What drives firm innovation? A review of the economics literature

This paper aims to give the reader a sense of the stylised facts about what makes some firms attempt more changes compared with others. The report begins with a review of definitions of innovation; and why we care about innovation and its differential treatment in the economic and management literatures. It is relevant to mention, however, at this juncture that the definition of innovation used in this study embraces all attempts by the firm to change and improve its production and operation processes and menu of products – whether successful or not. We then proceed to draw out the main conclusions from the applied economics literature, first by looking at studies of new-to-the-world innovation and next considering new-to-the-firm innovation studies.