Favorable and Unfavorable Conditions for Innovation: Some Cross Country Evidence

The paper employs cross country regression analysis to estimate the effect of democracy and income inequality, adjusting for the level of income and other variables, on country innovation. It finds that both of these variables are of consequence for innovation. Different countries innovate at different rates. Some countries are very creative while other countries are not. Innovation is of vital importance to economic activity. The long term health of the economy depends on innovation, as creativity and innovation are the key drivers of economic growth. Understanding the determinants of creativity and innovation is, therefore, a serious endeavor. While it is common to study the reasons for differences in creativity and innovation across firms and countries by knowledge production function inputs such as dollar expenditure on research and development, looking for more fundamental underlying socio-political variables at the country level that may lead to a more favorable or less favorable environmental conditions for innovation is less common. National socio-political country conditions are not the direct determinants of innovation such as those at the firm level, but, rather, they are the behind the scenes forces influencing the development of these direct components. For instance, greater freedom and democracy may create individuals who are more autonomous, independent, and entrepreneurial. If, at the firm level, certain corporate cultural characteristics are the key to innovation, then some country characteristics will provide a more favorable milieu for their evolution and appearance, while others will not. The purpose of this paper is to focus on two socio-political variables, democracy and income inequality, as potential determinants of innovation. In pursuit of this undertaking, the paper is divided into five parts. The first part looks at potential theoretical reasons why democracy and income inequality and a few other country variables may have relevance for innovation. The second section discusses the measures that are employed in the empirical analysis and identifies data sources. The third part shows the outcomes of regression runs on innovation and democracy and on innovation and income inequality adjusting for the level of economic development and for other variables. The final section concludes.