role of corruption, labor regulation, productivity and gender in the EU-27

Innovation outcomes are shaped by both institutional conditions and firms’ internal capabilities, yet prior research often examines these dimensions separately and rarely distinguishes between different types of innovation. This limits understanding of how external barriers and organizational resources jointly influence incremental versus market-novel innovation. To address this gap, the aim of this paper is to examine how institutional constraints, specifically perceived corruption and perceived labor regulation, and firm-level capabilities, measured by labor productivity growth, gender diversity in top management, and firm size (as a control), jointly shape firms’ innovation performance. Grounded in a unified institutional and resource-based view (RBV) framework, we test how de facto institutional frictions and internal capabilities differentially relate to incremental versus market-novel innovation. Using harmonized World Bank Enterprise Survey data from 2019–2023 covering EU-27 countries (5,534 firms), we estimate two ordinary least squares (OLS) models to explain cross-country differences in: (i) the share of firms introducing new products or services (incremental innovation); and (ii) the share of firms whose innovations are new to the main market (market-novel innovation). All estimates are at the country level (EU-27; N = 27) and are interpreted as between-country associations in the national share of firms innovating. Accordingly, we interpret results as cross-country patterns and avoid firm-level causal claims. The results reveal a clear divergence in determinants across innovation types. Perceived corruption significantly reduces incremental innovation but does not affect market novelty. Labor regulations do not influence incremental innovation yet show a positive association with market novelty, consistent with a compliance-induced innovation mechanism. Productivity growth displays a dual effect: it suppresses incremental innovation but enables market novelty through greater organizational slack. Gender diversity in top management and firm size further strengthen market-novel innovation, while showing no effect on incremental outcomes. The study contributes to institutional theory by demonstrating that governance weaknesses primarily constrain routine innovation and refines RBV by showing that internal capabilities – productivity, organizational scale and leadership diversity are decisive drivers of market-novel innovation. By linking institutional environments with firm-level resources, the study provides an integrated explanation of innovation heterogeneity across EU economies.