Innovation and Economic Growth: The Contribution of Institutional Quality and Foreign Direct Investment

Abstract

Innovation is considered essential to improving competitiveness and efficiency, thereby promoting economic growth in both theory and practice. This study analyzes the impacts of innovation, measured by the number of researchers, and the number of patents and trademarks, on economic growth. The results represent issues for consideration by policymakers dealing with sustainable economic growth. Besides the literature review, an empirical analysis was undertaken using the two-step system Generalized Method of Moments (GMM). Research data was collected through the World Bank"s database, with participants from 69 developed and developing countries between 2006 and 2014. Empirical results show that innovation, together with national openness, foreign direct investment inflows, and government expenditure on education, have directly and positively influenced economic growth. In addition, the study found a positive intermediate role for institutional quality and the spillover effect of foreign direct investment in promoting the relationship between innovation and economic growth. This study suggests that policymakers should focus on improving research and development activities, strengthening economic integration, attracting foreign direct investment, and extensively reforming the institutional environment to facilitate economic development. Contribution/ Originality:This study systematically explores the role of innovation in economic growth under the influence of institutional quality and foreign direct investment, using data from 69 developed and developing countries from 2006 to 2014.

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“…As a result, it can improve the productivity of the economy and lead to a higher level of sustainable economic growth. Our findings are similar to the findings of Baum, Checherita-Westphal, & Rother (2013), Kim et al (2017), andPhung et al (2019). Lastly, Human receives coefficients which were from 0.04605 to 0.16311, and they were statistically significant at the 1% level.…”

“…The improvement of human capital will be to attract foreign investors as well as promote innovation activities in the country (Grossman, 2000). In turn, innovation will promote sustainable economic growth (Phung et al, 2019). Our results are similar to the findings of previous authors, such as Woo and Kumar (2015); and Kim Kim et al (2017).…”

“…−4 is a vector of other control variables, and is a vector of coefficients for those control variables (see more at Table 1). They are often used by many studies in economic growth, such as Phung et al (2019), Kim et al (2017), Ha and Quyen (2018), Barro and Lee (2013), and Blackburn et al (2006). The last term, is the idiosyncratic error term.…”

“…Institutional theory has recently been integrated to explain economic relations more clearly (Cooray et al, 2017;Ha et al, 2019;Phung, Van, Thuong, & Ha, 2019). North (1990) implies that institutional perspectives are the rules or regulations for the functioning of society, which are the foundation for interaction among residents and organizations.…”

“…Bergeen et al (2015) found that institutional quality was positively correlated with the economic growth of 35 countries in Europe. Phung et al (2019) investigate a decisive intermediate role for institutional quality in promoting the relationship between innovation and economic growth. At the enterprise level, Ha et al (2019) revealed that the institutional environment would enhance firm profitability because it creates a comparative and transparent environment.…”