Economics of Innovation and New Technology

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Innovation, ICT Penetration,Trade and Economic Growth in
Developing and Developed Countries: A VECM Approach
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Journal: Economics of Innovation and New Technology

Manuscript ID GEIN-2020-0385
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Manuscript Type: Original Articles

Keywords: technology, innovation, international trade, vecm, growth

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Page 1 of 17 Economics of Innovation and New Technology

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3 1. Introduction
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Economic growth has always been a field of intense interest and research for economists, and continues
7 to be of prime relevance in present times as well. Economic development, on the whole, is also crucial
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9 for humanity at large as it has the capability to diminish the disparity and differences that exists within
10 economies of different countries. Even a minor change in percentage of country’s growth rate can lead
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12 to larger consequences to the wellbeing and living standards of its citizens. Various factors have been
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found to have profound importance in the process of economic growth which helps facilitate numerous
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15 research problems and approaches to study essential questions of economic growth for a country
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17 (Acemoglu, 2012). Trade openness is an important factor for economic growth of a country. The other
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crucial parameters are innovation and information and communication technology (ICT). There have
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20 been significant discussions and debate about the impact of innovation and ICT on transitioning the
21 economic growth of a country. Many researchers have considered these as the critical factors and hence
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23 various empirical studies have been conducted to assess the impact of these variables on trade and
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growth and the relationship that exists between them. There is vast literature to support that innovation
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26 leads to economic growth. At the same time literature also supports that ICT is also an important catalyst
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28 for trade and economic growth. The growing importance of ICT on economic growth has led researchers
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29 to study the relationship at the national level, cross-country level and industry level (Bahrini and
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31 Qaffas).
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33 Given this, the purpose of this paper is to investigate the nexus of four variables namely innovation,
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ICT, trade and economic growth in developing and developed countries over the period 1995 - 2018
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36 using VECM approach. The remainder of the papers is sketched as follows: Section 2 presents brief
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38 literature of the subject, rationale for the study and hypotheses. Section 3 describes the variables and
39 the econometric model used. Section 4 reports and discusses the results found. Section 5 concludes and
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41 provides recommendations and policy implications.

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43 2. Innovation, ICT Penetration, Trade and Economic Growth
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The development in ICT has led to many changes such as reorganization of economics, globalization,
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47 and trade (Farhadi et al, 2012). Literature also suggests trade openness as one of the determinants of
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49 economic growth. With more innovation processes being organized and adopted across technologies,
50 trade, etc., these are getting more closely related and needs fresh research perspective. The literature in
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52 this section has been studied to understand the subject around four variables, innovation, ICT, trade and
53 economic growth and dynamics that exists between them. The interconnection between different
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55 variables is not only of growing research interest but also a subject of growing attention for policy
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makers and other related government and non-government bodies.
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59 2.1. Review of Literature on Interlinkage between the selected variables
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 Economics of Innovation and New Technology Page 2 of 17

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3 Trade openness is a vital parameter for economic growth. Foreign trade and economic growth can both
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5 be considered as a multidimensional mechanism comprising many interlinked components which are
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accomplished through innovation and ICT. In literature, the relationship between trade openness and
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8 growth has yielded mixed results. At the same time, there have been various notions of ‘openness’ in
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10 the literature. Trade openness stimulates the quality of economic growth considerably in both short and
11 long run. There exists a relationship between degree of trade openness and quality of economic growth.
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13 Both the variables are positively significant in case of developing country like China. (Kong et al, 2020).
14 Liberalization of trade does not demonstrate simple and upfront relationship with growth. Some of the
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16 trade intensity ratios are in sync with the present literature. Trade openness measures such as trade
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shares, export shares, and import shares in GDP used in various studies are found to have significant
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19 and positive relation with growth. However, in case of developing countries, trade barriers indicate
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21 positive relation with growth under certain conditions and the relationship also depends upon certain
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22 characteristics of the countries (Yanikkaya, 2003).

