IMPACT OF FORMAL AND INFORMAL INSTITUTIONAL QUALITY ON INNOVATION ACTIVITY: A PANEL DATA ANALYSIS IN A GLOBAL PERSPECTIVE

Abstract

This study explores the impact of institutional quality (both formal and informal) on innovation activity in a global perspective. The aims of this study are threefold: 1) to build a conceptual model (framework) of institutions-driven-innovation that identifies the linkage between different attributes of formal and informal institutions and innovation. 2) to empirically examine whether it is formal, informal or both institutions promote innovation activities for a global sample. 3) to test the important attributes of formal and informal institutions that significantly affect innovation activities? The study contributes to the empirical literature in two ways. The results of this study show that both formal and informal institutions are essential for promoting innovation activities in the economy. Concerning the attributes of formal and informal institutions, bureaucratic quality, law & order, trust and self-control are appeared to be the most crucial factors in promoting innovation activities in the economy. Form policy perspective, these results suggest that improvement in the quality of both institutions not only promotes cooperative behavior but also strengthen the beliefs of the inventors that permit innovation to function in a lower transaction cost regime.