Macroeconomic Volatility, Institutional Instability and the Incentive to Innovate

This study investigates the channels through which macroeconomic and institutional instability hinders innovative investment undertakings financed by the domestic private sector. The analysis is based on a sample of 44 countries and considers various instability dimensions. The results suggest a negative impact of real, monetary and political instability on the aggregate level of R&D financed by the business sector. Thus, highlighting the importance of stable macro‐institutional environments in preventing avoidance or abandonment of private innovation undertakings.