"Peace, Easy Taxes, and a Tolerable Administration of Justice": Institutional Influences on SME Innovation in Developing Countries

Abstract

This thesis explores the effects of "peace, easy taxes, and a tolerable administration of justice" on innovation. These three factors are necessary to protect the property rights in every country, and protecting these rights is one of the fundamental chores for the institutions. However, in developing economies, lack of these institutions or non-functioning institutions can lead to corruption, crime, and tax corruption. The main objective of this thesis is how corruption, crime, and tax corruption are affecting small and medium-sized firms' innovation in developing economies. In order to explore this relationship and analyze the different aspects of it, quantitative econometric analysis is used. The empirical analysis is based on the data from the Enterprise Surveys by the World Bank group, which contains firm-level data regarding business environments from 139 countries. Furthermore, this thesis reports the effect of a variety of factors which influence innovation in developing countries. The results show that corruption and crime in emerging economies are facilitating innovation, while tax corruption is not significantly affecting innovation in small and medium-sized firms.