1. A multilevel study of country development factors
and firm innovation
and the moderating role of outsourcing and employee training
28 June 2016
Master Thesis
Master Business Administration
Strategy and Organization
Dr. O.R. Mihalache
Daniël Veen
2558970
d.veen@student.vu.nl

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The copyright rests with the author. The author is solely responsible for the content of the
paper, including mistakes. S&O cannot be held liable for the content of the author’s thesis.

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ABSTRACT
Numerous academics have studied firm innovation to improve firm performance or gain a
competitive advantage. The globalization and following internationalization led firms to
develop activities in unfamiliar emerging markets and possibly experience various
environmental effects on innovation. However, most innovation studies remained focused on
the firm level and did not consider environmental influences on firm innovation. This
hampered understanding is in this study overcome by using multilevel modeling and firm
level data of 27 countries in the ECA-region to test the relationship between financial market
development and firm innovation and between higher education system development and firm
innovation. Moreover, the moderating effect of outsourcing and employee training were also
tested for a more complex understanding. The outcomes imply that financial market
development has an insignificant influence on firm innovation but higher education
development has a positive and significant influence on firm innovation. Moreover,
outsourcing negatively and significantly influences the effect financial market development
and higher education development have on firm innovation. Employee training has an
insignificant influence on the effect financial market development has on firm innovation but
has a significant influence on the effect higher education development has on firm innovation.
This study‟s findings contribute to a more complex insight of multilevel factors‟ effect on
firm innovation and can lead to a better decision process for multinational foreign subsidiary
innovation decisions.

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TABLE OF CONTENTS
1 INTRODUCTION................................................................................................................... 5
2 THEORETICAL FRAMEWORK .......................................................................................... 7
2.1 FIRM INNOVATION ...................................................................................................... 7
2.2 EMERGING ECONOMIES............................................................................................. 8
2.3 NATIONAL SYSTEMS OF INNOVATION .................................................................. 9
2.4 DEVELOPMENT FACTORS........................................................................................ 10
2.5 HYPOTHESES DEVELOPMENT ................................................................................ 11
2.5.1 Financial Market Development and Firm Innovativeness ....................................... 11
2.5.2 Higher Education and Firm Innovativeness............................................................. 12
2.5.3 The Moderating Role of Outsourcing...................................................................... 13
2.5.4 The Moderating Role of Employee Training........................................................... 17
3 METHODOLOGY................................................................................................................ 20
3.1 RESEARCH SETTING AND DATA COLLECTION.................................................. 20
3.2 MEASURES................................................................................................................... 20
3.2.1 Firm Innovativeness................................................................................................. 20
3.2.2 Development Factors ............................................................................................... 21
3.2.3 Moderators ............................................................................................................... 22
3.2.4 Control Variables..................................................................................................... 22
4 ANALYSIS AND RESULTS ............................................................................................... 24
5 DISCUSSION AND CONCLUSION................................................................................... 28
5.1 THEORETICAL CONTRIBUTIONS ........................................................................... 28
5.2 MANAGERIAL IMPLICATIONS ................................................................................ 30
5.3 LIMITATIONS AND DIRECTIONS FOR FUTURE RESEARCH............................. 31
REFERENCES......................................................................................................................... 32
APPENDIX .............................................................................................................................. 38

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LIST OF TABLES AND FIGURES
List of Tables
Table 4.1 Descriptive statistics and correlations p. 25
Table 4.2 Results of the multilevel analysis for firm innovativeness p. 26
List of Figures
Figure 2.1 Conceptual Model p. 11
Figure 4.2 The moderating effect of outsourcing on hypothesis 1 p. 26
Figure 4.3 The moderating effect of outsourcing on hypothesis 2 p. 27

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1 INTRODUCTION
Numerous academics study firm innovation to determine its antecedents (Calantone,
Harmanancioglu & Droge, 2010; Rubera & Kirca, 2012), understand the way it influences
firm performance and to get a grip on competitive advantage (Crossan & Apaydin, 2010;
Damanpour, 1991). However, understanding firm innovation becomes more complex since
globalization and internationalization are increasingly important (Yuan, Qian & Pangarkar,
2015) and lead firms to develop business processes in unfamiliar emerging markets
(Ciravegna, Lopez & Kundu, 2015). Despite these developments, firm innovation studies are
mainly conducted on a single level and thus do not consider the important effects these
environments might have on firm innovation (Coriat & Weinstein, 2002).
This singular approach to firm innovation research leads to a hampered understanding of firm
innovation and can be improved by incorporating multiple macro, meso and micro level
effects in firm innovation research (Crossan & Apaydin, 2010; Gupta, Tesluk & Taylor, 2007;
Alexiev, Volberda & Van den Bosch, 2016; Coriat & Weinstein, 2002; Jackson & Deeg,
2008). Practically, the shortsighted view can be improved by considering the National
Systems of Innovation framework (NSI; Lundvall, Johnson, Andersen & Dalum, 2002). The
NSI states that, among others, the financial development and higher education system can
lead to more innovation in society and therefore also might influence firm innovation.
Therefore the NSI is used to test the relationship between financial development, higher
education and firm innovation. Further on, information dissemination also plays an important
role (Lundvall et al., 2002) and thus the moderating role of outsourcing and employee training
are tested. Therefore the overall aim of this study is to answer the following: What is the effect
of development factors on firm innovation in emerging economies and how are these relations
moderated by outsourcing and employee training?
This study tests the relationship between the macro development factors financial market
development and higher education development and firm innovation in emerging economies
in Eastern Europe and Central Asia. This multilevel research into firm innovation, is not
entirely new as some scholars already tested the relationship between financial market
development and innovation (Ayyagari, Demirgüç-Kunt & Maksimovic, 2012; Benfratello,
Schiantarelli & Sembenlli, 2008; Meierrieks, 2014) while others have contributed to a more
general understanding of how a firm its environment can influence firm innovation (Garcia-
Morales, Ruiz-Moreno and Llorens-Montes, 2007; Teece, 2000). However, the study its first
contribution to the literature is that it encapsulates two environmental factors simultaneously

