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Innovation and Firm Performance in the Caribbean

This study explores the link between innovation and firm performance for seven Caribbean countries based on data obtained from the IDB’s Innovation, Firm Performance, and Gender (IFPG) Surveys conducted in 2020. Our findings align with previous literature in that innovation and firm performance are positively related in the region; however, our results suggest that innovative firms switched markets favoring domestic sales, which could be interpreted as a resilience strategy in light of the pandemic shock.

The paper shows that innovation, broadly defined to include methods and processes, allowed firms to obtain larger revenues, even per worker, that also translated into better worker compensation, on average. Innovation is also highly correlated to Total Factor Productivity (TFP). 

The evidence presented in this paper suggests that innovation is mostly financed by the firm itself, and the main obstacles to innovation perceived by companies are related to lack of human capital. Innovation outputs in women-led firms are indistinguishable from male-led companies controlling for other determinants of innovation and productivity, despite having been more affected by the pandemic. Furthermore, COVID-19 may have exacerbated firm perceptions of market-wide obstacles to innovation.

The paper concludes by identifying potential policy and private sector recommendations for multilateral development banks, development finance institutions, and governments to stimulate innovation in the private sector. You can also find the DEBrief of this study here.

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