Overcoming the Middle-Income Trap: The Role of Innovation on Switching onto a Higher Income Group for ASEAN Member States

Abstract

In the past decade, many economists have discussed a phenomenon called the middle-income trap as the share of middle-income economies are growing. The trap is known as a condition of stagnant economic growth that prevents economies from reaching high-income level. In recent years, ASEAN countries have successfully reached the middle-income level. This study aims to understand the relationship between innovation and per capita income for ASEAN countries and understand the role of innovation in supporting ASEAN countries to switch towards a higher income level. This study found that innovation along with foreign direct investment and productivity contributes positively towards per capita income. Innovation was also found to increase the probability of moving up the income ladder, specifically for lower middle-income level toward upper middle-income level. Productivity was found to strongly influence the probability of moving up to a higher income level on any level of initial income group. Furthermore, we found that there is a curvilinear relationship between growth factors and per capita income, which indicates that the contribution of growth factors comes with diminishing marginal effects. As income per capita grows toward a higher income level, growth factors contribute towards income at a decreasing rate, which suggests heightened difficulty when moving up the income stages.