Good governance and innovation: Economic freedom matters

Abstract

The contribution of good governance to development has been extensively examined; however, the effects of good governance on innovation, a critical factor for achieving sustainable development in the volatility, uncertainty, complexity and ambiguity environment, have received limited attention. This study examines the effects of good governance on innovation and its channel mechanisms. Thus, using a two-way fixed effects regression model, we analyse data from a sample of 112 economies worldwide over the period 2011–2021. We determine that good governance, measured using the worldwide governance indicators, has positive effects on innovation. Moreover, based on the shaping effect of good governance on the external environment, we identify that economic freedom serves as a channel mechanism through which good governance impacts innovation. Furthermore, we observe that compared with advanced economies, the positive effects of good governance on innovation are more significant in samples of emerging markets and developing economies. These findings underscore the mechanisms through which good governance impacts innovation, drawing attention to the shaping effect of good governance on the external environment and offering empirical evidence for economies to enhance economic freedom and promote innovation.