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Social Indicators Research

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13-07-2022 | Original Research

Effect of Formal and Informal Institutional Indicators on Innovation Activities: An Empirical Analysis for a Global Sample

Authors: Amjad Naveed, Ghulam Shabbir

Published in: Social Indicators Research | Issue 2/2022

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Abstract

In the current society, institutional quality is essential to innovation activity, as formal and informal institutions have a positive impact on innovation. Formal institutional quality establishes the intellectual property rights culture that lowers the transaction costs, required to stimulate the innovation process. Strengthen informal institutions inseminate mutual trust and cooperation, necessary to share the previous knowledge, which is mandatory to invent new ideas. Thus, this study aims to investigate the effect of formal and informal institutions and their indicators on innovation activities. We construct the indices to measure the quality of formal and informal institutions using data on 73 countries for the period 1981–2014. The system GMM estimation technique is used to predict the performance of formal and informal institutions on innovation activities. Besides, this study estimates the effect of each indicator of formal as well as informal institutions on innovations after controlling for FDI, human capital, trade and government size. The hypotheses of positive effects of formal and informal institutional quality is accepted. The size of the effect of different indicators of institutions are varying. The results are robust across developed and developing countries. From a policy perspective, this study suggests that more focused monitoring of institutions is required to improve their quality that ultimately effects innovation activities.

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The indicators of formal institutions are government stability, socioeconomic conditions, democratic accountability, bureaucracy quality, law & order and control on corruption. The indicators for informal institutions are trust, respect, self-control, thrift and internet users. These indicators are selected from theoretical literature and detail of each indicator and their method to construct are presented in Sect. 3.

Acemoglu et al. (2003) identified the problems with empirical studies such as endogeneity, measurement errors and omitted variables bias that cannot be properly addressed by the OLS technique.

For detail, see Williamson (1985), North (1991), Tebaldi and Elmslie (2013) and Lee and Law (2017).

Web link to WVS is https://www.worldvaluessurvey.org/WVSEVSjoint2017.jsp, and WDI from World Bank is https://databank.worldbank.org/source/world-development-indicators#.

Because WVS consists of 6 waves—covering the period of 1981–2014. A new 7th wave of WVS is expected to arrive in 2021 but it is unlikely to get a common sample from all waves. For example, we can find one variable from one wave but the similar variable is not available for the same group of countries in another wave.

For detail, see Johnson and Wichern (2002). With reference to this study, the discussion about PCA and its procedure is added in the Appendix (see, Appendix 2).

Web link to ICRG data source is https://guides.tricolib.brynmawr.edu/icrg#s-lg-box-5809747.

For correlation efficient matrices, see Appendix Tables 8, 9 and 10.

For detailed individual institutions’ indicators and sensitivity analysis, see Appendix Table 11.

Countries are divided as per World Bank categorization; low income and lower-middle income countries are combined into one group-developing countries, whereas upper middle income and high-income nations are grouped as developed countries.

The system GMM estimates of control variables are not presented in the Tables 6 and 7, which are available on request.

A new 7th wave of WVS is expected to arrive in 2021 but again it is unlikely to get a common set of variables for global sample. For example, we can find one variable from one wave but the similar variable is not available for the same group of countries in another wave.

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Title: Effect of Formal and Informal Institutional Indicators on Innovation Activities: An Empirical Analysis for a Global Sample
Authors: Amjad Naveed
Ghulam Shabbir
Publication date: 13-07-2022
Publisher: Springer Netherlands
Published in: Social Indicators Research / Issue 2/2022
Print ISSN: 0303-8300
Electronic ISSN: 1573-0921
DOI: https://doi.org/10.1007/s11205-022-02975-w

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