Spillover effects of innovation and entrepreneurial activity on income inequality in developing countries: A spatial panel approach

This paper investigated the spatial effects of innovation and entrepreneurial activity on income inequality of 64 middle-and-low-income countries and 25 high-income countries from 2000 to 2016. Spatial panel methods are used to address the issues of spatial dependency and spillover effects among neighboring countries. We find the following: (1) Evidence of spatial correlations in income inequality across countries. (2) A positive direct effect between innovation and inequality but a positive feedback from innovation. (3) The relationship between entrepreneurial activity and inequality is mixed. The relationship is positive if entrepreneurial activity is proxied by self-employment but negative if measured by entry rate. Both produced a negative feedback effect, which suggests that entrepreneurial activity is linked to rising inequality in developing countries. (4) A positive spillover effect from innovation and negative spillover effect from self-employment. We also investigated whether the linkages between innovation-inequality and entrepreneurial activity-inequality are subject to a country-level institutional quality. The findings suggest that the interaction terms have negative effects on income inequality. For policy implications, innovation sharing should be encouraged to reduce monopoly power that increases the tendency for wealth accumulation. Another possible solution to increase entrepreneurial activities while reducing inequality is for governments in developing countries to offer various schemes targeted at the poor, especially finance.