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Innovation is an important frontier in the study of economic growth. The study on innovation is vast
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26 and multidimensional. It has had huge influence and proves vital in enhancing competitiveness of
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28 enterprises, industries and countries for growth and productivity of an economy. (Terzic, 2019).
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29 Schumpeter identified technological innovation as a significant aspect of economic change

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31 (Schumpeter, 1934; Rosenberg, 2004) that has widely impacted selected developing countries. There
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are positive relationships between the Global Innovation Index, GERD, GDP per capita, the Summary
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34 Innovation Index, Research Systems, Firm investments, Innovators and Linkage & Entrepreneurship.
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Countries that upsurge the higher quality patenting witness an affiliated rise in economic growth (Hasan
37 and Tucci, 2010). In high income OECD countries, the relationship between R&D and innovation,
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39 economic growth and innovation and R&D and economic growth are all significantly positive.
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Investment in research and development produce innovation which increases the economic growth rate
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42 in these countries (Guloglu and Tekin, 2012). In the long run, there exists a bi-directional causality
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between innovation and economic growth in OECD countries (Pradhan et al, 2017). There exist a
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45 significant correlation between innovation performance score and the economic development.
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47 Innovation performance score, an independent variable, is calculated by WEF (INOV), and the
48 economic development, a dependent variable, is understood by GDP per capita (Iacovoiu and Stancu,
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50 2017). The impact of innovation on economic growth during recession in 2007 to 2009 in the
51 manufacturing sectors of Lithuania discloses various characteristics of innovation during this phases
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53 because of which manufacturing firms in Lithuania could function successfully and were competitive
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(Snieska and Valodkiene, 2015). Investment in research and development in the peripheral regions of
56 the EU have positive association with innovation and eventually innovation leading to economic growth
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58 (Bilbao‐Osorio and Rodríguez‐Pose, 2004). In case of China and India, innovation has significantly
59 contributed to their economic growth (Fan, 2011).
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Page 3 of 17 Economics of Innovation and New Technology

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3 Innovation and economic growth exhibits positive relationship among themselves (Cameron, 1996;
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5 Cetin, 2013; Pece et al 2015; Maradana et al 2017). There is a positive relationship between innovation,
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productivity and economic growth in the selected European and non-European member countries where
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8 these factors are considerably associated with their innovation rank (Terzic, 2019). Sustainable
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10 economic growth are ensured by innovation, R&D expenditures and the investments in technology
11 (Pece et al, 2015) and creates a different profitable environment for a country. Countries adopt
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13 innovation in various areas so as to out produce by reducing costs. This helps them in increasing their
14 competitiveness in foreign trade (Sener and Delican, 2019). Innovation in ICT is one of the key driver
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16 of national competitiveness as it contributes significantly to the productivity and growth of the country
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(Reenen et al, 2010). For industries, innovation in ICT increase marketplaces choices, cope of potential
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19 market increase and decreases the costs of the transactions (Kramer et al, 2007).
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21 Another important frontier that leads to economic growth and foreign trade is investments in ICT and
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23 or ICT based innovation. Revolution in information and communication technology has spread across
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individual lives, organizations, industries and countries. ICT can be defined as “technologies that
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26 support data and information processing, storage and analysis, as well as data and information
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28 transmission and communication, via the Internet and other means” (Weber and Kauffman, 2011). ICT
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29 adoption takes place in a country when organizations invest in technology to support their business
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31 related activities and people also start to use it (Weber and Kauffman, 2011). Improvement in ICT is a
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very common form of technological advancement in the recent times, facilitating trade openness and
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34 contributing to the economic growth. ICT is a source of comparative advantage in trade as it stimulates
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export more in industries using them diligently (Wang and Li, 2017). They are also used by both public
37 and private organizations to enhance service delivery and to facilitate innovation-intermediation. ICT
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39 has a high potential to support innovation-intermediation and also enhances interaction and exchange
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of information suitable in service delivery (Munthali et al, 2018). Various studies indicate that there
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42 exists a positive effect of technological developments on foreign trade, particularly in developed nations
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(Sener and Delican, 2019). In the case of six Sub-Saharan African countries, adoption of ICT is an
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45 enabler of product, process, and organization innovation. The degree of novelty of the innovation
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47 introduced by the firm has final influence on productivity (Cirera et al, 2016). The usage of the Internet
48 (used as a proxy for ICT) increases trade among countries (Rodríguez-Crespo and Martínez-Zarzoso,
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50 2019). In the case of select G20 countries, ICT measure and financial development are factors that
51 positively drive economic growth (Nguyen et al, 2020).
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54 2.2. Rationale of the study
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56 This study is important for the effective implementation of both innovation and ICT policies to increase
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trade and economic growth. Hence, strategies should focus on fostering innovation and investment in
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59 ICT infrastructure. There exists the possibility that the significance and magnitude of the nexus of these
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 Economics of Innovation and New Technology Page 4 of 17

