Exploring the potential of institutional quality in determining technological innovation

Having better institutions facilitates many aspects of the economy. But this increase, assuming other factors, may lead to a gradual decrease in its effectiveness to promote innovation. The preposition behind this is that mature institutions increase businesses' compliance costs. Governments should try to find an appropriate intervention approach to promote innovation. This study posits to evaluate the non-linear effect of development in institutional quality on innovation. Panel FGLS model confirms the Innovation - Institutional quality Kuznets curve for four sets of countries segregated according to their level of development as very high HDI, high HDI, medium HDI, and low HDI. The study finds that all sets of countries witnessing an inverted U-relationship between development in institutional quality and innovation, pointing to the preposition of burdening effect of regulations. Further, this burden is eased with the increase in the economic development level as low HDI country's curve bends higher as compared to very high HDI countries. Further practical implications are discussed.

Automated summary

Having better institutions is beneficial for the economy in various aspects, but it may decrease its effectiveness in promoting innovation. Mature institutions increase businesses' compliance costs, and governments should find appropriate intervention approaches to promote innovation. This study finds an inverted U-shaped relationship between development in institutional quality and innovation, indicating a burdening effect of regulations, which is alleviated with higher economic development levels.