Technological innovations and premature deindustrialization: evidence from middle-income countries

Premature deindustrialization (PDI) has emerged as a critical challenge for middle-income countries amidst rapid technological innovations and globalization. This study explores how technological innovations (TI), measured by patent applications, influence PDI across 89 middle-income countries from 1980–2022. A novel composite index, integrating income levels and manufacturing sector contributions (value-added and employment shares), is developed to quantify PDI. Employing robust econometric techniques, including Ordinary Least Squares (OLS) with Oster’s stability test and Instrumental Variable Generalized Method of Moments (IV-GMM), we find that TI significantly reduces PDI’s likelihood. These results, consistent across subsamples and multiple robustness checks, underscore the pivotal role of innovation in fostering sustainable industrial growth. This research offers critical insights for policymakers aiming to balance technological advancement with industrial development in middle-income economies.