Business environment and innovation persistence: the case of small- and medium-sized enterprises in Vietnam

While it is well known that efforts have been increasingly paid to improve the business environment in transition economies to support the private sector, it is unclear how these efforts affect firm innovation. Utilising longitudinal data derived from bi-annually repeated surveys of randomly selected small- and medium-sized enterprises (SMEs) in ten provinces in Vietnam over the period of 2007-2015 combined with yearly collected panel data of Provincial Competitiveness Index (PCI), which is used to measure the quality of provincial business environment, this study employs a dynamic random probit estimation to analyse the effects of business environment on the persistence of innovation of the SMEs. It is found that the persistence of moderately complex innovation including both single-dimensional and multidimensional innovation exists in weak business environment, while it disappears in improved business environment. These findings suggest that policies to improve business environment enhance innovation policies and, thus, promote innovation of the SMEs that are inexperienced in carrying out such innovation.