Do indigenous or foreign innovation efforts matter for the middle-income economies transition to the higher-income rank? An empirical evidence

This study analyzes whether indigenous or foreign innovation efforts are more important for the transition of middle-income economies to the higher-income rank. Data on 61 countries in both lower middle-income and upper middle-income categories between 1980 and 2018 are used. Discrete-time hazard models are employed. The unobserved heterogeneity is controlled in the estimations to improve the continuous-time hazard model applied in existing studies on innovation at the national level. Results show that foreign sources of innovation measured by nonresident patents and international R&D spillovers through the FDI channel are more important for the lower middle-income group to move up the income ladder. For the upper middle-income group, domestic source of innovation measured by R&D capital stock is the most important, followed by foreign innovation diffused through the import channel. Institutional quality supports the upper middle-income economies to obtain the high-income rank.