Fostering innovation under institutional deficiencies: formal state–business consultation or cronyism?

Abstract

This paper is trying to investigate whether formal state–business consultations (or simply public private dialogues—PPD) and/or cronyism could counteract low institutional capacities and provide the needed mechanisms for fostering innovation. It is doing this with the help of a theoretical discussion highlighting the links between National Innovation System, state business relations (SBR) and good governance institutions. This is then followed by an empirical study based on this discussion and using various OLS multivariate panel regressions. Evidence is found that the presence of business associations that are widely participated help in promoting innovation. They do this also in countries suffering from low institutional settings, and correct for the shortcomings caused by low regulatory quality. PPD play also an important role in counteracting institutional deficiencies that could otherwise harm innovation; and this is specifically the case for low government effectiveness. High official representation in PPD is a key for such needed outcome. PPD, however, need an open climate where the government is accountable to various societal groups and where different interest groups are free to aggregate their power. On the other hand, favoritism in allocation of resources and Cronyism might counteract institutional deficiencies, especially with regard to low government effectiveness and low regulatory quality. Yet, the overall effect of cronyism on innovation is still negative. Tackling the reduction of cronyism as an objective presents PPD as an alternative that could counteract low government effectiveness and high participation in business associations as another alternative which manages to counteract low regulatory quality, provided that cronyism is minimized in both cases. The novelty of this study rests on the contribution it aims at providing in an area where research is insufficient. There is lack of research on how innovation is affected generally by SBR, and more specifically by either formal or informal forms of SBR and cronyism. Empirical studies are even scarcer in this regard.

This is a preview of subscription content, log in to check access.

Notes

  1. 1.

    PPD is an initiative that was boosted on a global level when an international workshop for PPD was organized in 2006 by the World Bank, UK Department for International Development (DFID) and the Organization for Economic Cooperation and Development (OECD), setting a charter for good practices aiming at private sector development (Herzberg & Wright, 2006, p. 10).

  2. 2.

    See Putnam et al. (1993), Haggard et al. (1997) and Rothstein and Stolle (2008).

  3. 3.

    For more on PPD and formal SBR, see Sabry (2013) and Sabry (2017B). For more on informal SBR, see Sabry (2017a).

  4. 4.

    It is to be noted that it is generally suggested that Durbin Watson should not be used in measuring autocorrelation in models having lagged dependent variables. However, in the literature it is also argued that Durbin’s H (the suggested test for autocorrelation in this case) and the standard Durbin Watson coefficient (d) would roughly give the same decision with regard to autocorrelation even when lagged dependent variables are included (see for instance Sapir, 1977).

  5. 5.

    In regression A1, the overall effect of cronyism = − 0.127 + (1*0.099) = − 0.028 and in regression A2 = − 0.121 + (1*0.110) = − 0.011

  6. 6.

    Fagerberg and Srholec (2008) suggested a proxy for NIS depending on the principal component factors method. It incorporated “patenting, scientific publications, ICT infrastructure, ISO 9000 certifications and access to finance” besides “education” and then tested the effect of this proxy on economic growth finding a positive effect. This proxy, unfortunately, couldn’t be used in testing the effect of NIS on innovation because it measures aspects which are often used in measuring innovation itself. In fact, it overlaps with components of the innovation proxy used in this paper. It also neglects important aspects of NIS of much relevance to the research conducted here such as the role of SBR.

References

  1. Achen, C. H. (2000). Why lagged dependent variables can suppress the explanatory power of other independent variables. Ann Arbor, 1001, 48106-1248.

    Google Scholar 

  2. Aghion, P., Harris, C., Howitt, P., & Vickers, J. (2001). Competition, imitation and growth with step-by-step innovation. The Review of Economic Studies, 68(3), 467–492.

    Article  Google Scholar 

  3. Aghion, P., & Howitt, P. (1998). Endogenous growth theory (2nd ed.). Cambridge: The MIT Press.

    Google Scholar 

  4. Alsina, A. (2013). Private equity in the North African Region: Case study of Morocco, Tunisia and Algeria. European Institute of the Mediterranean Papers 15.

  5. Begley, T. M., Khatri, N., & Tsang, E. (2010). Networks and cronyism: A social exchange analysis. Asia Pacific Journal of Management, 27, 281–297.