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and tests these relationships on firm innovation. Thereby a contribution is made to multilevel
firm innovation research in emerging economies and thus increases understanding in the
hampered field of multilevel firm innovation research (Crossan & Apaydin, 2010; Gupta,
Tesluk & Taylor, 2007; Alexiev, Volberda & Van den Bosch, 2016; Coriat & Weinstein,
2002; Jackson & Deeg, 2008).
The second contribution of this study is to include meso and micro factors in the model. From
the NSI it is known that general information dissemination might be important to innovation
as information dissemination enhances the exchange of ideas which can lead to innovation
(Lundvall et al., 2002). This means that a firm‟s absorptive capacity (Cohen and Levinthal,
1994) can play an essential role in firm innovation. To assess the absorptive capacity‟s effect
on firm innovation, two moderators are used to reflect two situations where absorptive
capacity is (1) lost due to outsourcing and (2) is gained due to employee training. Thus, the
moderating effect of outsourcing and employee training are incorporated and expected to
influence the relationship between the macro factors and firm innovation. Thereby, the second
contribution is made to multilevel firm innovation research by creating more insight in the
complex multilevel process (Crossan & Apaydin, 2010; Gupta, Tesluk & Taylor, 2007;
Alexiev, Volberda & Van den Bosch, 2016; Coriat & Weinstein, 2002; Jackson & Deeg,
2008).
The report continuous as follows. In the second chapter is elaborated on the most important
and relevant information about firm innovation, emerging economies, the development factors
and the NSI. In the third chapter is highlighted which analysis tool and data are used and how
the variables are measured. The fourth chapter presents the results of the analyses and the last
chapter discusses these results, elaborates on theoretical and practical contributions of the
report and discusses the limitations and potential future research avenues.

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2 THEORETICAL FRAMEWORK
This chapter elaborates on the paper‟s theoretical outlines. Firstly, there is a short overview of
relevant firm innovation knowledge. Secondly, it is explained what is understood by emerging
economies. Thirdly it is stated which development factors are chosen and what they represent.
Finally, the groundwork for the hypotheses is stated, the NSI is explained and the hypotheses
are developed.
2.1 FIRM INNOVATION
The term „innovation‟ has, in a strict sense, a different meaning than invention. Invention
means that new solutions and technical resources are necessary for firms to solve problems
while innovation resembles the implementation of these new solutions (Schumpeter, 1934).
However, this distinction between invention and innovation is not made here as it might also
be interesting to know the environmental and moderating effects on firm innovation.
Therefore Crossan and Apaydin (2010) their definition of innovation is the most appropriate:
‘The production or adoption, assimilation, and exploitation of value-added novelty in
economics and social spheres; renewal and enlargement of products, services and
markets; developments of new methods of production; and establishment of new
management systems; it is both process and an outcome (Crossan & Apaydin, 2010;
2)’
Strategy literature firm innovation studies mainly take a firm level approach (Crossan &
Apaydin, 2010) and can be classified according to two main streams. The first stream has
similarities to the Resource-Based-View (Barney, 1991) and focuses on the internal aspects
that affect firm innovation while the second stream has more similarities to the Five-Forces
Model (Porter, 1985) and focuses on the external aspects that affect firm innovation. Thus,
current firm innovation studies are mainly written from the internal aspect and study topics
such as the relationship between R&D-expenditure and innovation (Greve, 2003) or the
effects different types of organizational structure have on innovation (Chang & Harrington,
1998). Some studies also focus on the external view and study the relationships between, for
example, industry size, industry turbulence (Alexiev, Volberda & Van den Bosch, 2016) and
firm innovation. However, this last stream is less developed and especially not applied to
emerging economies.

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The literature that considers the environment of importance to firm innovation can be divided
in the top-down view and the bottom-up view (Gupta, Tesluk & Taylor, 2007). On the one
hand, the top-down view argues that innovations are externally sourced, which means that
firm innovation is mainly created by external forces. On the other hand, the bottom-up argues
that firms create their own innovation and that this affects the firm‟s environment. Although
both views could co-exist, the current focus is on the top-down approach as the study is
particularly interested the environmental effects can have on firms.
2.2 EMERGING ECONOMIES
Emerging economies are economies of countries with on average a low-income but rapid
economic growth and are primarily based on economic liberalization (Hoskisson, Eden, Lau
& Wright, 2000). These emerging economies can be divided in two groups: the developing
countries (Asia, Latin America, Africa and the Middle East) and the transition countries
(former Soviet-Union states and China). This leads to the following definition of emerging
economies: economies of countries with a low-income but rapid economic growth which exist
out of developing and transition countries.
A study about emerging economies might lead to theoretical difficulties as some theories
might be less applicable in these environments. Similarly, this could also be thought to be a
problem for the main theory of this study (the NSI). Some authors have noticed this issue
(Lundvall et al., 2002) as they state that the NSI was initially created for developed countries.
However, Lundvall et al. (2002) later stated that the framework is applicable in less developed
countries. Moreover, doubts have also arisen about the usefulness of, for example, the
institutional theory (which has many resemblances with the NSI). In a similar way these
doubts have been disputed by several authors (Hoskisson, Eden, Lau & Wright, 2000;
Shenkar & Glinow, 1994), who argue the theory to be specifically useful in explaining firm
behavior in the early stages of market emergence (as institutions, compared to markets, still
have a considerable amount of power over firms). As criticasters‟ concerns about the proper
application of the NSI and Institutional Theory in developing countries have been disputed by
several authors, the NSI can be considered an appropriate theoretical framework for studying
innovation in emerging economies.

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2.3 NATIONAL SYSTEMS OF INNOVATION
The National Systems of Innovation (Freeman, 1995) provides the groundwork for the
expected relationship between the development factors and firm innovation. The NSI is
defined by Lundvall (2010) in two manners:
„The narrow definition would include organizations and institutions involved in
searching and exploring – such as R&D-departments, technological institutes and
universities. The broad definition …… includes all parts and aspects of the economic
structure and the institutional set up affecting learning as well as searching and
exploring – the production system, the marketing system and the system of finance
present themselves as sub-system in which learning takes place. (Lundvall, 2010: 13)‟
The first (narrow) definition is too narrow for this study because other important institutions
are not included in the definition. For example, it can be expected that firm innovation is not
only influenced by R&D-departments or official technology institutes but also by
development factors such as higher education. Therefore, the second (broad) definition is used
to define the NSI in this study.
The NSI originates in the works of List (1841) and Lundvall (1992) but was fully developed
by Freeman (1995). Freeman (1995) developed the system in order to fulfill the necessity of
relationships on a national and local level to innovate. Practically this means that the system
was developed in such a way that it could explain that innovation not only resulted from
micro business processes but result from the nexus between environment and business
processes.
Thus, a coherent NSI was developed although Freeman (1995) was not the first to consider
the external influence on innovation. During the 1970‟s and 1980‟s, academics found that
R&D-investments were not the only important aspects of innovation but found that innovation
depended on a wide variety of other influences (Freeman, 1995). The NSI encapsulated this
new line of thoughts and came up with a new framework that could incorporate all these
influences in a coherent whole (Lundvall et al., 2002). Thus according to the NSI, innovation
should be seen as a process that is created through the interaction of several factors, whether
they are on a micro, meso or macro level (Malerba, 2002).
The appropriateness of the NSI instead of a global system of innovation could be a topic of
discussion. After all, the national borders could be said to play a less important role in

