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Procedia Economics and Finance 26 (2015) 461 – 467

4th World Conference on Business, Economics and Management, WCBEM

Innovation and economic growth: An empirical analysis for

CEE countries
Andreea Maria Pecea*, Olivera Ecaterina Oros Simonab, Florina Salisteanuc
a
PhD candidate, Finance Department, Faculty of Economics Sciences and Business Administration, Babes-Bolyai University, Cluj-Napoca,
Romania
b
PhD candidate, Accounting Department, Faculty of Economics, Valahia University, Targoviste, Romania
c
PhD candidate, Accounting Department, Faculty of Economics, Valahia University, Targoviste, Romania

Abstract

The innovation, R&D expenditures and the investments in technology are premises for ensuring competitiveness and progress,
and through them a sustainable economic growth. A sustained level of education of the workforce, increasing investments in
research area, the creation of the new products and the facile access of investors to stock markets, firstly, will ensure the
development of the private and public sectors, and secondly, will improve the living conditions of the population. The purpose of
this paper is to analyze if the long term economic growth is influenced by the innovation potential of an economy. Our analysis
was performed by using multiple regression models estimated for the following CEE countries, namely Poland, Czech Republic
and Hungary. In order to quantify the innovation we have used various variables, such as number of patents, number of
trademarks, R&D expenditures. The results provide evidence of a positive relationship between economic growth and innovation.
JEL Classification: O31, O30, O47, O52
©
© 2015
2015TheTheAuthors.
Authors.Published
PublishedbybyElsevier
ElsevierB.V. This is an open access article under the CC BY-NC-ND license
B.V.
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of Academic World Research and Education Center.
Peer-review under responsibility of Academic World Research and Education Center
Keywords: economic growth, innovation, education, research and development, CEE countries.

1. Introduction

The advantages offered by the globalization, the development of information technology and media represent the
premises for economic growth and for the improvement of companies’ financial performance (OECD, 2007). Thus,
we mention that innovation and technology, the increase in research and development expenditures are the

* Andreea Maria Pece. Tel.: +4-345-5444-343

E-mail address:andreeapece@yahoo.com

2212-5671 © 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of Academic World Research and Education Center
doi:10.1016/S2212-5671(15)00874-6
462 Andreea Maria Pece et al. / Procedia Economics and Finance 26 (2015) 461 – 467

prerequisites for ensuring competitiveness and progress, and through them a sustainable economic growth.
Furthermore, a sustained training level of workforce, an increase in the level of investments, facile access of
investors to stock markets will generate positive effects, firstly, on the private and public sectors development and
secondly, on the improvement of standards of living of the population. We consider relevant the assumptions of
(Gurbiel, 2002), according to which the innovation potential of an economy is influenced by both macroeconomic
and microeconomic factors: GDP/capita, R&D expenditures, international trade, competitiveness, technological gap,
level of profit recorded by foreign companies in a country.
According to (OECD, 2007) the innovation and the increase in the level of R&D expenditures are influenced by
the following factors:
ƒ adequate rules regarding market competition, which stimulates innovation, in conjunction with an
adequate level of foreign direct investment, so as to stimulate cross-border transfers of information;
ƒ the existence of a stable economic climate and low real interest rates to encourage
innovation activity by creating a stable environment for investment in sectors that support the development
of technology and information;
ƒ availability for internal and external funding;
ƒ the expansion of public research, which can further support the research in private sector, which
will require adequate human resources
ƒ tax incentives for companies that have as main object of activity, research and development;
ƒ usage of foreign capital for R&D, which is associated with higher levels of productivity.

Moreover, we focus our attention on the Schumpeter mentions, that refer to the concept of “creative destruction”,
according to which innovations replace old products and technologies, having a positive impact on the turnover
evolution. Therefore, the competition in the market caused by the entry of new innovations and the exclusion of old
technologies, comes to support the strengthen of economic growth (Aghion et al., 2010).
The financial literature (Cameron, 1998) highlighted the externalities arising from innovations:
ƒ technology spillover effect, which reduces the cost of competitors, imperfect patent, movement of
skilled labor force to other companies;
ƒ the failure of companies to acquire all the social gains generated by innovations;
ƒ the replacement effect generated by innovations, in that new ideas will make the current
production technologies to become old.

