FROM GOVERNANCE TO GROWTH How institutional quality and EU funding shape regional innovation across Europe

Abstract

Institutions have often been ignored in economic development research as a driving force for innovation. Nonetheless, high-quality institutions are described as playing a vital role in innovative activities. Within Europe, there are large regional discrepancies in innovation capacity, and the European Union is continuously working toward a more innovative and more coherent Union. Therefore, this thesis seeks to investigate whether higher institutional quality and EU funding increase innovation, as well as the interaction between institutions and funding. To examine the effect of these variables, a quantitative analysis is conducted, more specifically, a panel regression using fixed and random effects. Data recovered from the Quality of Government Institute, OECD, the European Commission, and Eurostat spanning from 2010 to 2021 across 138 EU regions. The findings of the analysis indicate that, depending on the methods used, institutions (using random effects) and funding (using fixed effects) significantly increase innovation in EU regions. However, there is not enough evidence to determine the effect that the interaction between institutions and funding has on innovation. The results demonstrate that factors such as institutions have a positive effect on innovation, proving that economic development is not merely dependent on other economic factors, for instance, high GDP per capita. Furthermore, the results highlight that there is more to be done if the EU want to reach its goals of a more coherent and innovative Union.