Productivity differentials have been documented as the main determinant of the variation ofincome per capita across countries. In this paper, we investigate whether the implementation ofinnovation-intensive or adoption-intensive business strategies by firms can explain differences inproductivity levels and productivity growth across industries and countries. We compute a novelinnovation-intensity strategy index for firms, based on textual analysis of financial reports issuedin the US by firms from developed and developing countries and from a wide range of industries.We show that the index captures dimensions of the innovation process implemented by firms thatgo beyond R&D efforts. Our empirical results indicate that firms that pursue an innovation-basedstrategy exhibit higher productivity levels compared to firms that follow an adoption-based strategy.Nonetheless, the optimal business strategy depends on the distance to the world technology frontier.Firms far from the frontier grow faster when implementing an adoption-based strategy, but aninnovation-based strategy better suits firms closer to the technological frontier. We provide evidenceindicating that a country’s financial market sophistication, competition policy and innovationcapabilities –such as educational level, availability of scientists and engineers, and intellectualproperty protection– are key determinants of the strategy implemented by firms. The empiricalevidence suggests that middle-income traps may occur if competition policy, innovation capabilitiesand financial market sophistication are not enhanced as a country moves closer to the technologyfrontier.