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innovation. For example, highly educated individuals or technological expertise that is
fundamental to innovation does not necessarily have to be developed nationally but could be
procured from abroad. However, empirical studies keep proving the importance of national
levels for innovation activities (Lundvall et al., 2002).
2.4 DEVELOPMENT FACTORS
The two development factors that are used as macro factors are the financial market
development and the higher education system development. These two development factors
are chosen as they closely resemble the NSI definition of Lundvall (2010) and are
theoretically seen to have an influence on innovation.
Financial market development is important to an economy and innovations as it enables the
allocation of resources to the most promising entrepreneurial activities, assess risk in an
insightful manner and makes capital available through banks, securities exchanges and
venture capital (Schwab & Sala-i-Martin, 2011; King & Levine, 1993). As these functions
improve the efficiency and total availability of credit for firms, firm innovation can also
prosper (King & Levine, 1993).
The second development factor, the higher education system, is also important as it represents
the learning function in the NSI (Lundvall, 2010) and was already included in the earliest
concepts of what is now called the NSI (List, 1841). A higher education system creates a
„push effect‟ of available knowledge through the training of scientists and the development of
a skilled workforce (Griliches, 1990; Acs, Anselin & Varga, 2002; Varsakelis, 2006) but also
creates a „pull effect‟ whereby the sophistication of the educated population and entrepreneurs
leads to a demand for similarly sophisticated products (Furman, Porter & Stern, 2002).
Thus, financial market development as well as a higher education system development are
both macro-level factors that influence entrepreneurs, firms, employees and the population
and thus could be expected to play a significant role in the ability of a firm to innovate.

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2.5 HYPOTHESES DEVELOPMENT
This last section of the theoretical framework elaborates on the development of the
hypotheses (Figure 2.1 provides an overview of the developed and discussed hypotheses).
Figure 2.1. Conceptual model of the expected relationships
2.5.1 Financial Market Development and Firm Innovativeness
Financial market development is expected to have an influence on firm innovation. In general,
this relationship can be expected to be positive as it creates abilities for firms to attract funds,
start a business and thereby innovate (King & Levine, 1993).
More specifically, four theoretical mechanisms enable a financial market to influence firm
innovation (King & Levine, (1993) based on Schumpeter (1934)). Firstly, financial
intermediaries choose the most promising venture to allocate funds to and thus enhance
chances for entrepreneurs to start a venture. Secondly, a financial system allows flexible
resource allocation and thus enables easier fund attraction. Thirdly, financial intermediaries
allow risk diversification, which is especially useful when risky innovations are involved and
therefore enable innovation investments. Finally, financial intermediaries make the large
profits of innovation investments noticeable to investors and in this way promote investments.

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The relationship between financial market development and firm innovation has been tested
previously and is found to increase firm innovation as financial systems reduce transaction
costs and facilitate risky innovation investments (Meierrieks, 2014). More specifically, a well-
developed financial system could lead to more firm innovation in developed (Benfratello,
Schiantarelli & Sembenlli, 2008) and developing countries (Demirgüç-Kunt & Maksimovic,
2012). Contrarily, a previous study (Aghion, Howitt & Mayer-Foulkes, 2004) found that firms
in poor countries are prone to weak financial systems as it limits available credit and thus has
a negative effect on firm innovation. Although a few studies in developing countries implied
the effect of financial systems on innovation, studying this relationship is still relevant as a
different time setting and sample might lead to different results. Moreover, this study also
simultaneously tests the effect of higher education on firm innovation.
Thus, findings from previous theoretical and practical findings imply that financial market
development is positively related to firm innovation. This leads to the following hypothesis:
Hypothesis 1: Financial market development will have a positive relationship with firm
innovativeness.
2.5.2 Higher Education and Firm Innovativeness
The original studies that developed the NSI (List, (1841) in Lundvall et al. (2002)) already
noted the importance of learning and education to improve innovation. When the NSI was
further developed, several authors confirmed the statements by List (1841) when they
highlighted the importance of learning for the NSI (Lundvall et al., 2002) and as an essential
resource for firms (Thornhill, 2006).
Practically seen, education plays an important role in firm innovation due to several reasons.
Firstly, education leads to trained scientists who can contribute to knowledge production and
therefore can lead to innovation when employed by firms (Griliches, 1990; Acs, Anselin &
Varga, 2002). Secondly, a country‟s workforce skills are created by the educational facilities
and thus could enhance firm innovation (Varsakelis, 2006). Thirdly, education increases the
number of active entrepreneurs and leads to a demand for innovation as entrepreneurs want to
improve their businesses (Varsakelis, 2006). Finally, well-educated customers are more likely
to demand sophisticated products which lead to an enhancement of firm innovation through
customer demand (Furman, Porter & Stern, 2002).

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Thus, educationally created knowledge can diffuse through society and lead to innovation.
For example, high levels of knowledge can occur when different companies‟ educated
individuals formally or informally exchange information and ideas (Feldman, 1996). This
leads to an easier knowledge accumulation and dissemination due to the high concentration of
the knowledge in a particular area (Gössin & Rutten, 2007). Ultimately, firms that are situated
in a region with an educated workforce are easier able to innovate (Teece, 2000).
The importance of education for innovation has also been empirically tested. For example, the
relationship between countries their education investments and national innovations are found
to have a positive relationship (Varsakelis, 2006; Furman, Porter & Stern, 2002). Further on,
education investment and education attainment are also found to be positively related to
innovation (Makkonen & Inkinen, 2013). Thus, education investments and attainment can be
considered to have a positive influence on national innovation. Although the relationship
between higher education and national innovation has been tested, no studies were found that
tested the relationship between higher education and firm innovation. Therefore testing this
relationship is of importance.
From the previous it can be expected that education enhances the knowledge, skills and
demand in a society and therefore lead to firm innovation. This leads to the following
hypothesis:
Hypothesis 2: Higher education will have a positive relationship with firm innovativeness.
2.5.3 The Moderating Role of Outsourcing
Outsourcing can be understood as a procurement of products or services from outside the firm
(Gilley & Rasheed, 2000). Outsourcing is conducted for several reasons but the most
important reason is from a cost saving perspective. When services are outsourced, employees
are replaced by cheaper contractors and thus money is saved on the operating costs (Breunig
& Bakhtiari, 2013).
Although the advantage of outsourcing is saving costs on operations, the disadvantage is a
loss in absorptive capacity. Absorptive capacity is the ability of a company to recognize the
value of new information, assimilate it and apply it to commercial ends (Cohen & Levinthal,
1994). Employees are the main source of absorptive capacity as they possess the knowledge
to give meaning to external information and apply it to a commercial end. Absorptive capacity

