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IZA DP No. 3962

Innovative Firms or Innovative Owners? Determinants of Innovation in Micro, Small, and Medium Enterprises
Suresh de Mel David McKenzie Christopher Woodruff January 2009

Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor

Innovative Firms or Innovative Owners? Determinants of Innovation in Micro, Small, and MediumEnterprises
Suresh de Mel
University of Peradeniya

David McKenzie
World Bank, BREAD and IZA

Christopher Woodruff
University of California, San Diego

Discussion Paper No. 3962 January 2009

IZA P.O. Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 E-mail:

Any opinions expressed here are those of the author(s) and not those of IZA. Research published inthis series may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with theUniversity of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to theinterested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author.

IZA Discussion Paper No. 3962 January 2009

ABSTRACT Innovative Firms or Innovative Owners? Determinants of Innovation in Micro, Small, and MediumEnterprises*
Innovation is key to technology adoption and creation, and to explaining the vast differences in productivity across and within countries. Despite the central role of the entrepreneur in the innovation process, data limitations have restricted standard analysis of the determinants of innovation to consideration of the role of firm characteristics. We develop a model of innovationwhich incorporates the role of both owner and firm characteristics, and use this to determine how product, process, marketing and organizational innovations should vary with firm size and competition. We then use a new large representative survey from Sri Lanka to test this model and to examine whether and how owner characteristics matter for innovation. The survey also allows analysis of theincidence of innovation in micro and small firms, which have traditionally been overlooked in the study of innovation, despite these firms comprising the majority of firms in developing countries. More than one quarter of microenterprises are found to be engaging in innovation, with marketing innovations the most common. As predicted by our model, firm size is found to have a stronger positive effect,and competition a stronger negative effect, on process and organizational innovations than on product innovations. Owner ability, personality traits, and ethnicity are found to have a significant and substantial impact on the likelihood of a firm innovating, confirming the importance of the entrepreneur in the innovation process.

JEL Classification: Keywords:

O31, 033, L26

innovation,microenterprises, SMEs, development

Corresponding author: David McKenzie The World Bank MSN MC3-300 1818 H Street NW Washington, DC 20433 USA E-mail:


We gratefully acknowledge funding from the World Bank’s Knowledge for Change trust fund, which funded this survey, and research assistance from Cristina Tealdi. The surveys on which the empirical analysis is based...
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