Business Sector Innovation and Economic Growth
Business Sector Innovation and Economic Growth

Business Sector Innovation and Economic Growth

Summary/Abstract: This paper examines the relationship between innovation carried out by the business sector and economic growth in the 28 member states of the European Union, divided into two groups (1 and 2) according to their innovation performance. We use fixed effects panel data methods to test the hypothesis that business sector innovation plays a relevant role in explaining the behaviour of real GDP per capita, estimating two growth regressions according to data availability (1990‐2015 and 2008‐2015; unrestricted/restricted sample). The results indicate that the role of business sector innovation in economic growth not only varies according to the sample of countries and the period under analysis but also the proxy for innovation used. In group 1 (above average innovation performance) the innovation indicators statistically significant in explaining growth also present a positive sign (with a few exceptions). In group 2 (below average innovation performance) on the other hand, the statistically significant business sector innovation indicators present a negative sign. One possible justification for these signs are differences in absorptive capacity so that the growth benefits of innovation activities depend on aspects such as human capital availability, accumulated knowledge, technological and financial support. Since group 1 includes countries with higher absorptive capacity, business sector innovation is effectively translated into faster economic growth. In group 2, innovation activities do not translate into productivity increases due to a lack of absorptive capacity. Additionally, resources used in innovation activities might compete with other activities more relevant in terms of the stage of the growth process these countries are in so that innovation saps growth.

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