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3 four variables in developing and developed countries might vary depending upon the level of innovation
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5 that takes place and ICT infrastructure planned. It can be concluded that focus and investment on
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Innovation and ICT are suitable to enhance trade openness and economic growth of these countries.
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8 Accordingly, the research will contribute to the policy makers in framing policies focusing on
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10 innovation and ICT penetration as an appropriate approach to proliferate trade and economic growth of
11 the countries.
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In addition to the existing literature, new research question and new approaches are explored within the
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15 domain of economic growth (Acemoglu, 2012). There also remain certain important concerns that
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17 revolve around the interrelationships existing between different factors. The findings in the literature
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establishes empirical relationships between innovation, trade, economic growth and between ICT
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20 penetration, trade and economic growth.
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22 The purpose of this study is to undertake the survey of academic literature in order to supplement the
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24 existing research in this domain that may be pursued to promote and aid further progress in the related
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25 field. Accordingly, the extensive literature study is carried out to mitigate the gaps associated with
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27 studies focusing on nexus of the four variables namely innovation, ICT, trade and economic growth in
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developing and developed countries. Hence, the prime objective of the paper is to determine the
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30 interactions between innovation, information and communication technology, trade openness and
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economic growth in 10 developing and 10 developed countries from 1995 - 2018 using VECM
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33 approach. The present study is also interesting because the framework adopted consists of four variables
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and helps to determine the difference between two set of countries in terms of relationship that exists
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36 between these four variables. Hence, the study effectively links and contributes to the literature is
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38 exploring the possibility of nexus that exists between these four variables for developing and developed
39 countries.
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42 2.3. Hypotheses tested
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44 Innovation has been found to be valuable for growth and development due to formulation of new
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technologies (Smith 1776, Schumpeter 1934). The theories underlying growth, development and
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47 innovation have been continuously revised and modelled to ascertain economic performance (Galbraith
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49 1967, Goodwin 1946, Grossman and Helpman 1991). Innovation led growth theory is the basis for the
50 present study and it aims at analyzing the following stated twelve hypothesis:
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H1A. Innovation causes economic growth.
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54 H1B. Economic growth causes innovation.
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56 H2A. ICT Penetration causes economic growth.
57 H2B. Economic growth causes ICT Penetration
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59 H3A. Trade Openness causes economic growth.
60 H3B. Economic growth causes Trade Openness.

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3 H4A. Innovation causes Trade Openness.
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5 H4B. Trade Openness causes innovation.
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H5A. ICT Penetration causes Trade Openness.
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8 H5B. Trade Openness causes ICT Penetration
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10 H6A. Innovation causes ICT Penetration.
11 H6B. ICT Penetration causes innovation.
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13 Thus, it can be summarized that as per Figure 1, the paper examines whether Innovation, ICT
14 Penetration and Trade Openness have inter linkages.
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33 Figure-1 Proposed linkages between Innovation, ICT Penetration, Trade Openness and growth
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37 3. Variables and econometric model
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39 Information and communication technology infrastructure now can be defined as comprising of digital
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41 telephone network, mobile phones, internet capability, internet servers and fixed broadband, including
42 other technologies (Pradhan et al 2018). In the study for selected G-20 countries, broadband users and
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44 internet users were used as variable for ICT and per capita economic growth, gross domestic fixed
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capital formation, labour force participation rate, consumer Price Index were variables to measures
47 economic growth (Pradhan et al 2018). In another study on Asian countries, to investigate the
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49 relationships between ICT infrastructure, financial development, and economic growth, the framework
50 adopted comprised of per capita economic growth and a composite index of information and
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52 communications technologies infrastructure (ICTI), which is derived from five variables, telephone
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landlines, mobile phones, internet users, internet servers, and fixed broadband (Pradhan et al., 2015,
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55 2017). In the business sector, deployment of ICT which is measured by the level of the Internet used
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57 by the business and exhibits a positive with the export activities between the countries concluding that
58 the Internet usage stimulates exports (Yushkova, 2014). Internet increase trade by reducing the fixed
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60 costs of the trade (Freund and Weinhold, 2004). In case of study conducted on MENA region,

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 Economics of Innovation and New Technology Page 6 of 17

