Democratization and Firm Innovation: Evidence from European and Central Asian post-Communist States

ABSTRACT

The paper analyses the impact of democratisation on firm innovation in European and Central Asian post-communist states using panel-data and cross-sectional approaches. The sample consists of over 25,000 establishments in 25 transition economies. Our empirical analysis provides an array of novel findings to the institutional literature. First, our analysis demonstrates that post-communist democratisation has had a direct impact on firms’ propensity to innovate across transition economies. Second, we find that the relationship between the level of democracy and firm innovation takes the form of a U-shape or inverted U-shape depending on the definition of firm innovation. That is, the states with the lowest and highest levels of democracy exhibit less firm innovation than states with intermediate levels of democracy. The paper contributes to the institutional literature and to studies on the consequences of post-communist regime transition for economic development.

KEYWORDS:

• Democracy
• democratisation
• firm innovation
• political institutions
• transition economies
• European and Central Asian post-communist states

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Surnames are listed alphabetically: the authors contributed equally to this paper.

2. The period of 1999–2009 reflects the first decade of transition and captures the development before the Great Recession of 2008. The Financial Crisis 2008 changed substantially economic development, political and social trends as well as attitudes in the EU’s new member-states and beyond (see Arpino & Obydenkova, 2019; Obydenkova & Arpino, 2018).

3. Due to the paper’s size, we don’t report the results of all robustness checks here; however, these results are available upon request.

4. On the EU’s impact on the democratisation process, decentralisation and the consequences of the regional development banks, see Lankina et al. (2016b), Libman and Obydenkova (2018), Obydenkova and Swenden (2013), and Obydenkova and Vieira (2020).

5. Besides that, future research may also look into the possibility of reverse causality between the variables of interest as an individual project. Society’s level of democracy can be at least partially driven by the firms’ successful adoption of new technologies.

6. See, for example, Lankina et al. (2016a) and Pop-Eleches and Tucker (2017).