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can increase when employees are well-educated, are experienced in their jobs, read literature
in their expertise area or have specifically accumulated manufacturing experience (Cohen
&Levinthal, 1994; Mangematin & Nesta, 1999). However, job positions are lost due to
outsourcing, the total absorptive capacity declines and thus also the ability of a company to
innovate.
Outsourcing, financial market development, and firm innovativeness
Outsourcing is expected to negatively influence the relationship between financial market
development and firm innovativeness. There are two mechanisms which are activated by the
outsourcing of activities and which have an effect on the previous mentioned relationship.
The first mechanism occurs when firms lose knowledge and skills due to outsourcing of
employees, thus lose absorptive capacity, are less likely to be scouted by financial
intermediaries as promising investment R&D-projects and ultimately lose firm innovation.
The second mechanism occurs differently for firms in low and high development financial
markets. The outsourced funds can be used in low financial developed markets as down
payment and therefore to attract funds to innovate. The outsourced funds can also be used in
high financial developed markets as down payment to attract funds but is unnecessary and
therefore the funds are unlikely to add to firm innovation in these environments.
The first aspect of the financial system that enables innovation is the ability of financial
intermediaries to allocate funds to the most promising ventures (King & Levine, 1993).
However, firms who outsource activities are likely to lose the relevant personnel, lose insight
into business processes and thus lose absorptive capacity (Cohen &Levinthal, 1994;
Mangematin & Nesta, 1999). Due to the loss of employee skills and knowledge, firms are less
able to innovate and therefore are less likely to be seen as „promising ventures‟ by financial
intermediaries. Moreover, firms that are planning to innovate and try to attract funds may end
up disenchanted as they do not possess sufficient skills and knowledge to abolish the
information asymmetry (Hall, 2002) between them and the financial intermediary. Therefore,
outsourcing seen from this first mechanism is expected to have a (general) negative effect on
the relationship between financial market development and firm innovation.
The second mechanisms by which outsourcing influences the relationship between financial
market development and firm innovation is through cost savings realized by outsourcing.
Outsourcing leads to the repelling of particular activities to external parties, resulting in the
repelling of particular employees to the subcontractor and thus being able to save on costs

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(Breunig & Bakhtiari, 2013). These saved costs have a direct effect on the second aspect of
the financial system that enables innovation, namely the ability of such a system to enable
flexible resource allocation and thus an easier attraction of funds (King & Levine, 1993).
Resources are not easy allocated to R&D-projects as these projects are inherently risky (Hsu,
Tian & Xu, 2014).The saved costs can make resource allocation easier in low developed
financial markets as funds are available for down payments. Low developed financial markets
cannot profit from equity funds (who require no down payments before investments (Brown,
Fazzari & Petersen, 2009) and often have difficulties overcoming information asymmetry
(leading to high amounts of required down payments; Berger & Udell, 1990; Brown, Fazzari
& Petersen, 2009). However, the saved costs do not change resource allocation in high
developed financial markets as information asymmetry is easier overcome and equity funds
are available. Therefore, on the one hand funds that are freed up due to outsourcing make a
down payment possible in low developed financial markets and thus lead to an easier
attraction of funds. On the other hand, funds that are freed up due to outsourcing do not lead
to the attraction of extra funds in developed financial systems.
In conclusion, through the first mechanism outsourcing leads to a decline in absorptive
capacity, therefore a decline in potential as „promising venture‟ and therefore a decline in
ability to gain funds to innovate at all financial market development levels. Through the
second mechanism, outsourcing leads to saved costs and thus freed up funds and therefore the
ability for firms in low developed financial markets to attract more funds to innovate while
the ability for firms in high developed financial market to attract funds remains relatively
similar. Thus, in sum, firms in high developed financial markets only lose innovation capacity
while firms in low developed financial markets lose some innovation capacity but regain
much innovation capacity by having the ability to attract funds and innovate. Therefore the
general effect of outsourcing leads to the following hypothesis:
Hypothesis 1a: Outsourcing will have a negative moderating effect on the relationship
between financial market development and firm innovativeness.
Outsourcing, higher education, and firm innovativeness
Outsourcing is expected to negatively affect the relationship between the higher education
system and firm innovativeness. This effect occurs through two mechanisms which are
activated by the outsourcing of activities. The first mechanism occurs when particular

17. 16
activities are subcontracted and there are less job positions available in the firm. This means
that a firm cannot use the trained scientists of the higher education system and thus lose
absorptive capacity and ultimately firm innovation. The second mechanism occurs when a
firms choses what it wants to do with the freed up funds of outsourcing. The freed up funds
are likelier to be invested in innovation in low developed higher education systems and the
funds are likelier to be invested in other activities in high developed higher education systems.
The first two aspects of the higher education system which enable firm innovation are the
availability of scientists for employment and the general workforce skill development. The
higher education system leads to a particular absorptive capacity in firms as employed
educated scientists and workers have the knowledge to give meaning to external information
and apply this to a commercial end (Cohen &Levinthal, 1994). Thus the employees and their
corresponding knowledge and skills are also of crucial importance to R&D-projects (Katz &
Allen, 1991; Sawang & Unsworth, 2011). However, the outsourcing of particular activities
would lead to a decrease in job positions and therefore fewer possibilities for firms to profit
from the scientists and skilled workforce of the higher education system. This would lead to a
decrease in knowledge, skills and absorptive capacity of the firm and ultimately to decreased
innovative activity for firms in low and high developed education systems.
The first two aspects of the higher education system than enable firm innovation also play a
role in the second mechanism. The second moderating mechanism occurs when the freed up
funds of outsourcing are spend or are saved. Outsourcing means that particular activities are
subcontracted and often lead to a saving of costs due to the replacement of cheaper
contractors (Breunig & Bakhtiari, 2013). On the one hand, these saved costs are likely to be
spend on innovation in low developed higher education environments where firms do not
have easy access to educated individuals. On the other hand, the saved costs are likely to be
used for other purposes in environments of high developed higher education systems as firms
have easy access to the educated individuals. Therefore outsourcing leads to a better use of
available scientists and skills of workforce in low developed higher education environment
than in high developed higher education environments. Thus, through the second
mechanisms, outsourcing influences firm innovation positively in low developed higher
education environment and does not have an influence on firm innovation in high developed
higher education environment.
In sum, through the first mechanism outsourcing leads to a decline in available job positions,
a decline in use of educated personnel and thus a general decline in firm innovation in higher
education systems. Further on, through the second mechanism, the freed up funds of

