Innovation Versus Technology Imitation Development Strategy: What Influences Government Decision?

Abstract

This paper is trying to investigate the effect of state-business relations (SBR) and institutional settings on government decision to foster innovation in developing countries. It differentiates between informal SBR-based cronyism and formal SBR-based lobbying and how they could influence government decision to innovate. After a theoretical discussion on the available literature, a theoretical model building on and complementing the Aghion and Howitt (2009) growth model with institutions is being introduced. The new model investigates how different forms of SBR affect government decision to adopt either a strategy fostering technology imitation/transfer or one fostering innovation. The model suggests that adopting the innovation strategy is more likely to be chosen at the presence of: higher probability of lobbying; higher public frustration from cronyism; lower initial levels of cronyism under the imitation strategy; ability to curb cronyism below levels tolerated by the public; higher economic growth caused by institutional (governance) improvement; and higher economic growth caused by additional resources but only when this is matched by institutional improvement that manages to curb cronyism. The suggestions of the model are then being investigated empirically with the help of a fixed effects regression model. The empirical study focuses on developing countries placed in the Global Competitiveness Indicators’ (GCI) category of “efficiency-driven” countries and those in transition between this category and the higher “innovation-driven” category. These are the countries in which government decision to adopt either highlighted strategy is of much relevance. The empirical results support some of the theoretical model suggestions, especially the negative effect of cronyism on choosing the innovation strategy and the positive effect of public frustration, change in cronyism attributed to institutional reform, economic growth attributed to change in natural resources when coexisting with diminishing cronyism attributed to institutional reform.