The causal nexus between innovation and economic growth: An OECD study

Abstract

Innovation contributes to economic growth by generating new ideas and improving production processes. At the same time, countries with high economic growth have the freedom to promote innovation. This article aims to examine the causal relationship between innovation and economic growth. Method: An innovation index was constructed using factors of innovation, utilizing principal component analysis. The study used Granger causality to investigate the causal relationship between innovation and economic growth. The sample comprised 34 OECD countries during the period 1961-2018. Results:The results showed that the United States had the highest innovation index, while Luxembourg had the highest economic growth. The study found both unidirectional and bidirectional causal relationships between innovation and economic growth. Conclusions:The study highlights the importance of innovation in driving economic growth and provides insights into the complex and dynamic relationship between these two variables. The findings could be useful for policymakers in designing effective strategies to promote innovation and foster economic growth in their respective countries. KEYWORDS economic growth, Granger causality, innovation, OECD, principal component analysisBritain was the foremost country that experienced the first industrial revolution . Then gradually it spread over Belgium, France, and other countries as well. Technological development is one of the important features of the industrial revolution. 1 It is found that large-sized firms are getting the advantage of lower capital costs than beginners in the industry (Hall 2002). The use of innovative tools is important for the same (Aminjonov 2020;Bianco et al. 2020).

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