Dynamics of innovation and income inequality mediated by human capital and financial development: a panel data study of Asia-Pacific countries

Income inequality is one of the most important among the grand challenges faced by the global economy. The hyper-globalization phase and rising digital innovations have accentuated income inequalities within countries. Asia-Pacific countries have shown a continuous rise of income inequalities and surge of innovations. This study attempts to examine the relationship between income inequality and innovation mediated by human development and financialization. For unravelling the dynamics of income inequality, impact of innovation, human capital and financial development of 15 Asia-Pacific countries covering the period 1990–2022 are examined. It employs panel cointegration econometric models for empirical estimation. Findings revealed that innovation has a significant adverse impact on income distribution. Human capital as a mediating variable of innovations has reduced income inequalities, whereas financial development widens income inequalities. Important finding of the study is that the income dis-equalizing effect of financial development outweighs the income equalizing effect of human capital in the presence of improved technological innovations. Public policy lesson emerged from this study is that the policymakers should enact those policies that foster technological innovations with expansion of human development, inclusive financial development, institutional quality and enhancement of macroeconomic stability that can ensure reduction of income inequality.