18. 17
outsourcing are used to attract educated individuals in low developed higher education
environments and are used for other purposes in high developed higher education
environments. Thus, in sum, firms in high developed higher education environments only lose
firm innovation capacity while firms in low developed higher education environments lose
innovative capacity but also gain innovative capacity due to their re-investments. This leads to
the following hypothesis:
Hypothesis 1b: Outsourcing will have a negative moderating effect on the relationship
between higher education development and firm innovativeness.
2.5.4 The Moderating Role of Employee Training
Employee training is of interest to the business and economic literature due to its resulting
increase in productivity and economic growth (Pfeifer, 2016). Besides increasing productivity
and economic growth, employee training might also contribute to innovation due to its
possibilities to reduce information asymmetry between investor and firm. Moreover,
employee training could also enhance firm innovation as employees are better educated, know
more about their area of expertise and therefore increase absorptive capacity (Cohen and
Levinthal, 1990).
Information asymmetry is a market failure which can orchestrate in financial systems.
Information asymmetry means that investors are not well-informed about a particular
investment to make an adequate judgment and thus might hesitate to invest (Hall, 2002). This
market failure can be weakened by several factors such as a well-developed financial system
(King & Levine, 1993). A decrease in information asymmetry means that investors are better
informed, more likely to invest and thus create more possibilities to innovate.
Employee training could also facilitate firm innovation as employees are better able to
recognize valuable knowledge, assimilate it and apply it to commercial ends (Cohen &
Levinthal, 1990). Firms‟ absorptive capacity can be increased by hiring employees that are
well-educated, experienced in their jobs, read literature in their area of expertise or have
specifically accumulated manufacturing experience (Cohen &Levinthal, 1994; Mangematin &
Nesta, 1999).
The knowledge absorption capacity is especially important when new knowledge (such as
training) enters a firm and is not directly understandable for employees. Compared to internal

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knowledge, external knowledge creates difficulties in interpretation and application and can
slow down the innovation process (Bierly & Gopalakrishnan, 2000). This difficulty in
interpretation and integration is arduous due to different frames of reference, language and
codes in which the external knowledge is encapsulated. Further on, these difficulties in
interpretation and integration of external knowledge can slow down the innovation process
due to difficulties in frames of reference, language and codes (Chakrabarti, 1996).
Employee training, financial market development, and firm innovativeness
The extent of employee training is expected to positively moderate the relationship between
financial market development and firm innovativeness. The first mechanism by which a
financial system can lead to more firm innovation is by allocating funds to the most promising
venture (King & Levine, 1993). However, when there is a high amount of information
asymmetry, allocating resource becomes difficult and thus could lead to investor
demotivation. Trained employees can reduce asymmetry as they have knowledge of the
product or service and thus can inform an investor better.
Information asymmetry remains problematic in markets and especially for R&D-investments
compared to physical asset investments (Czarnitzki, 2006). Entrepreneurial innovative
activities are often risky and therefore require an extensive period of research (Meierrieks,
2014) and eventually could lead to investor demotivation and thus a loss of innovations.
Therefore, any information that could reduce this gap would strengthen the possibilities for
these risky R&D-investments.
As information asymmetry is a large problem for innovation investments, it is expected that
employee training could reduce information asymmetry, increase fund allocation and thus
increase firm‟s innovation activities. For example, a skillful and product knowledgeable
employee is more likely not only to conceive an innovative idea but also have the skills and
knowledge to transfer these insights to an investor. Thus, it can be expected that a high extent
of trained employees could lead to an information asymmetry decrease and thus an increase in
firm innovation. This leads to the following hypothesis:
Hypothesis 2a: Employee training will have a positive moderating effect on the relationship
between financial market development and firm innovativeness.

20. 19
Employee training, higher education, and firm innovativeness
The extent of trained employees is expected to positively moderate the relationship between
higher education and firm innovativeness. Employee training increases the possibilities of
firms to use external knowledge to innovate but is more beneficial in high developed higher
education systems than in low developed higher education systems.
Basically, learning (education and training) increases employee competencies and thus
increases the ability of firms to innovate (Caolghirou, Kastelli & Tsakanikas, 2004).
However, external information is often more difficult to absorb than internal information due
to different frames of reference, language and codes in which the information is encapsulated
(Kessler, Bierly & Gopalakrishnan, 2000). Therefore it can be expected that especially low
educated personnel might have difficulties with the absorption of this new external knowledge
than higher educated personnel.
Firms‟ educated personnel‟s quality and education is dependent on the higher education
system development. A well-developed higher education system leads to trained scientists and
skillful employees (Griliches, 1990; Acs, Anselin & Varga, 2002; Varsakelis, 2006). Thus, on
the one hand, firms that operate in a high developed higher education system are more likely
to employ qualitative educated personnel, have a large absorptive capacity, have more
abilities to integrate external knowledge via employee training and thus have more abilities to
innovate. On the other hand, firms that operate in a low developed higher education system
are less likely to employ qualitative educated personnel, have a small absorptive capacity,
have fewer abilities to integrate external knowledge via employee trainings and thus have
fewer abilities to innovate. Moreover, a non-qualitative and small workforce could even be
expected to slow down the innovation process due to the large differences in frames of
reference, language and codes (Bierly and Chakrabarti, 1996). This leads to the following
hypothesis:
Hypothesis 2b: Employee training will have a positive moderating effect on the relationship
between higher education and firm innovativeness in such a way that the relationship will be
stronger when the extent of employees trained is higher.

