Local institutional quality, firm size, and innovation: evidence from Italy

Abstract This paper investigates whether local institutional quality is associated with firm-level innovation from an economic geography perspective. Focusing on Italian manufacturing firms, we examine whether cross-province differences in institutional quality are related to firms’ patenting activity and whether this relationship varies by firm size. Drawing on a longitudinal dataset of more than 125,000 manufacturing firms observed from 2011 to 2019, we combine firm-level patent data with a province-level measure of institutional quality. Our results show that higher local institutional quality is positively associated with firms’ patenting activity. Moreover, the relationship varies across firms and institutional dimensions, as improvements in control of corruption, government effectiveness, regulatory quality, and voice and accountability are associated with larger increases in patenting among smaller firms. By contrast, we find no evidence that the association between the rule-of-law dimension and patenting varies by firm size.