The Relationship between Innovation, Financial Development, and Economic Growth : Testing in ASEAN Countries for the Period 1986-2015

This study aims to determine the relationship between innovation, financial development, and economic growth. Innovation is measured by patents, and economic growth is measured by the percentage of GDP per capita, while financial development is measured by seven indicators, namely banking sector development. Index formation is done through the Principal Component Analysis (PCA), with the note of the variable were defined earlier. This study uses data from ten ASEAN member countries with observation periods from 1986-2015. Research data is secondary data derived from the World Development Indicator and Global Financial Development at the World Bank. The analytical method used in this study is granger causality test, VECM, and IRF and FEVD analysis. The results showed that there were several differences in results in the direction of the three relationships. This difference is due to the difference in proxy that used in the study. There are three cases in this study. Broadly speaking, the relationship between financial development and economic growth is a unidirectional causality from financial development to economic growth. On the other hand, testing on economic growth with innovation shows a bidirectional causality. On the relationship between financial development and innovation, there are unidirectional causality from innovation to financial development. Nevertheless, the relationship between the three variables shows a long-term relationship.