The Impact of Institutions on Innovation

Abstract

We study the impact of inclusive institutions on innovation using novel, hand-collected, county-level data for Imperial Germany. We use the timing and geography of the French occupation of different German regions after the French Revolution of 1789 as an instrument for institutional quality. We find that the number of patents per capita in counties with the longest occupation was more than double that in unoccupied counties. Among the institutional changes brought by the French, the introduction of the Code civil, ensuring equality before the law, and the promotion of commercial freedom through the abolition of guilds and trade licenses had a stronger effect on innovation than the abolition of serfdom, which increased labor market mobility, and agricultural reforms that broke up the power of rural elites. The effect of institutions on innovation is particularly pronounced for high-tech innovation, suggesting that innovation might be a key channel through which institutions ultimately affect economic growth. Our findings highlight inclusive institutions as a first-order determinant of innovation. This paper was accepted by Gustavo Manso, finance. Funding: During his Ph.D. at London Business School, Jean-Marie Meier received a grant from the Deloitte Institute of Innovation and Entrepreneurship (an internal research institute at London Business School) for this paper. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2022.4403 .