Institutional quality and innovation: some cross-country evidence
| Date | 10 April 2017 |
| DOI | https://doi.org/10.1108/JEPP-04-2016-0015 |
| Pages | 26-40 |
| Published date | 10 April 2017 |
| Author | Christopher John Boudreaux |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Institutional quality
and innovation: some
cross-country evidence
Christopher John Boudreaux
AR Sanchez Jr. School of Business, Texas A&M International University,
Laredo, Texas, USA
Abstract
Purpose –The purpose of this paper is to examine the cross-country variation in innovation and propose
that it can be explained by the presence of market institutions using the Global Innovation Index.
Design/methodology/approach –This paper uses ordinary least squares with region and OECD fixed
effects to test whether more economic freedom is associated with more innovation.
Findings –The findings reveal th at the effect of market institutions on inno vation is promoted by both
knowledge and creativ ity. When innovation is broken down into its co mponent measures, the r esults
suggest that a high-qua lity legal system is associated wi th more creativity and free trade is a ssociated with
greater knowledge.
Originality/value –These findings provide evidence that economic freedom matters for innovation through
both creativity and knowledge, particularly through the protection of property rights and the legal system
and free trade. Policy makers desiring to spur innovation may want to examine the level of freedom in private
ownership and the reduction of trade barriers as a prerequisite for innovation policy.
Keywords Innovation, Knowledge, Entrepreneurship, Creativity, Institutions
Paper type Research paper
Introduction
Innovation has been described as the single most important component for long-term
economic growth (Rosenberg, 2004) and a country’s largest source of competitive advantage
(Baumol, 2002). Further, the importance of innovation is evidenced by the inclusion of a
technological constant in economic growth models (Solow, 1956). However, since inputs may
only explain about 15 percent of the growth of outputs in the US economy between 1870 and
1950 (Abramovitz, 1956), there has been a demand to explain the remainder of the residual –
with technological innovation as one potential answer. Recent research supports this notion
as innovation is found to be vastly important when determining cross-country differences in
efficiency (Lafuente et al., 2016). The importance of innovation is further emphasized in
Schumpeter’s (1942) theory of creative destruction, which explains how capitalism drives
economic growth via innovation and entrepreneurship. Using Schumpeter’s theory, the
literature argues that market-based institutions are in better positions to promote growth
and recent research supports this proposition (Aristizabal-Ramirez et al., 2015). For instance,
Audretsch and Keilbach (2004) argue that entrepreneurship capital –the institutions that
foster entrepreneurship –is an important determinant of economic growth and is found to
facilitate regional growth in Germany. However, while innovation has been given a key role
in determining growth, little has been written about the drivers of innovation.
The purpose of this paper is to investigate the differences in the levels of innovation
among countries. We argue that high-quality market institutions may help explain this
variation. By reducing transactions costs, high-quality market institutions may foster an
Journal of Entrepreneurship and
Public Policy
Vol. 6 No. 1, 2017
pp. 26-40
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-04-2016-0015
Received 25 April 2016
Revised 25 August 2016
Accepted 25 August 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
JEL Classification —M2, O31, P12
The authors would like to thank two anonymous referees for their excellent advice and comments on
a previous draft of this paper. Any remaining errors are the authors’own.
26
JEPP
6,1
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