Education, Training, Innovation: Evidence from Transition Economies

Innovation is the key to productivity growth and prosperity. Most empirical cross-country analysis of the determinants of innovation focus mainly on developed countries. The objective of this study is to fill this gap in the research and analyze the determinants of innovation in transition countries of Eastern Europe and the Former Soviet Union. It develops a model of innovation which incorporates the role of both firm, industry and country characteristics. The study uses large representative surveys ("Business Environment and Enterprise Performance Surveys") to test this model and to examine whether and how firm, industry and country characteristics matter for innovation. In addition to information on firm size, access to finance, export involvement, and market concentration, these surveys explore impact of formal higher education and workforce training on the likelihood of a firm innovating. What is special about countries in transition from communism? They are unusual in many ways, but a vital fact is that educational achievements in transition economies are out of all proportion to their per capita GDPs. Educational levels are as high or even higher than in many rich countries yet the typical transition economy has a per capita GDP similar to that of a middle income developing country. In addition to assessing whether or not firms in transition economies take advantage of the highly skilled labor force in innovating and absorbing new technology, the study attempts to analyze if highly educated people in transition economies are rewarded accordingly. To verify this, the study analyzes the relationship between educational attainment and wages and attempts to assess returns to education. Using the available dataset ("Russia Longitudinal Monitoring Surveys"), it investigates if higher education has any effect on wages in post-reform Russia. The study finds that access to finance, export involvement, and some degree of firm concentration (as captured by the markup) are all significant determinants of innovation. Perhaps the most interesting finding is that the training provided by the firm is as important for innovation as formal higher education. It also finds the returns to education are indeed high. These are directly translatable into policy variables that affect education systems, financial development, openness, and industry regulation in transition economies. Figures and tables are appended. (Contains 3 figures and 28 tables.) [This document was submitted as a dissertation in April 2010 in partial fulfillment of the requirements of the doctoral degree in public policy analysis at the Pardee RAND Graduate School.]