Does innovative capacity affect the deindustrialization process? A panel data analysis

Abstract The objective of the article is to analyze the relation between the innovative capacity and the deindustrialization process. We use data from 80 countries from 1995 to 2016. In addition, we use a new dependent variable to measure the deindustrialization process, related to the quality of exports and industrial competitiveness. The results suggest that there is a direct relationship between the innovative capacity and the share of industry in GDP, the relative share of industrial employment, and the quality of industrial exports. In the estimates considering the income level, we found that the impact of the innovative process on the dependent variables decreases as the income level rises. Although the effects of innovative capacity on industrial muscle remain positive. The results suggest that low innovative capacity may affect the deindustrialization process of a given country. The estimated result for the dependent variable related to the quality of exports presented the same behavior as the variables reported in the literature. As a public policy implication, the results suggest that policymakers should adopt incentive policies to build innovative capacity according to their income level, so that industrial development can provide special and favorable conditions for sustained growth.