Innovation pays: but only with good institutions? Insights from regional data

This research examines how regional institutional quality (RIQ) influences the relationship between innovation and firm productivity. We used World Bank Enterprise Survey data from selected SAARC economies over the period 2005–2024. A modified CDM framework is employed to study the relationship between R&D, innovation, and productivity, with RIQ included in all stages to capture its influence. Results show that product and process innovations are the key determinants of firm productivity. RIQ has no direct impact on firm productivity; however, it enhances it when interacting with product and process innovations. This suggests that innovations become more effective in enhancing firm productivity when firms operate in regions with stronger institutions, such as strict rule of law, better regulatory quality, and low levels of corruption. The robustness of the results is checked using several alternative specifications and estimation techniques. Overall, this study contributes to the existing literature by offering new evidence on the innovation–productivity connection by integrating RIQ in a comprehensive CDM framework in developing economies, an area that largely remains underexplored.