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3 Percentage of Internet users, the numbers of telephone lines per 100 people, the mobile users and the
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5 ratio ICT imports to total service imports were considered to measure ICT and GDP per capita growth,
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the initial level of GDP per capita, and the ratio of credit provided to private sector to GDP were
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8 considered to measure growth (Sassi and Goaied, 2013). For a study on 24 developing economies ICT
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10 was measured using Number of main telephones and cellular subscribers, Total Telecom penetration,
11 Waiting list for main lines per 100 inhabitants, Growth of total telecom, mainline and cellular
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13 penetration, Annual real gross fixed capital formation net of telecom investment, monthly subscriptions,
14 revenue per user, Real annual telecommunications investment and growth was measured using real
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16 GDP, real GDP per capita, total labour force, time period (Sridhar and Sridhar, 2009).
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Innovation is considered in two ways. Firstly, comprising of seven individual variables and secondly as
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20 a composite innovation index. The seven individual variables are patents by residents measured per
21 million population, number of patents by non-residents measured per million population, total number
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23 of patents by both residents and non-residents measured per million population, research and
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development expenditure measured as a percentage of real gross domestic product, researchers engaged
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26 in research and development activities measured per million population, high-technology exports
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28 measured as a percentage of real gross domestic product, and scientific and technical journal articles
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29 measured per million population. Growth is measured by real per capita economic growth (Pradhan et
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31 al, 2018). In another study to investigate technological innovation in the ICT industry, Number of ICT
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patents grants per 1,000,000 inhabitants is used to measure ICT innovation. The independent variables
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34 considered were income, population density, diversity of R&D funding, industry R&D performance,
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number of researchers, broadband network infrastructure, openness to international trade, and education
37 (Lee et al, 2016). To measure innovation, number of patents issued during a year is used as patent counts
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39 is a good measure of intermediate output of innovative activity (Guloglu and Tekin, 2012). In the study
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undertaken by Maradana et al. (2017), six different variables of innovation were used to examine their
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42 relationship with economic growth. These are: patents-residents, patents-non-residents, research and
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development expenditure, researchers in research and development activities, high-technology exports.
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45 The present study has considered these six indicators of innovation. These variables have been selected
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47 considering past studies and PCA has been used in most of them and accessed from World Development
48 Indicators, World Bank.
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52 Table-1
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54 Constructed Index
55 ICT Penetration Index Definitions
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57 Fixed broadband subscriptions (per It refers to fixed subscriptions to high-speed access to the public
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100 people) Internet. This includes cable modem, DSL, fiber-to-the-
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3 home/building, other fixed (wired)-broadband subscriptions,
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5 satellite broadband and terrestrial fixed wireless broadband both
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residential subscriptions and subscriptions for organizations. It
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8 excludes subscriptions that have access to data communications
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10 (including the Internet) via mobile-cellular networks.
11 Fixed telephone subscriptions (per 100 It refers to the sum of active number of analogue fixed telephone
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13 people) lines, voice-over-IP (VoIP) subscriptions, fixed wireless local loop
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(WLL) subscriptions, ISDN voice-channel equivalents and fixed
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16 public payphones.
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18 ICT trade (% of total trade) Exports and imports of computers and peripheral equipment,
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21 electronic components, and other information and technology goods
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22 (miscellaneous).
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24 Individuals using the Internet (% of Internet users are individuals who have used the Internet (from any
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26 population) location) in the last 3 months.
27 Mobile cellular subscriptions (per 100 Mobile cellular telephone subscriptions are subscriptions to a public
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29 people) mobile telephone service that provide access to the PSTN using
30 cellular technology.
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32 Innovation Index
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34 High-technology exports (% of Exports with high R&D intensity, such as in aerospace, computers,
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35 manufactured exports) pharmaceuticals, scientific instruments, and electrical machinery.

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37 Patent applications, nonresidents Patent applications are worldwide patent applications filed through
38 the Patent Cooperation Treaty procedure or with a national patent
Patent applications, residents
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40 office for exclusive rights for an invention--a product or process that
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provides a new way of doing something or offers a new technical
43 solution to a problem. A patent provides protection for the invention
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45 to the owner of the patent for a limited period, generally 20 years.

46 Research and development It includes both capital and current expenditures in the four main
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48 expenditure (% of GDP) sectors: Business enterprise, Government, Higher education and
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Private non-profit. R&D covers basic research, applied research, and
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51 experimental development.
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53 Researchers in R&D (per million Researchers are professionals who conduct research and improve or
54 people) develop concepts, theories, models techniques instrumentation,
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56 software of operational methods. R&D covers basic research,
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applied research, and experimental development.
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3 Scientific and technical journal articles Number of scientific and engineering articles published in the fields:
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5 physics, biology, chemistry, mathematics, clinical medicine,
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biomedical research, engineering and technology, and earth and
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8 space sciences.
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10 Source: Authors Compilation from World Development Indicators, World Bank
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13 PCA helps in allocating weights to highly collinear variables and thus developing an index. Once the
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Indices are developed by carrying out PCA, panel data analysis is carried out by first checking the
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16 stationarity of the series, panel cointegration, panel regression and finally causality test. The present
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18 study aims to assess the multidirectional relationship between growth, innovation, trade as well as ICT
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19 Penetration. Annual time series data is obtained from World Development Indicators and International
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21 Financial Statistics published by World Bank and International Monetary Fund for 10 developing and
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22 10 developed nations from 1995-2018.

