Quality of pro-market national institutions and firms’ decision to invest in R&D: evidence from developing and transition economies

Does institutional quality affect firms’ decision to invest in R&D? This paper investigates the idea that well-functioning pro-market institutions spur firms’ R&D propensity by reducing transaction costs and uncertainties related to research and innovation activities. Evidence from the World Bank Enterprise Surveys on a large sample of firms in 57 developing and transition economies between 2002 and 2017 corroborates this idea. Controlling for countries’ level of economic development, industry fixed effects and a number of firm-level characteristics, the results show that firms’ propensity to invest in R&D is higher in countries in which national institutions ensure socio-political stability and enforcement of law and contracts.