Institutional dynamics and corporate innovation: A pathway to sustainable development

Abstract Modern corporate success is primarily reliant on a perfect balance of institutional effectiveness, innovation, and sustainability. Therefore, the primary goal of this research is to evaluate the impact of institutional frameworks on corporate innovation in developing countries. To achieve the said objective, we use firm and country data from multiple sources, and the final dataset consists of 24,166 observations from 41 developing countries during 2014–2018. For the analysis, we employ ordered probit and instrumental variable ordered probit regression models. According to the results, the success of corporate innovation in developing countries hinges on the strength of legal, financial, administrative, political, and religious institutions. Moreover, such associations stand out more clearly in nations with strong and stable institutional frameworks. The regression results show that innovative enterprises are more prevalent in strong institutional environments compared to those in poor institutional environments. These results also indicate that a strong rule of law, protection of property rights, easy access to financing, developed financial markets, an ethical environment, control of corruption, a stable political system, a democratic government, religious diversity, and freedom all contribute to corporate innovation. Moreover, institutional efficiency and corporate viability fuel the engine of corporate innovation, encouraging enterprises to create game‐changing products and services. These results contribute to the field of innovation management by considering institutional settings for sustainable development. The results have practical applications for building robust institutions and a creative culture.