Institutions, Innovation and Economic Growth

Abstract

This dissertation examines the impact of formal and informal institutions on economic growth through innovation using sample of 72 countries for the period 1980-2014.The main thrust of the study is to investigate whether differences in innovative and economic performance across countries are due to variation in institutions, particularly informal institutions. To address the objectives of the study, Endogenous Technological Change Model have been extended by incorporating both formal and informal institutions in research and development sector. The model is empirical tested using system GMM technique. The data on variables including real GDP, formal institutions indicators , informal institutions indicator, R&D expenditures, Patent Granted, Articles Published, Corruption perception index, geography, religions and mortality rate are taking from various sources such as world development indicator (WDI), international Country Risk Guide (ICRG), the quality of Government database (QoG institute), World Value Survey(WVS) different waves, Economic Co-operation and development Database(OECD) and Cross-Country Analyses of National Systems database( CANA). The empirical results show that institutions, both formal and informal, have a significant positive effect on growth performance of the sampled countries. Formal institutions are found more effective in case of developed. Also Institutions are found supplementary to each other. Further, the empirical results show that informal and formal institutions, research and development expenditures, existing stock of knowledge have positive effect on innovation. However in case of developing countries, informal institutions are found to have significant positive effect on innovation as compared to informal institutions of developed countries. However formal institutions in developed countries are found to be main drivers of innovation. Trade liberalization is found as diffusion mechanism of knowledge and as engine of economic growth. Internet usage has significant impact on innovation. In essence, informal institutions are supplementary to formal institutions and therefore attention should be given to informal institutions to accelerate innovation and economic growth in the world. Informal networking at regional, national and international level will assist innovation and economic growth. Therefore, countries should facilities collective innovative activities across the world.