Macroeconomic Determinants of Innovation: Evidence from Asian Countries

Abstract

Innovation is fundamental to the process of an economy’s growth and is crucial for its survival in today’s dynamic world. Investing in innovation, therefore, is a requisite for developing and developed countries alike. The innovation revolution has been as manifesting as the Industrial Revolution. Yet, its patterns are unevenly distributed. While some regions have witnessed a phenomenal growth in the level of patenting activity, other regions have shown a decline in the innovative output. With this backdrop, the present article analyses various institutional and macroeconomic variables that impact the level of innovation for a set of 15 Asian countries. Using two-step system generalized method of moments (GMM) technique on a panel dataset for the period 2008–2017, the study examines the determinants of macroeconomic indicators on the level of innovation (as measured by the country’s patenting activity). The econometric results indicate that institutional quality, education and trade openness influence innovation favourably. Further, foreign direct investments have a negative impact on the level of innovation. A key finding of emerging from the analysis is the U-shaped relationship between financial development and innovation. Based on the results, the article concludes from a broad policy perspective.