The relationship between financial development and innovation: An empirical study on developed and developing countries

Innovation is one of the main driving forces that provides competitive advantage for firms and countries and also supports economic growth in the long term. In order to compete effectively in international markets, businesses need to constantly innovate and increase their competitive advantage. Economists have long emphasized the importance of innovations in economic growth and productivity growth. In this regard, Schumpeter (1911) stated that innovations that provide economic growth and productivity growth depend on financial development. However, it is seen that this element is largely ignored in the empirical literature. In this direction, the aim of the study is to examine the relationship between financial development and innovation theoretically and empirically. In order to determine the relationship between financial development and innovation, an analysis was conducted with panel data analysis processes for three separate country groups using data from 17 developed countries, 14 developing countries and a total of 31 countries according to the classification made by the IMF for the period 1980-2019. The dependent variable of the created model was determined as the number of patent applications for residents and the independent variable was determined as the financial development index. The relationship between financial development and innovation was analyzed using Parks-Kmenta, Beck-Katz and Driscoll-Kraay estimators and Eviews 10 and Stata 15 package programs. As a result of the tests, a statistically significant and negative relationship was found between financial development and innovation in general.