How Important Is Industry-Specific Managerial Experience for Innovative Firm Performance?

According to many studies it is a commonly held view among economists that the level of countries’ institutional development is positively associated with economic growth. Among other factors, this interrelation might be explained by higher or more advanced innovative activities of firms operating in countries with well-developed institutional environments. It is thus of great interest to understand how differences in institutional environments moderate firms’ decisions to innovate and the success of these activities.

The present study focuses on industry-specific experience of the top manager as a largely neglected but important firm attribute with respect to innovation activities. As experienced managers are likely to have better insights into future business opportunities, threats, niche markets, products, technologies and market development, managerial experience is generally expected to be positively related to innovative activity and its performance. We argue that managerial experience is especially important in environments with lower institutional developments which are presumably less conducive to innovation activities.

The empirical analysis tests this presumption based on the 2008-2009 Business Environment and Enterprise Performance Survey (BEEPS) which comprises firm-level data from 27 Central and Eastern European countries. Regression analyses show that managerial experience enhances both the propensity to innovate and the innovative firm performance, as measured by the share of sales accounted for by new products. Further empirical investigations show that having an experienced manager is especially beneficial for small firms operating outside the EU and in institutionally less developed regions, respectively. These findings support the perception that managerial experience is an important factor explaining firms’ innovation activities as it helps to identify new business opportunities and it partly substitutes for institutional obstacles on the road to commercialization of new products.

Balsmeier, Benjamin and Dirk Czarnitzki (2014), How Important Is Industry-Specific Managerial Experience for Innovative Firm Performance?, ZEW Discussion Paper No. 14-011, Mannheim.