Innovation and institutions: a symbiotic marriage?

Abstract: This paper studies the long-term relationship between economic growth and institutional change. Using a dynamic panel data model, several tests are conducted to test for both long- and short-term movements in GDP, and institutional quality using annual data from 87 countries ranging from 1984 to 2016. This paper contributes with an econometric approach to long-term GDP change theory as several tests are conducted for both general long-term effects of institutional reform on GDP growth, geography-specific effects and an interaction test of productivity’s and institutional reforms’ combined effect on economic activity. This paper finds that both improved political- and economic institutional quality raise long-term innovation-driven growth. The causal relationship is found to be in the direction from institutional reform to economic growth.