Public sector innovation in local government and its impact on development outcomes: Empirical evidence in Indonesia

This study investigates a scarce case of the effect of innovation by local government on development performance using district level data in Indonesia. We use the accumulation number of innovations (the quantity side) produced by each district during 2015-2022 period according to the top 99 nominations listed by the Ministry of Administrative and Bureacratic Reform, the Republic of Indonesia. We, alternatively, also use measure of innovation based on "the quality side" by applying regional innovation index. The descriptive results, not surprisingly, show that districts situated in Java and Sumatra Islands have had greater productivity in either collected innovations nomination number or index of regional innovation compared to those situated in Kalimantan and East Region in Indonesia. In this paper, we employ cross-sectional ordinary least squares (OLS) and two-stage least squares (2 S LS) approaches and find positive and significant impact of innovation on each development proxy used (growth in real per capita local GDP and the average of Inclusive Development Economic Index (IDEI)). Implementing the proportion of locals attaining higher education and geographical distance as instruments, our 2SLS estimator also confirms that public-sector innovations play as a positive driving factor on development outcomes. This study offers its novelty by providing empirical evidence of the effect of innovation within government organization on development for Indonesia's case where none has been found before.