21. 20
3 METHODOLOGY
3.1 RESEARCH SETTING AND DATA COLLECTION
The data used in the empirical analysis is gathered from the Global Competitiveness Report
(GCR) of 2010-2011 (Schwab & Sala-i-Martin, 2010), 2011-2012 (Schwab & Sala-i-Martin,
2011) and 2012-2013 (Schwab, Sala-i-Martin & Brende, 2012) and from the World Bank
enterprise survey database (World Bank, 2013). The GCR‟s of these three years are chosen as
firm innovation is measured in the World Bank Enterprise Survey of 2013 as a percentage of
sales contributed to innovations in the previous three years. Meso and micro level data are
gathered form the Eastern Europe and Central Asia database of the enterprise survey database
(World Bank, 2013), which consists of firm level data of 15,883 firms in 30 emerging
countries. The GCR consists of data on 139 countries (including 27 of the countries in the
former dataset) and more than 100 underlying indicators. Because of a mismatch between
countries in the two datasets, the total sample includes 27 countries. (the included countries
can be found in Appendix A).
The firms that are included in the sample have an average firm age of 14.82 years (standard
deviation (s.d.) = 11.59). The size of the firms in the sample is categorized into four divisions
(micro 1-5 employees, small 5-19 employees, medium 20-99 employees and large 99+
employees). Only 3.5% of the sample consisted of micro-firms, 49.2% of the companies were
small firms, 35.5% were medium firms and 11.9% were large firms. The firms operated in
several industries such as retail (22.8%), wholesale (15.4%), construction (8.3%), food (7%)
and many other industries of which most could be related to the manufacturing sector (see
Appendix B for an overview of the included industries).
3.2 MEASURES
The following part explicates the used measurements for firm innovativeness, development
factors, the moderators and the control variables.
3.2.1 Firm Innovativeness
Firm innovation can be measured in multiple manners. For example, patent data can be used
or the number of new products introduced can be retrieved. However, this study uses the
percentage of sales that is accounted for by new or significantly improved products that were
introduced over the last three years. (Leiponen & Helfat, 2010). This type of measurement
(mean = 27.82, s.d. = 25.09) fits to the chosen definition of Crossan and Apaydin (2010)
which is focused on commercialization of innovations.

22. 21
3.2.2 Development Factors
The development factors that are used in this study originate from the twelve determinants of
the GCR. Originally, the development factors are used in the GCR to assess the
competitiveness of nations but are here used as representatives of the country level factors
„financial market development‟ and „higher education system‟ that are expected to influence
firm innovation.
Although the World Economic Forum (the organization responsible for the GCR) can be
considered reliable, the items that measure the development factors were assessed in SPSS
(Statistical Package for the Social Sciences) 21.0 on reliability and validity. The validity
analyses were carried out with principal component exploratory factory analysis while using
direct oblimin instead of orthogonal rotation. Direct oblimin rotation is chosen as preferred
method as it is expected that the development factors correlated as their aggregated purpose
was to measure country development. Further on, some of the items that are used to measure
the development factors were normalized on a min-max scale of 0-100 in order to increase the
reliability of the constructs.
The construct „financial market development‟ is measured in the GCR using eight items.
However, the principal component exploratory factor analysis showed that item eight loaded
on a different component (Eigenvalue > 1). Further on, the consistency measurement showed
that the eight factors together were not reliable (α = 0.65). Therefore, the eight item (legal
rights index) is excluded from the construct; which resulted in a sufficient reliability level (α
= 0.9. The used items for all development factors can be found in Appendix C.
The construct „higher education’ is originally measured together with the construct „training‟
but is deconstructed due to a high factor loading (> 0.5) on a separate construct (e.g. training).
This separation of education and training also fits Lundvall (2010) his definition of the NSI,
whereby universities and R&D were mentioned but not specifically training. Thus, the first
six items of the original development factor are used to measure higher education. Further on,
some of the items were normalized on a 0-100 scale in order to improve reliability. The
resulting reliability of the six item scale is sufficient (α = 0.82) and the validity of the
resulting construct had an Eigenvalue > 1.

23. 22
3.2.3 Moderators
Outsourcing is measured with the item „outsourcing‟ of the enterprise survey. Respondent
were asked the following: Over the last three years, has this establishment introduced any
new or significantly improved organizational methods for the first time in outsourcing or
subcontracting of business activities in production, procurement, distribution, recruiting or
ancillary services? This item was developed by the OECD (2005) and is primarily intended to
measure if firms have organized their external relations in a different manner. This
measurement was also used in the study of Mothe, Yen and Thi (2002). The firms are able to
answer the question as a yes (2) or no (1) and the question is later recoded to yes (1) and no
(0).
Employee training is measured with the item „formal training‟ from the enterprise survey.
Firms were asked the following: What percentage of full-time permanent production
employees received formal training? The answer could range from 0% to the full 100% of the
production workforce. The measurement of „formal employee training’ is not new as it is
previously used by several authors (Barron, Black & Loewenstein, 1987; Frazis &
Loewenstein, 2005).
3.2.4 Control Variables
In order to limit the effect other variables might have on the model, micro and macro control
variables have been incorporated in the analysis. The micro factors exist of firm size, firm age,
industry and R&D-intensity. Firm size is noted to be positively related to firm innovation as
well as negatively related in other studies (Camisón-Zornoza, Lapiedra-Alcamí, Segarra-
Ciprés & Boronat-Navarro, 2004). Firm size is measured according to the four categories
presented in section 3.1. Firm age is also included as control variables as firm age is thought
to influence firm innovation negatively as firms gain experience and develop routines (Coad,
Segarra & Teruel, 2016). Further on, the different types of industries that are represented in
the sample are also taken into consideration by the control variable „industry‟ (Bantel &
Jackson, 1989; Kochhar & David, 1996). The industries which are entailed by this variable
can be found in Appendix C.
The macro control variables that are included in the analysis are economic openness, country
size, GNI per capita and national R&D-expenditure. Economic openness is expected to affect
innovation as it involves the information dissemination among countries (Anokhin &
Wincent, 2012). Economic openness is defined and measured as the total trade compared to

24. 23
the GDP of a country (Anokhin & Wincent, 2012). The data of this and other control
variables are retrieved from the World Bank database (World Bank, 2016). Further on,
country‟s size likely affects innovation as larger countries exchange more resources, apply for
more patents, have more R&D-investments and have a larger share of high-technology export
(Dakhli & De Clercq, 2004; Anokhin & Wincent, 2012).Country size is defined and measured
as the total population. The third control variable is GNI per capita (Efrat, 2014). GNI per
capita possibly affects firm innovation as a larger income means more resource are available
and exchanged and thus affect the innovation capacity. GNI per capita is measured by
dividing the total national income by the population size. The last included control variable is
the „national R&D-expenditure‟ (Efrat, 2014; Dakhli & De Clercq, 2004). This factor is
measured as the expenditure on R&D compared to the gross domestic product. National
R&D-expenditure likely affects innovation as it acts as an indicator for the technology rate
development.

