Innovation, Energy Consumption and Trade Dynamic: Evidence from Developed and Developing Countries

The study examines and distinguishes the impact of innovation input, innovation output, and energy consumption in two distinct groups of countries classified by the United Nations Development Program (UNDP). It contributes to the literature by taking innovation in disaggregate form as innovation input index and innovation output index instead of a single proxy variable. Innovation input has a higher positive impact in developing countries as compared to developed countries, whereas innovation output has a higher positive impact in developed countries as compared to developing countries. It also validates the findings of the new trade theory of Krugman (NTTK) along with the technology push model of innovation. The findings are based on the system generalized method of moments (GMM) to avoid endogeneity, simultaneity, and short panel data issues. The study re-confirms that innovation spurs exports of goods and services. Energy consumption and foreign direct investment (FDI) have a higher impact on exports in developing countries as compared to developed countries. However, the impact of the real effective exchange rate (REER) is less important for developing countries as compared to developed countries. The study suggests a greater emphasis on innovation input, energy consumption, and FDI by developing countries to catch up with the developed countries.