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24 Economic growth is indicated by and index of Gross Domestic Product with base as 1995, while for
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Innovation and ICT Penetration, indices are developed using Principal Component Analysis. PCA helps
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27 in converting a set of correlated variables into linearly uncorrelated components by orthogonal
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29 transformation. In PCA, the first component explains maximum variability of data. Trade openness is
30 indicated by sum of export and import volumes of each nation. The log of the values is taken to
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32 overcome the issue of heteroskedasticity. 6 measures of innovation and ICT Penetration comprises of
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6 measures as depicted in table- 1. Researchers in the literature have used various variables to discuss
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35 innovation and ICT and study their impact on trade openness and economic growth.
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39 Four models are considered separately for developed and developing countries over the time period
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1995-2018. The vector error-correction models (VECMs) in order to investigate the directions of
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42 causality among these variables for developed and developing nations individually is as follows:
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45 𝑝1 𝑝2
∆𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 = η11𝑗 + ∑𝑘 = 1𝛼11𝑖𝑘∆𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 ― 𝑘 + ∑𝑘 = 1𝛽11𝑖𝑘∆𝐼𝐶𝑇 𝑃𝑒𝑛𝑒𝑡𝑟𝑎𝑡𝑖𝑜𝑛𝑖𝑡 ― 𝑘 + ∑𝑘 = 1𝛾11𝑖𝑘
𝑝3
46 𝑝4
47 ∆𝐼𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑜𝑛𝑖𝑡 ― 𝑘 + ∑𝑘 = 1𝛿11𝑖𝑘∆𝑇𝑟𝑎𝑑𝑒 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑖𝑡 ― 𝑘 + 𝜔11𝑖𝐸𝐶𝑇11𝑖𝑡 ― 1 + 𝜀11𝑖𝑡 -----1
48
49
50 𝑝1 𝑝2
51 ∆𝑇𝑟𝑎𝑑𝑒 𝑂𝑝𝑒𝑛𝑒𝑠𝑠𝑖𝑡 = η22𝑗 + ∑𝑘 = 1𝛼22𝑖𝑘∆𝑇𝑟𝑎𝑑𝑒 𝑂𝑝𝑒𝑛𝑒𝑠𝑠𝑖𝑡 ― 𝑘 + ∑𝑘 = 1𝛽22𝑖𝑘∆𝐼𝐶𝑇 𝑃𝑒𝑛𝑒𝑡𝑟𝑎𝑡𝑖𝑜𝑛𝑖𝑡 ― 𝑘
52 𝑝3 𝑝4
+ ∑𝑘 = 1𝛾22𝑖𝑘∆𝐼𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑜𝑛𝑖𝑡 ― 𝑘 + ∑𝑘 = 1𝛿22𝑖𝑘∆𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 ― 𝑘 + 𝜔22𝑖𝐸𝐶𝑇22𝑖𝑡 ― 1 + 𝜀22𝑖𝑡 ---------2
53
54
55 𝑝1 𝑝2
56 ∆𝐼𝐶𝑇 𝑃𝑒𝑛𝑒𝑡𝑟𝑎𝑡𝑖𝑜𝑛𝑖𝑡 = η33𝑗 + ∑𝑘 = 1𝛼33𝑖𝑘∆𝐼𝐶𝑇 𝑃𝑒𝑛𝑒𝑡𝑟𝑎𝑡𝑖𝑜𝑛𝑖𝑡 ― 𝑘 + ∑𝑘 = 1𝛽33𝑖𝑘∆𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 ― 𝑘 +
57 ∑𝑝3 𝛾33𝑖𝑘∆𝐼𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑜𝑛𝑖𝑡 ― 𝑘 + ∑𝑝4 𝛿33𝑖𝑘∆𝑇𝑟𝑎𝑑𝑒 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑖𝑡 ― 𝑘 + 𝜔33𝑖𝐸𝐶𝑇33𝑖𝑡 ― 1 + 𝜀33𝑖𝑡 ---------
58 𝑘=1 𝑘=1
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𝑝1 𝑝2
5 ∆𝐼𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑜𝑛𝑖𝑡 = η44𝑗 + ∑𝑘 = 1𝛼44𝑖𝑘∆𝐼𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑜𝑛𝑖𝑡 ― 𝑘 + ∑𝑘 = 1𝛽44𝑖𝑘∆𝐼𝐶𝑇 𝑃𝑒𝑛𝑒𝑡𝑟𝑎𝑡𝑖𝑜𝑛𝑖𝑡 ― 𝑘 +
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7
∑𝑝3 𝛾44𝑖𝑘∆𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 ― 𝑘 + ∑𝑝4 𝛿44𝑖𝑘∆𝑇𝑟𝑎𝑑𝑒 𝑂𝑝𝑒𝑛𝑛𝑒𝑠𝑠𝑖𝑡 ― 𝑘 + 𝜔44𝑖𝐸𝐶𝑇44𝑖𝑡 ― 1 + 𝜀44𝑖𝑡 ---------4
𝑘=1 𝑘=1
8
9
10 Where Δ is the first difference operator, i is the country, t is time period and ε is the error term. ECT is
11
12 the lagged error correction term which helps in representing long run dynamics and the short run
13 dynamics are explained by the differenced variables. For the proposed models to provide robust results,
14
15 the variables should be integrated of order one and must be cointegrated. In case the variables on
16
applying estimation techniques are found to be not cointegrated, the error correction terms are removed.
17
18
Fo

