Connecting the dots between democracy and innovation: The role of pro-market institutions and information processing

Prior studies examining the democracy-innovation relationship have reported mixed results. To resolve this tension, our framework grounded in information processing and institutional theory proposes two mechanisms through which democracy influences innovation-pro-market institutions and information processing. Our analysis reveals that democracy indirectly affects innovation primarily through information processing rather than pro-market institutions. While gradually or increasingly democratizing states tend to focus on adopting promarket systems without considering information freedom (e.g., lifting censorship), our results underscore the importance of information processing for strengthening the democracy-innovation relationship. Our study extends the literature on national innovation rates by shedding light on the information processing implications of democratic institutions.