Against Democracy, Neo-totalitarianism, or What? A Cross-Country Dynamic Panel Endogenous Switching Regressing Analysis of Innovation, Economic Growth, and Political Stability

Abstract

Innovation has long been recognized in economic literature as an important source of Schumpeterian disequilibrium for societies’ economic development, but until now, it has played no role in the debate on the political stability of countries regarding its disequilibrating and destabilization role between societal demands and government capabilities. Thus, the extent to which a country’s level of innovation disequilibrates public demands and government capabilities and leads to adverse impacts on political stability has been neglected in the literature. This paper analyzes the effects of innovation on the political stability of countries using 2013–2020 panel data for 121 countries from the World Bank and the World Intellectual Property Organization in static and dynamic simulation frameworks. The paper uses panel endogenous switching regression with control function, the robust Arellano-Bover/Blundell-Bond system dynamic panel model, and other techniques that have never been used before in this subject matter to disentangle the effects of innovation on political stability. The dependent variable is an index measuring political stability, and the explanatory variable indicates a country’s level of innovation. Controls include the country’s institutional, socioeconomic, and environmental factors. Endogeneity is controlled using a combination of traditional instrumental variables, lag variables in dynamic systems, and endogenous treatment models. The findings are that the recent rapid rise and proliferation of innovation negatively correlate with political stability, especially in countries with high levels of innovation production. On average, rising levels of uncontrolled innovation reduce political stability by 48 percent in high-innovation-producing countries relative to low-innovation-producing countries. High institutional quality factors, such as improvement in voice and accountability and the rule of law, moderate the negative relationship between innovation and political stability. The findings confirm the relevance of other-disregarded factors in sustaining and improving political stability and reinforce the importance and urgent need for enhanced regulatory mechanisms for the production, dissemination, and use of innovation.