Research and development as a driver of innovation and economic growth; case of developing economies

Abstract: The goal of this research is to uncover the channels through which research and development (R&D) impacts economic growth in developing countries. The study employed nine variables from three broader categories in the World Economic Forum database, each covering 32 countries from the lower-middle-income group for the year 2019. The theoretical framework is based on the R&D ecosystem, which includes components such as Institutions, Human capital, Capital market, R&D, and Innovation. Each of these components can contribute to the economic development of the country. Using Structural Equation Modelling (SEM), we build a path diagram to visualize and confirm a potential relationship between the components. R&D features had a positive impact on innovation (regression weight estimate: +0.34, p = 0.001), as did capital market institutions (regression weight estimate: +0.12, p = 0.007), but neither had a significant impact on growth. According to the Schumpeterian institutional interpretation, R&D and innovation efforts may not lead to sustained growth in middle-income countries. We find no significant connection between innovation performance and economic growth. This suggests that while R&D and capital markets may contribute to innovation through entrepreneurship, this contribution is not impactful enough to drive economic growth in developing countries. Our findings provide further evidence of the middle-income trap.