Editor's Note: The following post was contributed by Paulo Correa, Lead Economist for Private Sector Development in the Europe and Central Asia Region of the World Bank.
International debate on the financial crisis has shifted attention to the potential drivers of the future economic recovery. The countries of Eastern Europe were hit hard by the global financial crisis, after having long enjoyed abundant international financing and large inflows of foreign direct investment that brought them high rates of growth, mainly through the expansion of domestic consumption. With the slowing of international trade and the indefinite tightening of financial conditions, sustained economic recovery will depend to a greater extent on productivity gains and growth in exports.
Two important sources of expansion in firms’ productivity are learning and R&D. Economic research tells us that, depending on size and survival rate, younger firms tend to grow faster than older firms. Because the learning process presents diminishing returns, younger firms, which are in the early phases of learning, will learn faster and thus achieve higher productivity gains than older firms. Innovative firms are expected to grow faster too – R&D tends to enhance firm-productivity, while innovation leads to better sales performance and a higher likelihood of exporting.