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Fostering innovation in South Asia: Evidence from FMOLS and Causality analysis

shah, Muhammad ibrahim (2019): Fostering innovation in South Asia: Evidence from FMOLS and Causality analysis.

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Abstract

Innovation is at the core of fourth industrial revolution which is already under way. Both Sustainable growth and development depend on technological innovation. Traditional economic models/theories are now undermined because of new technologies like AI, automation,3D printing, robotics etc. Lack of innovation creates major socio-economic problems such as inequality, unemployment, poverty and many more. Therefore, in this competitive world, a country needs innovative people with innovative ideas to go forward. The aim of this study is to explain and critically examine the determinants of technological innovation across 5 South Asian countries using yearly data for 1980-2015 period. This paper employs several econometric techniques such as Cross sectional dependence to see if shocks that occur in one country affect another, Panel unit root test to check the stationary of the data and Panel Cointegration test to check long run relationship among the variables. This study also applies Fully Modified OLS to estimate long run coefficients and Dumitrescu and Hurlin panel causality test (2012) to see the causality between the variables. The findings suggest that democracy and human capital are negatively related to innovation, contrary to popular belief. The analysis also reveals that trade openness positively and significantly affects innovation and there exists a nonlinear, in particular an inverted U shaped relationship between innovation and financial development in South Asia. Findings from the Causality test reveals that there is bidirectional causality between total patent application and trade openness and also between financial development and human capital. This study, therefore, has several policy implications for South Asian countries.

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