Unlocking innovation: Governance and firm-level innovation in selected Asian countries

This study examines the association between governance and firm-level innovation in Indonesia and Philippines, offering insights for escaping the Middle-Income Trap (MIT). Using the 2023 World Bank Enterprise Surveys (WBES), we estimate cross-sectional logit models with stratified analyses by sector and firm size. Our findings reveal that while burdensome tax administration and informal payments are negatively associated with innovation in Indonesia, these payments paradoxically show a positive association in the Philippines, reflecting firms’ strategic adaptation to weak formal institutions. Across both countries, worker training emerges as the most consistent innovation driver, regardless of sector or firm size. By providing the first 2023 WBES-based comparison of how formal and informal governance obstacles shape firm-level innovation in two ASEAN economies, this study identifies critical pathways for governance reform and innovation-led growth.