In simple words, if the coefficients ie α, β, γ and δ are significantly different from zero, then the selected
19
20 variables are not related causally. If one of the coefficients is different from zero while others are not
21 then causality exists between the dependent and independent variable.
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22
23
24 4. Empirical results and Discussion
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25
26
27 Principal Component Analysis has been used to reduce the eighteen dimensions of ICT Penetration and
28
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six dimensions of Innovation into two indices, separately for developed and developing nations. These
29
30 indices are an adequate measure of innovation and ICT Penetration as PCA assists in extracting
31 adequate information from the selected parameters and also avoids the problem of multicollinearity as
ev

32
33 the variables selected have high correlation, which are used to develop a single variable. For the
34
innovation index, eigen values of developed nations indicate that the first principal component explains
iew

35
36 54.14 percent variance and on rotation 41.40 percent while for developing nations, the first principal
37
38 component explains 51.28 percent variance and on rotation 47.41 percent. While for the ICT Penetration
39 index, eigen values of developed nations indicate that the first principal component explains 52.12
40
On

41 percent variance and on rotation 50.78 percent while for developing nations, the first principal
42
component explains 61.69 percent variance and on rotation 61.64 percent. Thus, the first PCA is most
43
44 relevant as it explains the variation in the best possible manner. The KMO and Bartlett’s Test for
ly

45
46 sampling adequacy in the analysis is more than 65 percent in case of innovation index for both
47 developed and developing nations and more than 58 percent for ICT Penetration index for developed
48
49 and 69.8 percent for developing nations. Thus, the indices will now be used as an independent variable
50 to analyse the objective of the present paper.
51
52 The variables selected based on existing literature for developed and developing countries are assessed
53
for by applying the Levin-Lin-Chu test (Levin et al 2002) and Panel Cointegrations Test (Pedroni 2004).
54
55 The results indicate that the variables are stationary at first difference level and are depicted in Table-2
56
57 and are also cointegrated as depicted in Table-3. Thus, there exists long run relationship between
58 innovation, ICT Penetration, growth and trade.
59
60 Table-2

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 Economics of Innovation and New Technology Page 10 of 17

1
2
3 Panel Unit Root Test
4
5 Developed Nations Developing Nations
6 Variable Test Test Inference Test Test Inference
7 Statistic at Statistic at Statistic at Statistic at
8 Level First Level First
9 Difference Difference
10 Level Level
11 Growth 17.12 -3.60(0.00*) I(1) 19.06(1.00) 0.07 I(1)
12 (1.00) (0.04**)
13
Trade - 10.91(0.00*) I(1) 4.22 (1.00) -13.52 I(1)
14
Openness 2.61(0.00*) (0.00*)
15
16 Innovation -0.94 (0.17) -31.03 I(1) 1.42 (0.92) - I(1)
17 (0.00*) 7.53(0.00*)
18 ICT -4.85 -3.16(0.00*) I(1) -7.35 -1.57 I(1)
Fo

19 Penetration (0.00**) (0.00*) (0.01*)

20 Source: Authors Calculation
21
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22
23 Table-2
24
Panel Cointegration Test Results
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25
26 Developed Nations Developing Nations
27
28 λTra λMax λTra λMax
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29
None 136.7(0.00*) 82.80(0.00*) 118.5(0.00*) 83.70(0.00*)
30
31 At most 1 68.11(0.00*) 43.10(0.00*) 55.45(0.00*) 37.27(0.00*)
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33 At most 2 41.94(0.00*) 33.35(0.03*) 33.51(0.01*) 22.34(0.21)
34 At most 3 40.56(0.00*) 40.56(0.00*) 28.54(0.05**) 28.54(0.05**)
iew