25. 24
4 ANALYSIS AND RESULTS
Table one shows the results of the descriptive statistics of the model variables and table two
shows the results of the hierarchical regression analysis of the hypotheses. The analysis tool,
hierarchical linear modeling, was chosen because it can analyze the interaction between
multiple level variables while simultaneously accounting for their different source of variance
(Yeo & Neal, 2004). During the analysis, random slope and random intercept are applied in
order to account for individual country effects.
The independent variables are mean centered in order to prevent multicollinearity (Field,
2013). However, the extent of multicollinearity is difficult to assess in SPSS as it does not
include bias assessment functions (Scott, Simonoff & Marx, 2013). Concerning table 4.2,
model one state the control variables, model two ads the moderators, model three includes the
independent variables and model four comprises all the variables and the interaction terms.
The fourth model‟s outcomes are discussed.
The analysis outcomes show that hypothesis one is not supported because of the insignificant
positive linear relationship between financial market development and firm innovation (β =
39.99, P < 0.1). However, hypothesis two, the relationship between higher education and firm
innovation, is supported as the outcome is positive and significant (β = 36.14, P < 0.05). This
means that an increase in development of the higher education system leads to a greater extent
of firm innovation.
Hypothesis 1a, the moderating effect of outsourcing on the relationship between financial
market development and firm innovation, is supported as the outcome describes a negative
significant effect (β = -27.66, P < 0.05). Hypothesis 1b, the moderating effect of employee
training on the relationship between financial market development and firm innovation, is not
supported as the interaction outcome is negative and insignificant (β = 0.02, P > 0.1). Further
on, hypothesis 2a, the moderating effect of outsourcing on the relationship between the higher
education system and firm innovation, is supported as the outcome is negative and significant
(β = -21.09, P < 0.05). Hypothesis 2b, the moderating effect of employee training on the
relationship between the higher education system and firm innovation, is not supported as the
interaction effect is slightly positive but insignificant (β = 0.25, P < 0.1).

26. 25

27. 26
The interaction effects are plotted in a 2-dimensional graph to improve interpretability (Field,
2013). The results of hypothesis 1a (Figure 4.2) show that (as expected) outsourcing
negatively moderates the relationship between financial market development and firm
innovation. This means that outsourcing contributes positively to firm innovation in low
financial developed markets and negatively high financial developed markets.

28. 27
The plotted results of hypothesis 2a (Figure 4.3) show that (as expected) outsourcing
negatively moderates the relationship between the higher education system and firm
innovation. Outsourcing contributes positively to firm innovation in a low developed higher
education system but contributes negatively to firm innovation in a high developed higher
education system.

29. 28
5 DISCUSSION AND CONCLUSION
Firm innovation studies on multiple levels have recently attracted more attention of academics
(Crossan & Apaydin, 2010; Gupta, Tesluk & Taylor, 2007; Alexiev, Volberda & Van den
Bosch, 2016; Coriat & Weinstein, 2002; Jackson & Deeg, 2008). However, this only resulted
in a few studies about multilevel firm innovation. Some of these studies chose financial
market development as independent variable and none chose higher education as independent
variable. Therefore, there is currently a limited understanding of multilevel effects. This
hampered understanding can be considered a shortcoming as firm innovation is thought to
have a positive effect on firm performance and competitive advantage (Crossan & Apaydin,
2010; Damanpour, 1991). Therefore, this study contributes to the existing literature by
enabling a multilevel insight into innovation in different environments in emerging
economies. Thereby the study contributes to a better theoretical understanding of firm
innovation but also enhances the practical understanding. For example, the outcomes enable a
multinational enterprise (MNE) with foreign subsidiaries to careful consider the environment
and its outsourcing activities in order to increase firm innovation.
5.1 THEORETICAL CONTRIBUTIONS
The main contribution of this study is the complex, multilevel insight of firm innovation in
emerging economies. The outcomes indicate that firm innovation is strongly influenced by its
environment. Specifically, firm innovation is independently influenced by the state of its
environment but is also influenced via the moderating effect of outsourcing and possibly via
employee training.
Financial market development is in this sample, strictly seen, not related to firm innovation (P
< 0.1) but might have a significant effect on firm innovation in a different sample with
different control variables. Former studies found that the financial system could play an
important role in national innovation (Meierrieks, 2014) as well as firm innovation
(Benfratello, Schiantarelli & Sembenlli, 2008; Demirgüç-Kunt & Maksimovic, 2012) and
therefore the current results are somewhat surprising. The outcomes could be the result of a
low importance of higher education in emerging economies or the possible exclusion of
relevant macro control variables.

30. 29
This study advances the current knowledge of external influences on firm innovation by
contributing to a better understanding of the effect higher education might have on firm
innovation in emerging economies. As the higher education system is found to be
significantly and positively related to firm innovation, a well-developed higher education
system thus leads to more firm innovation. Former studies indicated that education and
education attainment could have a positive effect on national innovation capacity (Varsakelis,
2006; Furman, Porter & Stern, 2002; Makkonen & Inkinen, 2013) but have not tested the
positive relationship between higher education and firm innovation. Therefore the NSI
(Lundvall et al., 2002) might alsobe able to explain firm innovation instead of only national
innovation.
Although the relationship between financial market development and firm innovation is not
found significant in this study, the moderating effect of outsourcing on firm innovation in
different environments. The outcome indicates that outsourcing leads to a severe loss in firm
innovation in high developed financial market environments and a gain in firm innovation in
low developed financial markets. In general, outsourcing could lead to a loss in absorptive
capacity (Cohen & Levinthal, 1990) and thus a loss in firm innovation but can also lead to a
gain in available financial resources (Breunig & Bakhtiari, 2013) and thereby a gain in firm
innovation. For instance, firm in low developed financial markets in the absence of equity
funding (Brown, Fazzari & Petersen, 2009) could use the saved costs to pay the high amounts
of down payments for a loan (Berger & Udell, 1990, Brown, Fazzari & Petersen, 2009) and
thereby overcome the inherent riskiness of R&D-projects (Hsu, Tian & Xu, 2014). The
findings of this study also indicate that firms in high developed financial markets do not
innovate more due to outsourcing; an outcome that could be explained as a lower down
payment is necessary to attract a loan (Berger & Udell, 1990, Brown, Fazzari & Petersen,
2009) and sufficient accessibility to equity funding (Brown, Fazzari & Petersen, 2009) in
these high developed markets.
Outsourcing also influences the relationship between higher education and firm innovation
such that outsourcing contributed negatively to firm innovation in high developed higher
education systems and positively to firm innovation in low developed higher education
systems. Outsourcing generally leads to a decrease in absorptive capacity and thus is expected
to decrease firm innovation in the low and high developed higher education systems (Cohen
& Levinthal, 1990). However, firms in low-developed education systems might have re-invest
the saved costs of outsourcing (Breunig & Bakhtiari, 2013) in innovation and thus made up
for the loss in absorptive capacity. The results could also indicate that firms in high developed

