Summary 

Research purpose of the given work, using a large sample of firm-level data from the Business Environment and Enterprise Performance Survey (BEEPS V round) across 28 transition economies, is to explore the role of business environment in transition economies in enhancing firm’s performance:

—  R&D activity;

—  innovation;

—  labour productivity.

Research objective is to study of the structural relationship

—  between Business Environment – Research & Development – Innovations – Labor productivity

—  at the individual firm level

—  in transition economies,

—  applying augmented CDM model.

Research novelty is that we modify traditional CDM model by incorporating additional equation for the business environment performance and estimating the effect of BE at each stage of the model.

The main contribution of this study is that it provides new empirical insights into the casual link between Business Environment-Research&Development-Innovation-Labour Productivity for individual firms in transition economies.

We found strong support of the impact of the Business Environment index on the intensity of R&D and innovation as well as on labor productivity.

The study supports early findings that R&D is important determinant of innovation, and that innovation is a driver of labor productivity.

The study results suggest that business environment can influence labor productivity both indirectly through firm’s R&D-innovation activity and directly reducing transaction cost and ensuring better specialization and governance structures.

The study results, generally, imply that in transition economies, business environment, providing incentives for investing in knowledge, innovation activity and productivity enhancement, represents an important factor for firm’s development.

Direction for further research is to explore the casual links between Business Environment and business performance, employing:

—  various alternative proxies for Business Environment;

—  dynamic perspective rather cross-section research.