Foreign technology adoption, democracy and SME innovation

Abstract This study investigates how foreign technology adoption and the institutional context of democracy interact to shape innovation outcomes among small and medium-sized enterprises (SMEs). Drawing on World Bank Enterprise Survey data covering 45,542 SMEs across 63 developing countries (2006–2022), we find that both foreign technology adoption and democratic institutions independently stimulate SME innovation. Moreover, democracy moderates the returns to innovation from foreign technology. Specifically, democracy reduces the positive impact of foreign technology adoption on SME innovation. These relationships remain robust to alternative measures and endogeneity checks. By demonstrating that democratic governance not only fosters innovation directly but also amplifies the innovation-enhancing effects of foreign technology, this study advances theory on institutional environments and capability development in SMEs. The results highlight the importance of policies that jointly strengthen democratic institutions and facilitate cross-border technology diffusion to enhance SME innovation in developing economies.