Does Innovation Explain the Performance Gap Between Privatized and Private Firms?

Abstract In this study, using a unique firm-level survey database, I investigate innovation for privatized former state-owned enterprises (SOEs) versus originally private firms (private at inception) in 30 Eastern European and Central Asian (ECA) countries. Besides using an invention-based narrow definition of innovation, I use an imitation and adaptation-based broad definition of innovation. I find that origin of the firm matters for its innovativeness; privatized former SOEs in transition economies are less innovative than originally private firms. The results hold after controlling for important firm and country characteristics affecting firm innovativeness. Using alternative, patent-based innovation measures provides support to the main findings of the study. These findings on the relation between firm origin and innovation provide a possible explanation for the underperformance of privatized firms compared to private firms.