    Article  Google Scholar 

  6. Bräutigam, D., Rakner, L., & Taylor, S. (2002). Business associations and growth coalitions in Sub-Saharan Africa. The Journal of Modern African Studies, 40(04), 519–547.

    Article  Google Scholar 

  7. Campos, J., & Root, H. (1996). The key to the Asian miracle: Making shared growth credible. Washington, DC: Brookings Institution.

    Google Scholar 

  8. Capello, R., & Lenzi, C. (2014). Spatial heterogeneity in knowledge, innovation, and economic growth nexus: Conceptual reflections and empirical evidence. Journal of Regional Science, 54(2), 186–214.

    Article  Google Scholar 

  9. Cohen, W. M., & Levinthal, D. A. (1989). Innovation and learning: The two faces of R&D. The Economic Journal, 99(397), 569–596.

    Article  Google Scholar 

  10. Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35, 128–152.

    Article  Google Scholar 

  11. Crescenzi, R., Gagliardi, L., & Percoco, M. (2013). The bright side of social capital: How bridging makes Italian provinces more innovative. Geography, Institutions and Regional Economic Performance (pp. 143–164). Berlin: Springer.

    Google Scholar 

  12. Desai, R. M. (2007). How cronyism harms the investment climate. Washington DC: The Brookings institution.

    Google Scholar 

  13. Diwan, I., Keefer, P., & Schiffbauer, M. (2014). On top of the Pyramids: Cronyism and private sector growth in Egypt, Working Paper. Washington DC: World Bank.

    Google Scholar 

  14. El-Elj, M. (2012). Innovation in Tunisia: Empirical analysis for industrial sector. Journal of Innovation Economics and Management, 1(9), 183–197.

    Article  Google Scholar 

  15. Enderwick, P. (2005). What’s bad about crony capitalism? Asian Business and Management, 4(2), 117–132.

    Article  Google Scholar 

  16. Fagerberg, J., & Srholec, M. (2008). National innovation systems, capabilities and economic development. Research Policy, 37, 1417–1435.

    Article  Google Scholar 

  17. Haggard, S., Maxfield, S., & Schneider, B. R. (1997). Theories of business and business-state relations. In S. Maxfield & B. R. Schneider (Eds.), Business and the state in developing countries. Ithaca: Cornell University Press.

    Google Scholar 

  18. Hausmann, R., & Rodrik, D. (2003). Economic development as self discovery. Journal of Development Economics, 72(2), 603–633.

    Article  Google Scholar 

  19. Hausmann, R., Rodrik, D., & Sabel, C. (2008). Reconfiguring industrial policy: A framework with an application to South Africa. Cambridge: Harvard Kennedy School of Government: Faculty Research Working Papers Series 08-031.

    Google Scholar 

  20. Herzberg, B. & Wright, A. (2005). Competitiveness partnerships—Building and maintaining Public–Private Dialogue to improve the investment climate: A resource drawn from the review of 40 countries’ experience. The World Bank Policy Research, Working Paper 3683.

  21. Herzberg, B., & Wright, A. (2006). The public private dialogue handbook: A toolkit for business environment reformers. USA: DFID, the WB Group.

    Google Scholar 

  22. Kang, D. C. (2003). Transaction costs and Crony Capitalism in East Asia. Comparative Politics, 35(4), 439–458.

    Article  Google Scholar 

  23. Kaufmann, D., Kraay, A. & Mastruzzi, M. (2009). Governance Matters VIII: Aggregate and Individual Governance Indicators 1996–2008. The World Bank Policy Research, Working Paper 4978.

  24. Keefer, P. (2007). Governance and economic growth. In L. A. Winters & S. Yusuf (Eds.), Dancing with giants: China, India and the global economy. Washington: The World Bank and Institute of Policy Studies.

    Google Scholar 

  25. Keele, L., & Kelly, N. J. (2005). Dynamic models for dynamic theories: The ins and outs of lagged dependent variables. Political Analysis, 14(2), 186–205.

    Article  Google Scholar 

  26. Leftwich, A. & te Velde, D. (2010). State–business relations and economic growth in Sub-Saharan Africa: A review of case studies in Ghana, Mauritius, South Africa and Zambia, IPPG Discussion Paper Series 48.

