Institutions, Innovation and Development: A Critical Review and Political Economy Analysis of Late-Industrialising Countries

Abstract

This paper critically reviews dominant approaches to the economics of innovation in contemporary developing contexts, namely new institutional economics (NIE) and national innovation systems (NIS). Both traditions explain capitalist development in late-industrialising countries using underlying assumptions and logics of advanced industrialised societies with respect to transaction costs, path dependence, the nature and structure of institutions, and economic history. At their core, both approaches proffer ideal-type institutions as an essentialist route to technological and productivity improvement akin to a staged theory of development. The NIS framework became dominant in scholarly and policy circles but has neglected the implication that the concept was developed at the Organisation of Economic Cooperation and Development during the emergence of first-stage neoliberalism. NIE has become an essential analytical toolkit of mainstream economists and international organisations promoting competitiveness in developing countries. Analyses of the economic performance of developing countries have thus diverged from structural perspectives on development, attributing instead lacklustre technological deepening to certain national features, institutional gaps, or linkage failures. The paper exposes narrow assumptions and illustrates that the 'transition costs' that arise from new socio-institutional configurations during the development process induces firms and other actors to compete for rents. Conversely, power asymmetries, historical factors and constraining forces in the global capitalist system generate unevenness in productive forces and technological progress. The paper proposes a political economy of technological change that considers the structural, technical and socio-political interdependencies and tensions that underpin transformative policies to improve technological, coordination and collective capabilities in the economic system.

Keywords: new institutional economics; national innovation systems; industrial policy; broad-based industrialisation; political settlements

JEL Classification: O3; O43; O14