Abstract
Does institutional quality affect firms’ decision to invest in R&D? This paper investigates the idea that well-functioning pro-market institutions spur firms’ R&D propensity by reducing transaction costs and uncertainties related to research and innovation activities. Evidence from the World Bank Enterprise Surveys on a large sample of firms in 57 developing and transition economies between 2002 and 2017 corroborates this idea. Controlling for countries’ level of economic development, industry fixed effects and a number of firm-level characteristics, the results show that firms’ propensity to invest in R&D is higher in countries in which national institutions ensure socio-political stability and enforcement of law and contracts.
Highlights
The efforts of firms to upgrade technological capabilities and invest in innovation are crucial in processes of catching up and economic development (Lee et al, 2021; Malerba & Nelson, 2011)
Does institutional quality affect firms’ decision to invest in R&D? This paper investigates the idea that well-functioning pro-market institutions spur firms’ R&D propensity by reducing transaction costs and uncertainties related to research and innovation activities
We address this gap by building on the institutional economics literature that argues that the extent to which national institutions facilitate market interaction defines firms’ perceived transaction costs of alternative strategies
Summary
The efforts of firms to upgrade technological capabilities and invest in innovation are crucial in processes of catching up and economic development (Lee et al, 2021; Malerba & Nelson, 2011). National pro-market institutions are important to ensure socio-political stability that spurs investments and reduce uncertainties related to R&D, well-functioning legal institutions and contract enforcing systems that reduce transaction costs in R&D collaborations, and an efficient IPRs system that enable firms to reap the benefits of innovative activities (Castellacci, 2015; Kafouros & Aliyev, 2016). Our empirical analysis relies on two secondary datasets: (1) the World Bank Enterprise Surveys (WBES), providing information on more than 10,000 firms in 57 transition and developing countries between 2002 and 2017; (2) the World Governance Indicators (WGI), measuring different aspects of the national institutional setting The focus of this analysis on firms in transition and developing economies is important, because previous literature on this topic has mostly focused on advanced economies, whose national institutions are typically better able to ensure the socio-political and legal conditions that facilitate economic activity and market transactions (Bothello et al, 2019).
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