The Role of Country Characterisitics for Country Innovativeness

The Role of Country Characteristics for Country Innovativeness

Abstract

The development and launch of innovations is one of the key factors for boosting growth and improving welfare across all economies. Therefore, it is important to identify the drivers of innovations. This study examines the role of country characteristics for country innovativeness. Hypotheses are developed and tested using the data collected by the World Economic Forum for 122 countries. The research focuses on the years 2007 and 2016. Innovation, which is taken as a dependent variable is represented by the index ranging from 1 to 7. The hypotheses are tested with the use of OLS models, from which the significance of the independent variables is determined. The study shows that firm-level technology absorption, competition, market size, and education level and quality are the most important factors driving innovations.

Introduction

Innovation is an essential driver of economic progress that benefits consumers, businesses and the economy as a whole. In economic terms, innovation describes the development and application of ideas and technologies that improve goods and services or make their production more efficient.

One of the major benefits of innovation is its contribution to economic growth. Simply put, innovation can lead to higher productivity, meaning that the same input generates a greater output. As productivity rises, the economy grows, which brings vast benefits for both consumers and businesses. Simultaneously, the wages of workers increase. Therefore, this shows that the development and launch of innovations is one of the key factors for boosting growth and improving welfare across all economies. Observing the number of innovations for different years and countries, it turns out that the number significantly differs on a country level. Yet, triggering the question: what drives innovations in a country?

For many years, innovation and its main causes have been a significant topic for research in many countries. Scholarly work has produced several narratives concerning the possible drivers of innovation. Very important drivers are considered to be the country’s economic size and the level of development. Using the data from 625 companies across 31 countries, Allred and Steensma (2005) show that firms competing in developed countries with large economies invest more heavily in R&D. This may be because the country's economic, trade, and demand structure encourages innovation, which means that large economies not only provide the resources to pursue successful innovation strategies, but also have market pressures from customers to do so.

Culture is another important factor stimulating high levels of innovation. In spite of the evidence that country’s size and level of development have a strong impact on the degree of innovativeness, Tellis, Stremersch and Yin (2003) prove that these factors do not guarantee the leadership in innovations. Focusing on the time-to- takeoff of new consumer durables across 16 European countries, they show that large economies of Europe, France, Germany, Italy, Spain, and the United Kingdom turned out to be less “innovative” than the Scandinavian countries. This phenomenon is explained by culture, which acts as a contradiction to the major assumption that the size of economy is the main driver of innovations.