Does Digitalization Moderate the Link Between Innovation and Economic Growth? A Two-Step Difference GMM Analysis of Developed and Developing Countries

The purpose of this paper is to investigate how innovation is related to economic growth, and whether digitalization moderates this relationship. We examine this relationship using a two-step difference generalized method of moments (GMM) in a sample of 300 country-year observations from developed and developing economies from 2014 to 2019. The findings show that innovation is positively and significantly related to economic growth, but that this effect is stronger in high-income countries than in upper middle-income countries. The digital infrastructure and the digital market have positively and significantly moderated the relationship between innovation and economic growth for the high-income countries, but this effect is minimal for upper middle-income countries. The policy implications of this study suggest that policymakers in upper middle-income countries should invest more in the digital economy to increase economic competitiveness and growth. Furthermore, the findings suggest that policymakers and governments should improve regulations and policies to ensure that the benefits of digitalization are shared equally.