Innovation in Transition: a Comparison of the Innovation Potential of Incumbent Firms and Innovative Start-ups in the Western Balkans

Innovation can play an important role in helping transition economies accelerate their development towards a competitive market economy. Alternative theoretical perspectives, however, suggest contrasting views of the innovative potential of transition economies, and the relative importance of innovation in existing and new firms. Here, we draw on the knowledge spillovers model of entrepreneurship to consider the potential contribution to innovation of existing and start-up companies in the Western Balkans (WBCs). Innovation production functions estimated using the Business Environment and Enterprise Performance Survey suggest significant limitations in the innovation capabilities of incumbent firms in the WBCs and the weakness of the ̳knowledge filter‘. The result is unexploited knowledge spillovers which might provide the basis for innovative start-ups given appropriate levels of entrepreneurial capital. In fact, while the attitudinal elements of entrepreneurial capital are relatively strong in the WBCs aspects of the business environment for start-up remain problematic. These are likely to constrain innovative start-up activity and therefore the contribution of innovative activity to the transition process in the WBCs emphasising the importance of continued institutional and policy development. Acknowledgements I am grateful for valuable comments on an earlier draft from participants in the American Association of Geographers conference, Las Vegas, April 2009 and from Kevin Mole (Warwick) and Jim Love (Aston). JEL Codes: P20, L26, O31, O52