The objective of the current paper is to examine the connection between economic growth and innovation for
some Central and Eastern European countries, namely: Poland, Czech Republic and Hungary. In order to quantify
the innovation, we have used the following variables: the evolution of R&D expenditures, number of trademarks,
number of patents. The paper is structured as follows: Section 2 reviews the financial literature, Section 3 presents
the data and the methodology, Section 4 analyzes the empirical results obtained and Section 5, concludes.

2. Literature Review

The connection between economic growth and innovation presents a great interest for researchers, as a result, the
concept is a well debated topic in the financial literature. This concept has its origin in the research realized by
(Solow, 1956), who pointed out the existence of a long term relationship between economic growth and innovation.
(Schumpeter, 1912, 1939) makes the distinction between economic growth and economic development. Thus, from
his point of view, the economic growth represents a slowly and progressive change of the economic system,
resulting from exogenous factors of the economic system and on the other hand, the economic development which is
generated by discontinuous internal changes caused by economic innovations, coming from the economic system.
The economic growth model developed by Schumpeter argues competition through innovation and the importance
of education in ensuring economic growth, these assumptions are supported also by empirical studies (Aghion et al.,
2005, 2009).
 Andreea Maria Pece et al. / Procedia Economics and Finance 26 (2015) 461 – 467 463

Furthermore, on the one hand, the financial literature (Wong, P.K., et al., 2005) refers to theoretical models
(Solow, 1956; Romer, 1986), which examines the connection between technological innovation and economic
growth. In the neoclassical model of (Solow, 1956), the economic growth is sustained by capital and labor force.
(Nadiri, 1993) has used a Cobb-Douglas function to highlight the link between innovation, output and productivity
growth. In this model, the economic growth is influenced by the growth rate of innovations, which are determined
exogenously. On the other hand, in the endogenous growth model developed by (Romer, 1986) the economic
growth is endogenously determined and is influenced by agents’ decisions to maximize profits, taking into
consideration aspects related to entrepreneurship by modeling the innovation process based on microeconomic data.
The empirical studies from the financial literature that pointed out the relationship between economic growth,
innovation, the research and development expenditures, make references both to developed and emerging markets,
using both macroeconomic and microeconomic data.
Ulku, H. (2004) has investigate the relationship between economic growth, research and development
expenditures, innovation for 20 OECD countries and 10 countries that are not OECD members, by applying the
model that was proposed by (Romer, 1986), by using a panel model, built on GMM methodology. The study was
conducted for the period 1981-1997 and tested the following assumptions: the research and development
expenditures increase the level of innovations and the latter lead to permanent growth of GDP/capita. The results
obtained provide evidence that innovations have a positive impact on GDP/capita, both for developed and emerging
economies. Another conclusion was that only developed OECD countries can increase the level of innovation based
on research and development expenditures, and furthermore, there is an interdependence between OECD countries,
since some countries ensure their innovation by using the know-how of other OECD countries. Furthermore, the
innovation is created endogenous in an economy and support the economic growth, but the assumption of the
existence of constant yields of innovation is not sustained, indicating that innovation leads to an increase in the
output for a short period of time, and cannot explain the perpetual economic growth.
Another research that investigates the connection between economic growth and innovation was developed by
(Pessoa, 2007), who has focused on the role of the research and development expenditures in the relationship
between innovation and economic growth in the case of Sweden and Ireland. The findings suggest that there is not a
strong link between research and development expenditures and economic growth, and the innovation policy must
take into consideration the complexity of economic growth process, by including other indicators, in addition to
research and development expenditures.
Another study realized by (Westmore, 2013) was aimed to investigate the determinants of R&D expenditures and
patents and the link between innovation and economic growth, by using a panel model, based on a sample of 19
OECD countries, during the period 1980-2008. The empirical results provide evidence that tax incentives and public
support for research and development and for patent rights encourage innovation activities in private sector.
Moreover, the results have not identified a direct effect of these policies on aggregate productivity growth. Also, the
policies that support competition are important for the transmission of knowledge from both sources, both domestic
and external.
Regarding the Central and Eastern European countries, (Petrariu et al, 2013) have examined the connection
between economic growth and innovation, by using a panel model. Their findings indicated that the level of
development of an economy, reflected in the allocation of resources for research and development is the main
support for innovation. The results pointed out that Central and Eastern European economies recorded fast economic
growth, but it was not based on the innovation process. Compared with the growth rate, innovation is seen as a
catch-up process.
Furthermore, we focus our attention on the studies that were performed by using microeconomic data. (Norris, et
al., 2010) have analyzed the innovation process for manufacturing industry from both developed and emerging
countries, during the period 2005-2007. The authors have concluded that innovation has a major impact on financial
performance of the companies. Furthermore, the authors have analyzed the connections between innovation,
performance and capital markets and concluded that the positive effect of innovation on companies’ performance is
mediated through capital markets. The positive effect of innovation on productivity is significantly higher in
countries with developed capital markets. Further, their findings showed that financial development may influence
economic growth through the facility provided by technological innovations that will boost productivity. Another
research was performed by (Czarnitzki and Toivanen, 2013) who have analyzed the link between economic growth
464 Andreea Maria Pece et al. / Procedia Economics and Finance 26 (2015) 461 – 467

