Impact of Innovation on Productivity Growth of SMEs in a Factor-Driven Economy

This study explores the relationship between various types of innovation and productivity growth in small and medium-sized enterprises (SMEs) within Vietnam, a factor-driven economy. Utilizing a longitudinal data set from three surveys of 3,550 Vietnamese manufacturing SMEs, the study employs regression analysis to account for dual causality between innovation and factor productivity growth. The results reveal that process innovation leads to greater productivity gains compared to product modification and product innovation strategies. The findings underscore the importance of process innovation in enhancing productivity in factor-driven economies, where firms primarily exploit unskilled labor and natural resources. The study also highlights the need for policymakers to tailor innovation support strategies to the unique contexts of factor-driven economies, emphasizing process innovations that leverage existing factor endowments. The research contributes to the limited literature on innovation in the lowest stages of economic development and provides practical insights for promoting sustainable economic growth in developing countries.