31. 30
education environments might not be aware of their loss in absorptive capacity (as they do not
compensate for this loss) or are confident that their firm is sufficiently innovative and
therefore do not profit from outsourcing as much as firms in low developed education systems
do. These findings advance the current understanding of environmental effects on firm
innovation.
Another striking (but slightly insignificant) finding of the report is the potential interaction
effect of the extent of employee training on the relationship between higher education and
firm innovation. The outcome indicates that employee training might positively influence firm
innovation in a high developed higher education system and negatively in a low developed
higher education system. Firstly, these results underscore the importance of environmental
factors (the higher education system) on absorptive capacity (Cohen & Levinthal, 1990) and
thus firm innovation. Secondly, these results also highlight the importance of understanding
the interaction between environmental influences and internal factors on firm innovation. For
instance, the education system creates a particular absorptive capacity (Cohen &Levinthal,
1994; Mangematin & Nesta, 1999) which can enhance or diminish the integration process of
external knowledge and thereby increase or decrease the pace of the innovation process
(Chakrabarti, 1996). This finding contributes to a deepened understanding of the education
environment on firm innovation (Gupta, Tesluk & Taylor, 2007; Alexiev, Volberda & Van
den Bosch, 2016).
5.2 MANAGERIAL IMPLICATIONS
Firm innovation has become more complex due to globalization, internationalization (Yuan,
Qian & Pangarkar, 2015) and therefore the development of business activities in confronting
unfamiliar emerging markets (Ciravegna, Lopez & Kundu, 2015). This study makes three
practical contributions to the field of innovation research in the business administration
discipline that enables managers to better cope with these various settings. Firstly, managers
of MNE‟s that are involved with foreign subsidiaries can gain more insight into suitable
innovation locations when they consider the development of the financial and higher
education system in an emerging economy. Secondly, managers of firms in emerging
economies or MNE managers can conclude from the results that outsourcing deters
innovation in environments of high developed financial systems and education systems. The
other way around, managers can also make more use of outsourcing in low developed
financial and higher education environments to increase firm innovation. Thirdly, managers in
environments of well-developed financial and higher education systems in emerging

32. 31
economies can make use the insight of the negative effects of outsourcing to consider re-
investing their saved costs and management time in innovation and thus to keep up with the
general innovation pace.
5.3 LIMITATIONS AND DIRECTIONS FOR FUTURE RESEARCH
The first limitation is that only emerging economies are included instead of developed and
emerging economies. Including developed economies in the sample would make it possible to
compare the results and enhance the generalizability of the outcomes. Thus, future studies
should include data of developed and emerging economies in the sample to make a more
general statement about the effect multilevel aspects can have on firm innovation.
The second limitation is the bias in type of industries represented in the sample (see Appendix
B). The primary industries in the sample are manufacturing (several types of different
categories), the retail sector (22.8 %) and the wholesale sector (15.4 %) and thus do not
include data of, for example, the services sector. As the types of industries are not
representative to a regular industry division, the outcomes are only limitedly generalizable.
Future studies should include firms in more diverse industries to find a more generalizable
outcome.
A third limitation is a measurement difficulty in the development factors. Although the
development factors were individually reliable and valid, the joint exploratory factor analysis
showed cross-loading and a measurement of four constructs with an Eigenvalue above 1. The
plotted Eigenvalues showed a steep decline till the third factor and then leveled, indicating
that three constructs were measured while two should be measured. A potential explanation is
that the third construct measures country development as financial market development and
higher education were originally intended to do. Future studies should determine if
development is measured and if this has an adverse effect on the outcomes.
The last limitation is the slight insignificance of the first hypothesis and hypothesis 2b. If both
hypotheses were significant this would create a more extended understanding of the
multilevel effects on firm innovation. Especially hypothesis 2b was slightly insignificant and
thus could provide a future fruitful avenue for research. Therefore, future research could try to
find support for hypothesis 2b as it would be interesting to know if the higher education
system could improve (or deter) absorptive capacity in such a manner that it would enable (or
limit) the interpretation of external knowledge and thus firm innovation.

33. 32
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APPENDIX
A. Countries included in the sample
Albania Hungary Poland
Armenia Kazakhstan Romania
Azerbaijan Kyrgyz Republic Russian Federation
Bosnia and Herzegovina Latvia Serbia
Bulgaria Lithuania Slovak Republic
Croatia Macedonia Slovenia
Czech Republic Moldova Tajikistan
Estonia Mongolia Turkey
Georgia Montenegro Ukraine
B. Industry distribution
Industry Percentage Percentage
Retail 22.8 Plastic and rubber 1.9
Wholesale 15.4 Supporting transport activities 1.8
Construction 08.3 Electronics 1.5
Food 07.0 IT 1.4
Non metallic mineral products 04.3 Precisions instruments 1.1
Fabricated metal products 04.0 Post and telecommunications 1.0
Hotel and restaurants 03.9 Basic metals 0.5
Garments 03.6 Tanning and leather 0.5
Machinery and equipment 03.4 Paper and paper products 0.4
Services of motor vehicles 02.6 Other transport equipment 0.3
Chemicals 02.5 Motor vehicles 0.3
Publishing, printing and recorded
media
02.4 Recycling 0.2
Furniture 02.1 Tobacco products 0.2
Wood 02.1 Communication equipment 0.2
Transport 02.1 Office machinery 0.1
Textiles 02.0 Coke and refined petroleum 0.1

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C. Development factors item list
Development Factor and Item Used
Scale
Financial Market Development
Does the financial sector in your country provide a wide variety of financial products and
services to businesses?
1-7
To what extent does competition among providers of financial services in your country
ensure the provision of financial services at affordable prices?
1-7
How easy is it to raise money by issuing shares on the stock market in your country? 1-7
How easy is it to obtain a bank loan in your country with only a good business plan and
no collateral?
1-7
In your country, how easy is it for entrepreneurs with innovative but risky projects to find
venture capital?
1-7
How would you assess the soundness of banks in your country? 1-7
How would you asses the regulation and supervision of securities exchange in your
country?
1-7
Higher Education
Gross secondary education enrollment rate 0-100
Gross tertiary education enrollment rate 0-100
How well does the educational system in your country meet the needs of a competitive
economy?
1-7
How would you assess the quality of the math and science educations in your country‟s
schools?
1-7
How would you assess the quality of the management and business schools in your
country?
1-7
How would you rate the level of access to the internet in schools in your country? 1-7