and research and development investments in the case of Germany and Belgium. The results indicated that public
investments in research and development stimulate private investments and the effects vary based on experience in
corporate innovation activity and the level of labor productivity from the past. Another research, using micro-level
data for nineteen US manufacturing industries over the period 1975 to 2000, was conducted by (Minniti, Venturini,
2013). As indicator for innovation has been used the number of patents granted annually for each industry analyzed.
The results obtained showed that the impact of tax incentives for research and development activity is lengthy.
Furthermore, the subsidies awarded to for research activities increase the research and development efforts and the
economic growth rate, but only for short term. For a long time horizon, this research and development policy does
not have a significant effect, in the best case it is noted that subsidies for research and development activities have a
temporary effects on growth. Studies from the financial literature pointed out that research and development policy
supported more endogenous growth theory than semi-endogenous growth theory.
Finally, we review the innovation process from stock markets, which is achieved through the venture capital
investments. Empirical evidences from financial literature (OECD, 2006) indicated that venture capital ensure the
progress only in an economy with a high level of innovation and appropriate legal regulations. In developed
markets, both in the US and Europe, venture capital investments are performed by institutional investors and banks.
The development of capital markets and their role in achieving public offers represent premises for venture capital
investments. Furthermore, the achievement of such venture capital in newly created companies, but with a high
growth potential, assume the existence of specialized capital markets in the listing of companies with a high growth
potential.

3. Data and methodology

The main objective of this paper is to quantify the connection between economic growth, innovations,
investments and human capital for the major economies from Central and Eastern Europe, respectively: Poland,
Czech Republic and Hungary. The data source is Eurostat, the research was conducted at an individual level, by
taking into consideration the time period 2000-2013. The main variable used to quantify innovation was the level of
research and development expenditures, as a major factor of progress in an economy.
The variables used in the current study , can be observed in the below table:

Table 1 Variables used to quantify the connection between economic growth and innovation

Variable Explanation
GDP Logarithmic value of GDP
Number of patents Annual number of registered patents
Number of trademarks Annual number of registered trademarks
Research and development expenditures EUR/capita Research and development expenditures EUR/capita
Research and development expenditures The share of research and development expenditures in total
expenditures
FDI Logarithmic value of the foreign direct investment stock
The share of population with tertiary education in the The share of population with tertiary education in the total active
total active population population
Unemployment rate Unemployment rate
Exports Logarithmic value of exports
Source: Authors’ calculations

The regressions used to estimate the connection between economic growth, innovation, foreign direct investments,
education, labour force and the level of exports can be observed below:

 Andreea Maria Pece et al. / Procedia Economics and Finance 26 (2015) 461 – 467 465

‫ ܲܦܩ‬ൌ ܿ ൅ ߙ ൈ ܲܽ‫ ݏݐ݊݁ݐ‬൅ ߚ ൈ ܶ‫ ݏ݇ݎܽ݉݁݀ܽݎ‬൅ ߛ ൈ ܴ݁‫ ݏ݁ݎݑݐ݅݀݊݁݌ݔ݁ݐ݊݁݉݌݋݈݁ݒ݄݁݀݀݊ܽܿݎܽ݁ݏ‬൅ ߝ௧ ሺͳሻ