  27. Mazumdar, S. (2008). Crony capitalism: Caricature or category? Institute for studies in Industrial Development, Working Paper 02.

  28. Moon, C., & Prasad, R. (1994). Beyond the developmental state: Networks, politics, and institutions. Governance: An International Journal of Policy and Administration, 7(4), 360–386.

    Article  Google Scholar 

  29. Mueller, D. (2003). Public choice III. Cambridge: Cambridge University Press.

    Google Scholar 

  30. OECD. (1997). National innovation systems. Paris: OECD Publishing.

    Google Scholar 

  31. OECD. (2015). New approaches to SME and entrepreneurship financing: Broadening the range of instruments. Paris: OECD Publishing.

    Google Scholar 

  32. Olson, M. (1982). The rise and decline of nations: Economic growth stagflation and social rigidities. New Haven: Yale University Press.

    Google Scholar 

  33. Putnam, R. D., Leonardi, R., & Nanetti, R. Y. (1993). Making democracy work: Civic institutions in modern Italy. NJ: Princeton University Press.

    Google Scholar 

  34. Romijn, H. A., & Caniëls, M. C. (2011). Pathways of technological change in developing countries: Review and new agenda. Development Policy Review, 29(3), 359–380.

    Article  Google Scholar 

  35. Rothstein, B., & Stolle, D. (2008). The state and social capital: An institutional theory of generalized trust. Comparative Politics, 40, 441–467.

    Article  Google Scholar 

  36. Sabry, M. I. (2013). State business relations: Networks, institutions and their effect on growth and cronyism. Munich: Verlag Dr Hut.

    Google Scholar 

  37. Sabry, M. I. (2017a). Informal state–business connections, institutions and economic growth. Economia Politica, 34(2), 233–258.

    Article  Google Scholar 

  38. Sabry, M. I. (2017b). Taming cronyism!: The role of public private dialogues. International Journal of Social Economics, 44(12), 1622–1638.

    Article  Google Scholar 

  39. Sabry, M. I. (2018). Cronyism as an outcome of institutional settings: The case of pre-2011 Egypt. Topics in Middle Eastern and African Economies, 20(1), 85–111.

    Google Scholar 

  40. Sapir, A. (1977). Use of the Durbin Watson Statistic with lagged dependent variables. Metroeconomica, 29(1–3), 169–172.

    Article  Google Scholar 

  41. Schneider, B. R. (2010). BusinessGovernment interaction in Policy Councils in Latin America: Cheap talk, expensive exchanges, or collaborative learning? Inter-American Development Bank Working Paper Series, No. IDB-WP-167.

  42. Schneider, B. R., & Maxfield, S. (1997). Business, the state, and economic performance in developing countries. Business and the state in developing countries (pp. 3–25). New York: Cornell University Press.

    Google Scholar 

  43. Schwab, K., & Sala-i-Martin, X. (2016). The Global Competitiveness Report 2016–2017. Switzerland: World Economic Forum.

    Google Scholar 

  44. te Velde, D. (2009). Analyzing the economics of State–Business Relations: A summary guide, IPPG Discussion Paper Series 23B.

  45. Ulke, H. (2004). R&D, innovation, and economic growth: An empirical analysis. IMF Working Paper WP/04/185.

  46. United Nations Industrial Development Organization (UNIDO). (2000). Public–Private partnerships for economic development and competitiveness: With special reference to the African experience. Vienna: UNIDO.

    Google Scholar 

  47. Watkins, A., Papaioannou, T., Mugwagwa, J., & Kale, D. (2015). National innovation systems and the intermediary role of industry associations in building institutional capacities for innovation in developing countries: A critical review of the literature. Research Policy, 44, 1407–1418.

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Mohamed Ismail Sabry.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Sabry, M.I. Fostering innovation under institutional deficiencies: formal state–business consultation or cronyism?. Econ Polit 36, 79–110 (2019). https://doi.org/10.1007/s40888-018-00137-1

Download citation

Keywords

  • Innovation, national-innovation-system
  • State–business-relations
  • Public–private-dialogue
  • Cronyism
  • Institutions

JEL Classification

  • K2
  • L5
  • O3