Global Innovation and uncertainty dynamics: Implications for bank performance

This paper examines the impact of the Global Innovation Index (GII) and uncertainty and of their interaction on bank performance in the Middle East and North Africa (MENA) from 2011 to 2022. Our findings indicate that innovation is associated with nuanced relationships with bank performance indicators, and innovation potentially increases (decreases) performance via the return on asssets (ROA), return on equity (ROE), Tobin’s Q, and stock market returns. Our analysis demonstrates that uncertainty plays a complex role in influencing bank performance. It has a negative impact on economic policy uncertainty (EPU) and the World Uncertainty Index (WUI), but a positive impact on geopolitical risk (GPR). However, we observe an interaction effect, which suggests that uncertainty has the potential to either diminish or amplify the impact of innovation on bank performance metrics. Specifically, the relationship between innovation and bank performance, whether negative or positive, is influenced by the presence of uncertainty. This nuanced interaction highlights the dynamic nature of the relationship between innovation and bank performance, as it is contingent on the prevailing level of uncertainty. Therefore, fostering an environment in the banking sector that is conducive to growth and stability is crucial for enhancing innovation, minimizing uncertainty, and improving bank performance.