‫ ܲܦܩ‬ൌ ܿ ൅ ߙ ൈ ‫ ܫܦܨ‬൅ ߝ௧ ሺʹሻ

‫ܴܷܧ‬
‫ ܲܦܩ‬ൌ ܿ ൅ ߙ ൈ ܴ݁‫ݏ݁ݎݑݐ݅݀݊݁݌ݔ݁ݐ݊݁݉݌݋݈݁ݒ݄݁݀݀݊ܽܿݎܽ݁ݏ‬ ൅ ߝ௧ ሺ͵ሻ
ܿܽ‫ܽݐ݅݌‬
ܲ‫݊݋݅ݐܽܿݑ݀݁ݕݎܽ݅ݐݎ݁ݐ݄ݐ݅ݓ݊݋݅ݐ݈ܽݑ݌݋‬
‫ ܲܦܩ‬ൌ ܿ ൅ ߙ ൈ ൅ ߝ௧ ሺͶሻ
ܶ‫݊݋݅ݐ݈ܽݑ݌݋݌݁ݒ݅ݐ݈ܿܽܽݐ݋‬
‫ ܲܦܩ‬ൌ ܿ ൅ ߙ ൈ ܷ݊݁݉‫ ݁ݐܽݎݐ݊݁݉ݕ݋݈݌‬൅ ߚ ൈ ‫ ݏݐݎ݋݌ݔܧ‬൅ ߝ௧ ሺͷሻ

4. Empirical results

The empirical results obtained from testing the connection between economic growth and its main determinants,
respectively: innovation, foreign direct investment, human capital and exports for the Central and Eastern European
economies are presented in the tables below.

Table 2 Regression results for the connection between economic growth and its determinants in the case of Poland

Variable Model 1 Model 2 Model 3 Model 4 Model 5

ܿ 12.659 6.839 12.058 11.350 7.869
(45.635)*** (12.429)*** (96.695)*** (100.96)*** (6.277)***
ܰ‫ݏݐ݊݁ݐܽ݌݂݋ݎܾ݁݉ݑ‬ 0.001
(2.230)***
ܰ‫ݏ݇ݎܽ݉݁݀ܽݎݐ݂݋ݎܾ݁݉ݑ‬ 0.0001
(0.111)
ܴƬ‫ݏ݁ݎݑݐ݅݀݊݁݌ݔܧܦ‬ 0.683
(1.914)*
‫ܫܦܨ‬ 0.495
(10.296)***
ܴƬ‫ܴܷܧݏ݁ݎݑݐ݅݀݊݁݌ݔܧܦ‬Ȁܿܽ‫ܽݐ݅݌‬ 0.026
(3.925)***
ܲ‫݌݋‬Ǥ ‫݊݋݅ݐܽܿݑ݀݁ݕݎܽ݅ݐݎ݁ݐ݄ݐ݅ݓ‬ 5.124
ൗ‫݌݋݌݁ݒ݅ݐܿܣ‬Ǥ
(10.496)***
ܷ݊݁݉‫݁ݐܽݎݐ݊݁݉ݕ݋݈݌‬ -0.015
(-1.412)
‫ݏݐݎ݋݌ݔܧ‬ 0.427
(4.279)***
‫݆݀ܣ‬Ǥ ܴ ଶ 0.897 0.889 0.562 0.893 0.888

Source: Authors’ calculations, ***,** and * represent statistical significance at the 1%, 5% and 10% levels, respectively.

The results pointed out that the economic growth is influenced by the following factors: innovations (quantified
by number of patents and the level of research and development expenditures), foreign direct investments stock,
education and exports. The education has a significant impact on economic growth.

Table 3 Regression results for the connection between economic growth and its determinants in the case of Czech Republic

Variable Model 1 Model 2 Model 3 Model 4 Model 5

ܿ 10.718 4.336 10.609 10.158 4.018
(26.143)*** (12.459)*** (57.875)*** (41.243)*** (4.965)***
ܰ‫ݏݐ݊݁ݐܽ݌݂݋ݎܾ݁݉ݑ‬ 0.005
(3.981)***
ܰ‫ݏ݇ݎܽ݉݁݀ܽݎݐ݂݋ݎܾ݁݉ݑ‬ 0.0002
(0.777)
466 Andreea Maria Pece et al. / Procedia Economics and Finance 26 (2015) 461 – 467

