Fostering innovation under institutional deficiencies: formal state–business consultation or cronyism?

This paper is trying to investigate whether formal state–business consultations (or simply public private dialogues—PPD) and/or cronyism could counteract low institutional capacities and provide the needed mechanisms for fostering innovation. It is doing this with the help of a theoretical discussion highlighting the links between National Innovation System, state business relations (SBR) and good governance institutions. This is then followed by an empirical study based on this discussion and using various OLS multivariate panel regressions. Evidence is found that the presence of business associations that are widely participated help in promoting innovation. They do this also in countries suffering from low institutional settings, and correct for the shortcomings caused by low regulatory quality. PPD play also an important role in counteracting institutional deficiencies that could otherwise harm innovation; and this is specifically the case for low government effectiveness. High official representation in PPD is a key for such needed outcome. PPD, however, need an open climate where the government is accountable to various societal groups and where different interest groups are free to aggregate their power. On the other hand, favoritism in allocation of resources and Cronyism might counteract institutional deficiencies, especially with regard to low government effectiveness and low regulatory quality. Yet, the overall effect of cronyism on innovation is still negative. Tackling the reduction of cronyism as an objective presents PPD as an alternative that could counteract low government effectiveness and high participation in business associations as another alternative which manages to counteract low regulatory quality, provided that cronyism is minimized in both cases. The novelty of this study rests on the contribution it aims at providing in an area where research is insufficient. There is lack of research on how innovation is affected generally by SBR, and more specifically by either formal or informal forms of SBR and cronyism. Empirical studies are even scarcer in this regard.