Innovation, external technological environment and the total factor productivity of enterprises

In this paper, we study the impact of endogenous innovation and the external technological environment on total factor productivity. We first develop an endogenous growth model and derive a testable empirical model. We then estimate the empirical model based on the World Bank’s worldwide enterprise survey data for 119 countries spanning 2007–2017. Our results suggest that: (i) enterprises’ R&D activity increases their total factor productivity; (ii) a higher level of external technology weakens the impact of the R&D activity on total factor productivity; and (iii) enterprises located in low‐ and middle‐income countries often lack continuous innovation.