ܴƬ‫ݏ݁ݎݑݐ݅݀݊݁݌ݔܧܦ‬ 0.064
(0.201)
‫ܫܦܨ‬ 0.660
(20.876)***
ܴƬ‫ܴܷܧݏ݁ݎݑݐ݅݀݊݁݌ݔܧܦ‬Ȁܿܽ‫ܽݐ݅݌‬ 0.010
(5.579)***
ܲ‫݌݋‬Ǥ ‫݊݋݅ݐܽܿݑ݀݁ݕݎܽ݅ݐݎ݁ݐ݄ݐ݅ݓ‬ 8.599
ൗ‫݌݋݌݁ݒ݅ݐܿܣ‬Ǥ
(5.942)***
ܷ݊݁݉‫݁ݐܽݎݐ݊݁݉ݕ݋݈݌‬ -0.006
(-0.249)
‫ݏݐݎ݋݌ݔܧ‬ 0.683
(11.134)***
‫݆݀ܣ‬Ǥ ܴ ଶ 0.929 0.971 0.698 0.725 0.942

Source: Authors’ calculations, ***,** and * represent statistical significance at the 1%, 5% and 10% levels, respectively.

The results highlighted a positive impact of innovation on the evolution of economic growth. Furthermore, the
findings support a strong and positive relationship between the quality of human capital and economic growth.

Table 4 Regression results for the connection between economic growth and its determinants in the case of Hungary

Variable Model 1 Model 2 Model 3 Model 4 Model 5

ܿ 10.325 4.020 10.888 9.722 3.142
(24.204)*** (4.590)*** (72.720)*** (29.323)*** (2.139)*
ܰ‫ݏݐ݊݁ݐܽ݌݂݋ݎܾ݁݉ݑ‬ 0.006
(2.056)*
ܰ‫ݏ݇ݎܽ݉݁݀ܽݎݐ݂݋ݎܾ݁݉ݑ‬ 0.0002
(0.306)
ܴƬ‫ݏ݁ݎݑݐ݅݀݊݁݌ݔܧܦ‬ 0.025
(0.092)
‫ܫܦܨ‬ 0.669
(8.316)***
ܴƬ‫ܴܷܧݏ݁ݎݑݐ݅݀݊݁݌ݔܧܦ‬Ȁܿܽ‫ܽݐ݅݌‬ 0.008
(2.942)**
ܲ‫݌݋‬Ǥ ‫݊݋݅ݐܽܿݑ݀݁ݕݎܽ݅ݐݎ݁ݐ݄ݐ݅ݓ‬ 6.595
ൗ‫݌݋݌݁ݒ݅ݐܿܣ‬Ǥ
(4.795)***
ܷ݊݁݉‫݁ݐܽݎݐ݊݁݉ݕ݋݈݌‬ -0.021
(-0.868)
‫ݏݐݎ݋݌ݔܧ‬ 0.763
(5.111)***
‫݆݀ܣ‬Ǥ ܴ ଶ 0.715 0.839 0.371 0.628 0.832

Source: Authors’ calculations, ***,** and * represent statistical significance at the 1%, 5% and 10% levels, respectively.

Similar to the case of Czech Republic, the results obtained provide evidence of a positive link between economic
growth and innovations. Furthermore, the results indicated a positive relationship between foreign direct
investments stocks, research and development expenditure expressed in EUR/capita and exports. We note that the
most important factor that influences economic growth is the quality of human capital.

5. Conclusions

The purpose of this paper was to examine the existence of the connection between economic growth and
innovation for the economies from Central and Eastern Europe, namely: Poland, Czech Republic and Hungary. The
economic development of an economy is influenced by the innovation degree, the allocation of resources for
research and development activities, the quality of human capital and by foreign direct investments stock.
We have analyzed the relationship between economic growth and its main determinants by using a single country
analysis, based on multiple regressions. The results have provided evidence of a positive connection between
economic growth and innovations. Furthermore, we have concluded that foreign direct investments have a major
 Andreea Maria Pece et al. / Procedia Economics and Finance 26 (2015) 461 – 467 467

impact on economic growth through knowledge transfer and improvement of technological processes. Moreover, the
results highlighted that education and human capital have a positive and strong impact on economic growth. We
finalize by mention that the results obtained sustain the endogenous growth model, because the output of the model
confirms a positive connection between economic growth and innovation.

Acknowledgement

This paper has been financially supported within the project entitled „SOCERT. Knowledge society,
dynamism through research”, contract number POSDRU/159/1.5/S/132406. This project is co-financed by
European Social Fund through Sectoral Operational Programme for Human Resources Development 2007-2013.
Investing in people!”

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