The Impact of Institutions on Innovation: Three Empirical Studies

Abstract

This thesis carries out empirical investigations of the possible impacts of institutions relating to different aspects of innovation, namely incremental innovation activities, collaborative research and development (R&D) activities and radical innovation outcomes. It comprises three studies. The first empirical study focuses on examining the impact of financial constraints and intellectual property rights (IPR) protection on incremental innovation. Using firm-level data from transition countries and employing a two-step probit model with endogenous regressors, this study provides evidence that both financing constraints and strong IPR protection are negatively associated with the incremental innovation activities of firms. Results also confirm that financing constraints faced by firms are significantly influenced by the overall levels of development of financial institutions within a country. The second empirical study looks at the effects of contracting institutions and intellectual property institutions on firms’ collaborative research and development (R&D) activities in developing and transition countries. By employing the Cragg double-hurdle model, this study finds that efficient contract enforcement has a positive effect on the likelihood of firms engaging in R&D partnership and the intensity of firms' expenditures on collaborative R&D. On the other hand, the decision of firms to participate in R&D partnerships and their level of expenditure on collaborative R&D are adversely affected by the strength of IPR protection. The third empirical study investigates the influences of a set of institutions on producing new-to-the-world technologies, as measured by patents. This study is conducted by using a large panel dataset of 98 developed and developing countries over a period of 23 years. Building on the idea production framework, the unconditional quantile regression (UQR) estimates of this study show that along with key research inputs (i.e., existing knowledge stock and resources devoted to R&D), the strength of IPR protection, quality of governance and functioning of financial institutions are also significant determinants of the patent output of a country. The UQR methodology also demonstrates that the effects of institutions on patent production are heterogeneous throughout the various quantiles of patent output distribution. This thesis, therefore, offers an example of how the new institutional economics (NIE) theory is applicable in analysing innovation performances. The findings of this thesis propose useful policy directions that can assist policymakers and managers in accelerating innovation and technological development.