Innovation has long been considered an important factor for creating and maintaining
the competitiveness of nations and firms. Common knowledge stands that innovation
is the cause of the increase of exports. However, contradicting empirical evidences are
reported in the literature on the causality between innovation and export. In this paper
we examine whether innovation performed by small and medium enterprises (SMEs)
enhances their exporting likelihood in the context of a developing country of Vietnam.
Using an uniquely rich Vietnamese SMEs database, we find that innovation as
measured directly by ‘new products’, ‘new production process’ and ‘improvement of
existing products’ are important determinants of exports by Vietnamese SMEs. We
add to the current literature by examining modification of existing products as an
innovation activity. We also find evidence of endogeneity of innovation that may lead
to biased estimate of innovation in previous studies, which failed to take this problem
into account.