The Impact of Innovation on Economic Complexity: The Role of Institutions

Institutions play a significant role in spurring a country's innovative activities.However, to the best of our knowledge, the relative importance of institutions in the innovationeconomic complexity link remains unexplored.This study examines the role of institutional quality in moderating the impact of innovation on economic complexity for 68 countries from 1996 to 2020.We employed various estimation techniques for the analysis, including the generalized method of moments (GMM), pooled ordinary least squares (OLS), fixedeffects, and random-effects regression.In this study, economic complexity is measured using the Economic Complexity Index (ECI), which captures a country's productive capabilities.At the same time, institutional quality (INS) is constructed from the six governance dimensions of the Worldwide Governance Indicators (WGI).The GMM estimator results reveal that institutions are significant determinants on the innovationeconomic complexity link.The positive impact of innovation on economic complexity becomes higher when institutional quality is stronger.Furthermore, institutions and innovation were found to have a direct influence on economic complexity.We are also utilizing research and development (R&D) expenditure as a proxy for innovation, which resulted in similar results.Finally, only export, foreign direct investment (FDI), and capital investment are significant in explaining economic complexity.