Financial Development, Institutions, and Technological Innovation in Africa

Most African countries are notably confronted with inefficient financial systems, weak institutional arrangements, and low technological innovations. This motivates this study to examine if financial development has any implications on technological innovation in the region, while putting the direct and nonlinear role of institutional quality into consideration. We find that, excluding institutional quality, financial development has a negative impact on technological innovation. The findings are not altered when the influence of institutional quality is linearly examined. The threshold results, however, show that financial development positively affects technological innovation at the low institutional quality level, whereas financial development has no significant impact on technological innovation at higher institutional quality levels. This paradox, although in contrast to expectation, explains the reality of the institutional arrangements in the African countries. They are not just weak, but very restrictive, thereby concentrating the financial means into the hands of few elites who then discretionarily engage in innovative activities. The direct impact of institutional quality on technological innovation is heterogeneous, as it depends on the specific institutional quality indicators and their threshold levels. These findings have crucial policy implications for the governments of the African countries.