INNOVATION IN THE DIGITAL ECONOMY: INVESTIGATING THE BIDIRECTIONAL RELATIONSHIP BETWEEN TECHNOLOGICAL INNOVATION AND DIGITAL SERVICES TRADE

This study examines the bidirectional relationship between digital services trade and technological innovation, as well as the distinct dynamics of the relationship between exports and imports. Using a three-stage least squares estimation approach on panel data from 83 economies from 2014 to 2021, findings reveal a positive and statistically significant two-way relationship between digital services trade and innovation output. Exports and imports of digital services are positively associated with technological innovation, and innovation corresponds positively to the digital services trade. While innovation exerts a substantial and elastic relationship with digital trade, the association between trade and innovation is modest and inelastic. Moreover, innovation has a stronger relationship with digital services exports than with imports, while imports exert a more pronounced link with innovation than exports. The findings imply policy priorities on financial access support, institutional quality, human capital, digital infrastructure and balanced regulations to foster innovation and digital services trade.