Institutions and Innovation by New Entrants: Cross-National and Firm-Level Evidence from 136 Nations

Abstract

This study evaluates the institutional determinants of firm-level innovation output. It draws on theories of institutional development to argue that historical conditions affecting preferences for inclusive institutions contributed to higher rates of innovation by new entrants. The analyses evaluate these arguments using data from 212 nations (countries and autonomous territories) over 1960-2019 and nationally-representative samples of 28,335 new entrants in 136 nations over 2004-2019. The models instrument for institutions using data on historical conditions (pathogens and natural disasters) affecting institutional development. The findings show that inclusive institutions facilitating startup entry, growth, and exit are first-order determinants of national and firm-level innovation. At a national level, these institutions contributed to 33% higher rates of new entry, 102% higher scientific and technical knowledge production, 3.34% higher rates of patent applications, 205% higher value of high-technology products, and 313% higher receipts for intellectual property use. At a firm level, these institutions contributed to 27.64% higher rates of new product introductions, 11.50% higher rates of new process development, and 5.67% higher rates of R&D spending by new entrants.