusion (buy) and creation (make) of new technologies, is centrepiece for sustaining growth. Also on the role of foreign technologies, trade and FDI, Brazil is an interesting case. Although it has recently opened up to the global economy, it still carries the reminders of a closed economy set-up, relying on its own large internal market, protecting "local champions" in strategic sectors, and with a strongly supported public sector R&D in specific technology and geographic areas. Before we present our results in section 5, we first review several strands of the literature (section 2), discuss the specifics of Brazil (section 3) and introduce our data (section 4).
