Formal institutions and national innovation capabilities: Evidence from a multi-country study

Innovation has been recognized as a key ingredient for transformational change in national economies. It has also been dubbed as essential for the development of nations and even for tackling global scale impediments to prosperity as described in the United Nation's sustainable development goals. Although there is an agreement on the critical role of innovation, significant cross-national variation exists in terms of its prevalence. This study aims to explore how formal institutions are related to national innovation capability in different country contexts. In order to achieve this end, a panel dataset that observes 121 countries from high, upper-middle, lower-middle and low income groups over an eleven-year time period between 2007-2017 is utilized. This study provides three types of contributions to the literature. First, it evaluates innovation capability with a comprehensive measure that includes both inputs and outputs of the innovation process. Second, it builds and tests several models with a method that is robust to heteroscedasticity, autocorrelation, cross-sectional dependence and spatial dependence. Thus it obtains reliable results from which to theorize. Thirdly, it tests the relationship between innovation capability and formal institutions in different country groups based on income. Important policy implications for each country group are derived as a result of this methodological decision. Keywords: Innovation capability, formal institutions, institutional theory, comparative institutionalism, panel data analysis