35
36 Inference Cointegrated Cointegrated Cointegrated Cointegrated
37
38 Source: Authors Calculation
39
40
On

41 Once the results indicate the presence of cointegration, long run cointegration parameters are estimated
42 by applying dynamic and fully modified OLS. The results are depicted in Table-4.
43
44
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46
Table-4
47 Panel FMOLS and DOLS Results
48
49 Dependent Independent FMOLS(Develop FMOLS(Deve DOLS(Develo DOLS(Develo
50 Variable Variables ed Nations) loping ped Nations) ping Nations)
51 Nations)
52 Coeff t-Stat Coeff t-Stat Coeff t-Stat Coeff t-Stat
53 Growth1 Trade -66.34 -2.66 31.74 1.92( - - - -
Openness (0.00*) 0.05* 44.15 1.77( 20.89 1.24(
54
*) 0.07* 0.21)
55
**)
56
57
1FMOLS (Developed Nations)- R squared-79.76 Adj R squared-78.64, FMOLS (Developing Nations)- R squared- 80.97
58
59 Adj R squared-79.89
DOLS (Developed Nations)- R squared-79.57 Adj R squared-78.49, DOLS (Developing Nations)- R squared- 95.44 Adj R
60
squared- 91.08

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Page 11 of 17 Economics of Innovation and New Technology

1
2
3 ICT 17.65 8.53(0. 27.95 4.05( 17.27 8.27( 49.57 7.49(
4 Penetration 68) 0.00* 0.00* 0.00*
5 ) ) )
6 Innovation 5.21 2.00(0. 179.7 8.98( 5.50 2.12( 53.51 1.87(
7 04**) 8 0.00* 0.03* 0.06*
8 ) *) **)
9 Trade OpennessGrowth -0.00 - 0.00 1.02( -0.00 - - -
10 2 3.27(0. 0.30) 2.60( 9.88E 0.000
11 00*) 0.01* -07 769(0
12 ) .99)
13 ICT 0.08 9.91(0. 0.27 6.16( 0.08 8.32( 0.241 3.726
14 Penetration 00*) 0.00* 0.00* 580 759(0
15 ) ) .00*)
16 Innovation -0.00 - -0.48 - -0.00 - - -
17 0.20(0. 2.82( 0.89( 0.455 2.230
18 83) 0.00* 0.37) 492 495(0
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19 ) .02**
20 )
21 Source: Authors Calculation
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23
24 The key finding of the study indicates that for developed nations, significant relationship is present
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between growth and trade and innovation. ICT Penetration doesn’t have a significant relationship with
26
27 growth in case of developed nations. The relationship between trade and growth is negative while with
28
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29 innovation it is a positive one. While for developing nations, significant and positive relationship is
30 present between growth and trade, ICT Penetration and innovation. On assessing the impact of various
31
ev

32 variables on trade, it is seen that in case of developed nations, significant and negative relationship is
33
present between trade and growth while significant and positive relationship is present with ICT
34
iew

35 Penetration. While for developing nations, significant and positive relationship is present between trade
36
37 and ICT Penetration but negative and significant relationship with innovation. Thus, it implies that in
38 developed nations growth boosts through innovation while in developing nations, growth boosts
39
40 through trade, innovation and ICT Penetration. In terms of trade promotion, in case of developed
On

41 nations, trade boosts through ICT Penetration with no role of innovation. While for developing nations
42
43 there is no significant result for trade promotion.
44
ly

Based on the VECM results between the four sets of variables, panel granger causality test was also
45
46 applied as depicted in Table-5. There exists short run causality between growth, trade and innovation
47
48 in case of developed but no such causality between variables for developing nations. The trade led
49 growth hypothesis as proven by numerous works in literature holds true for the developed nations only
50
51 in the present study. Short run causality can also be seen between trade and innovation for developed
52 nations while for developing nations the causality is runs from trade to ICT Penetration. Thus the finding
53
54
55
56
57
2FMOLS (Developed Nations)- R squared- 92.40 Adj R squared- 91.98, FMOLS (Developing Nations)- R squared- 98.28
58
59 Adj R squared- 91.18
DOLS (Developed Nations)- R squared-98.20 Adj R squared- 96.66,DOLS (Developing Nations)- R squared-99.65 Adj R
60
squared- 99.32

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 Economics of Innovation and New Technology Page 12 of 17

