The article provides empirical evidence that developing countries are characterized by higher levels of investment but lower levels of innovation compared to developed countries. To explain these differences, the authors construct and analyze a Schumpeterian model of creative destruction that describes the impact of macroeconomic factors (recession and growth periods), financial factors (borrowing capacity and risk hedging), and industry sector factors (intensity of industry sector competition) factors on the optimal allocation of resources between innovation (creation of new products) and investment (production of established products). The authors show that differences in the ratio of investment and innovation between developing and developed countries can be explained by differences in the sophistication of financial markets, namely in the ability to borrow and hedge risks.
The authors also show that economic downturns stimulate innovation in advanced economies; however, their effect in emerging markets is ambiguous and depends on the main parameters of the shock process. Industry sector competition reduces innovation in emerging markets, while it is neutral in advanced market economies. In both advanced and emerging market economies, uncertainty stimulates innovation growth. Based on this analysis, the authors propose an optimal policy that combines financial and pro-competitive regulation.
Imprint: Lianos, Gerasimos, and Igor Sloev. "Investment and Innovation in Emerging Versus Advanced Market Economies: a Schumpeterian Approach." Journal of the Knowledge Economy (2024): 1-24. (https://doi.org/10.1007/s13132-023-01681-3).