Complementarity between product and process innovation in small and micro-enterprises in Johannesburg, South Africa

Innovation is important to firms’ productivity, competitiveness, agility, resilience and growth. The success of a firm’s innovation strategy depends in part on how it combines and absorbs different innovation activities. Using the Crépon-Duguet-Mairesse (CDM) structural model, this paper analyses complementarity between product and process innovation for the case of small and micro manufacturing firms in Johannesburg, South Africa. The empirical analysis utilises rich new firm-level survey data that, unlike most firm surveys, includes micro-sized firms as well as informal enterprises. Our results show strong evidence of complementarity between product and process innovations in their effects on firm performance. The results suggest that firm size, capital intensity, firm age, innovation expenditure and financial constraints are key variables associated with complementarity. We extend the specifications used in previous studies to take account of the contextual setting, with split samples by firm formality, ownership and size. We find evidence of complementarity in formal firms only. Our results also show stronger effects of complementarity in micro-firms and foreign-owned firms. The findings have relevance for promoting innovation and for enhancing the effects of innovation on firm performance among micro- and small enterprises (MSEs) in a developing country context.