Do domestic innovations promote trade openness? Empirical evidence from emerging economies

Innovation activities have gained much importance due to their pivotal role in achieving economic growth - directly by increasing productivity and - indirectly by increasing the degree of trade openness. This study aims to focus on the indirect channel, a rarely explored area of research, especially in the context of emerging economies.

To achieve the aim of the study, four proxies of innovation (resident patent applications, nonresident patent applications, scientific and technical journal articles, and research and development expenditures) are used to establish a robust relationship between innovation activities and trade openness in BRICS economies. Panel data from 2000 to 2020 is obtained from World Development Indicators and Penn World Tables. Econometric techniques of panel data such as fixed effect and generalized least squares are employed to extract results from the specified models.

The findings of the study revealed that three proxies of innovation (i.e., resident patent applications, nonresident patent applications, scientific and technical journal articles) have a significant positive role in improving trade openness in the BRICS economies. However, the fourth proxy of innovation i.e., research and development expenditures had a negative impact on the degree of trade openness. Besides, innovation activities such as inflation rate and foreign direct investment have also influenced the degree of trade openness positively and significantly. Conversely, GDP per capita had a negative relationship with trade openness. Moreover, domestic investments showed a positive influence on the degree of trade openness while employment had a negative and insignificant influence on the degree of trade openness. Finally, the causality analysis revealed a one-way relationship running from innovations to trade openness.

In view of the results obtained, the policymakers of the BRICS economies might focus on encouraging innovation activities to enhance the degree of trade openness. Increased trade openness will consequently contribute to economic growth enormously and thus the attainment of sustainable development goals (SDG-8). Policymakers are also suggested to encourage FDI inflows and further ensure a moderate inflation rate to improve the degree of trade openness and hence accelerate economic growth.

This study focused on examining the nexus between innovation activities and trade openness in emerging economies, which is indeed an interesting but rarely explored area of research. The findings of the study might help the policymakers of the BRICS economies in formulating policies regarding trade openness and innovation activities.