Institutional Effects on Innovation and the Requirements for Structural Reforms

The effect of institutions on innovation outcomes, and therefore on economic growth, is a well-defined relationship in the literature. However, through the empirical analysis of the present paper, this relationship seems to differ between different groups of countries. The above issues are examined using annual data for 152 countries for the period from 2007 to 2017. The empirical investigation of the above relations highlights the fact that there is a positive and statistically significant effect of institutions on innovative performance for the total period under analysis. The countries under investigation are divided into three groups based on their difference in the institutional background score in relation to the average of 20 benchmark economies. The analysis shows that there is an “S-shaped” relationship between innovation and institutions. The higher the distance of a group from the reference economies—in terms of their institutional performance—the higher the impact of the institutional background on innovation since there is more capacity and greater potential for improvement of the institutional background. The analysis highlights the need for structural reforms to accelerate institutional changes at an unprecedented pace in order to transform institutions that hinder innovation into institutions that promote innovation within a reasonable time frame. Finally, the analysis results in the creation of heat maps (one for each country group) which presents—for each economy—which institutions are deemed necessary to be structurally reformed, culminating in policy proposals.