“Governance in action: transforming financial landscape through innovation among developing countries”

Using annual data from 78 developing countries between 2009–2023, we examine the effects of innovation on financial development, considering the moderating effect of corruption control and the channel effect of government effectiveness. Employing the System Dynamic Generalized Method of Moments (GMM) for long-run cointegrated impact and Quantile regression for robustness, our findings reveal that innovation positively influences financial development. However, corruption control negatively moderates this relationship, and government effectiveness, while positively affected by innovation, negatively mediates financial development. The analysis also highlights heterogeneity between lower- and upper-middle-income countries. Innovation has a stronger positive effect on financial development in upper-middle-income countries, whereas the negative impacts of corruption control and government effectiveness are more pronounced in lower-middle-income countries. These results underscore the importance of effective governance in maximizing innovation’s benefits. Policymakers in developing countries should prioritize improving governance to create an environment conducive to innovation and sustainable financial development.