1
2
3 in line with the Innovation led growth hypothesis (Pradhan et al 2016, Yang 2006). There is no short
4
5 run causality between ICT Penetration and Innovation (Pradhan et al 2016).
6
Table-5
7
8 VECM Results
9
Variable Developed Nations Developing Nations
10
s and ΔGr ΔTO ΔICT ΔInn ECT- ΔGr ΔTO ΔICT ΔInn ECT-1
11
ECT-1 1
12
13 ΔGr -- 0.00* 0.91 0.00*(- 0.92(+ -- 0.11( 0.48(+) 0.12(-) 0.00*(+
14 (-) (+) ) ) -) )
15 ΔTO 0.88(-) -- 0.61(+ 0.03**( 0.22(-) 0.35(+ -- 0.03**(+ 0.29(-) 0.50(-)
16 ) -) ) )
17 ΔICT 0.86(+ 0.97(+ -- 0.99(-) 0.00*( 0.46(+ 0.19( -- 0.90(+ 0.00*(-)
18 ) ) -) ) -) )
Fo

19 ΔInn 0.13(+ 0.49(+ 0.91(+ -- 0.27(+ 0.37(+ 0.93( 0.75(-) -- 0.01*(+

20 ) ) ) ) ) -) )
21 Source: Authors Calculation
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23
24 The long run equilibrium relationship, as indicated by VECM results, the lagged error correction term
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25 indicates insignificant relationship between Growth, Trade and Innovation but significant relationship
26
27 with ICT Penetration for developed countries. The long run relationship in case of developing countries
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29
is present only for Growth. Thus, the results suggest existence of long run equilibrium between growth
30 and its determinants for developing nations but Growth and ICT Penetration in developed nations.
31
ev

32 In case of long run equilibrium with Trade as the dependent variable, it is seen that the variables have
33 an insignificant relationship in both developed and developing nations with a negative sign. On similar
34
iew

35 lines, ICT Penetration has a long run significant equilibrium with growth, Trade and innovation in case
36
of developed and developing nations. It is only in developing nations that Innovation has a long run
37
38 significant relationship with Growth, Trade and ICT Penetration.
39
40
On

41 5. Policy Implications and Conclusion

42
43
The study examines relationship between growth, trade, innovation and ICT Penetration simultaneously
44
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45 in 20 nations, 10 developed and 10 developing nations, using annual time series data from 1995-2018.
46
47 Two indices are constructed, one for ICT Penetration with 5 variables and one for Innovation with 6
48 variables. On applying panel estimation techniques, it is seen that the variables are cointegrated
49
50 indicating towards a long run equilibrium relationship between growth, trade, ICT Penetration and
51 innovation. On applying OLS techniques like Fully Modified OLS and Dynamic OLS, it is evident that
52
53 for developed nations, significant and positive relationship is present between growth and trade and
54
innovation. ICT Penetration doesn’t have a significant relationship with growth in case of developed
55
56 nations. The relationship between trade and growth is negative while with innovation it is a positive
57
58 one. While for developing nations, significant and positive relationship is present between growth and
59 trade, ICT Penetration and innovation. On assessing the impact of various variables on trade, it is seen
60

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1
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3 that in case of developed nations, significant and negative relationship is present between trade and
4
5 growth while significant and positive relationship is present with ICT Penetration. While for
6
developing nations, significant and positive relationship is present between trade and ICT Penetration
7
8 but negative and significant relationship with innovation. Thus, it implies that in developed nations
9
10 growth boosts through innovation while in developing nations, growth boosts through trade, innovation
11 and ICT Penetration. In terms of trade promotion, in case of developed nations, trade boosts through
12
13 ICT Penetration with no role of innovation. While for developing nations there is no significant result
14 for trade promotion. On further employing the vector error correction model, the presence of short run
15
16 causality between growth, trade and innovation in case of developed nations but no such causality
17
between variables for developing nations. There is no short run causality between ICT Penetration and
18
Fo

19 Innovation. Thus the uniform result across various estimation techniques indicates insignificant
20
21 relationship between Growth and ICT Penetration for developed countries but significant relationship
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22 in case of developing countries between Growth and ICT Penetration and significant relationship
23
24 between Trade and ICT Penetration for both developed and developing countries. A significant
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25
implication of the present study is to formulate policies which enhance economic growth through
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27 developing ICT infrastructure and simplifying trade policies for developing countries. While in case of
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29 developed countries, it is suggested to enhance growth through adopting innovation related policies.
30 The government’s of developed and developing countries should also focus on prioritizing resource
31
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32 allocation for development of ICT and innovation.

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