Can economic structural change and transition explain cross-country differences in innovative activity?

Motivated by the combination of Schumpeter's view on innovation and the Kuznets’ retardation theory concerning structural change introduced by Quatraro (2009), this paper attempts to explain the impact of structural change on innovation. Using a global sample from 1970 to 2012 for a panel of 75 developed and developing countries with treatments for endogeneity by using physical instruments (2SLS) and the system GMM estimation technique, we find a positive significant effect of service sector share and a significant negative impact of the agriculture sector share on innovation. We also find these effects to differ in different economies characterized by income and structural transition phases. In particular, shifting away from the agriculture sector is found to be important for more advanced economies, while the industry sector is important for innovation among upper middle income economies. The low income economies generally benefit much less from their structural change efforts than lower middle, upper middle and high income economies do.