Do Institutions Contribute to a Comparative Advantage in Innovation?

Abstract: Adopting a comparative capitalism approach, this study examines three institutional configurations: Liberal Market Economies (LMEs), Coordinated Market Economies (CMEs), and Creative Corporatist Economies (CCEs) in an attempt to assess whether they are associated with a comparative advantage in radical or incremental innovation. Three hypotheses are tested: (1) LMEs have a comparative advantage over CMEs in radical innovation, (2) CMEs have a comparative advantage over LMEs in incremental innovation, and (3) CCEs have a comparative advantage over LMEs and CMEs in radical innovation. Panel data on exports and R&D expenditure in high-tech and medium high-tech industries are used as proxies for radical and incremental innovation. In line with expectations, CMEs are found to have a comparative advantage over LMEs in incremental innovation. The results do not confirm that LMEs have a comparative advantage over CMEs in radical innovation, nor that CCEs have a comparative advantage over LMEs and CMEs in radical innovation. This challenges the notion that radical innovation is exclusive to LMEs and indicates that the comparative capitalism approach cannot fully explain comparative advantages in innovation.