Connecting the dots between democracy and innovation: The role of pro-market institutions and information processing

Abstract

Prior studies examining the democracy-innovation relationship have reported mixed results. To resolve this tension, our framework grounded in information processing and institutional theory proposes two mechanisms through which democracy influences innovation—pro-market institutions and information processing. Our analysis reveals that democracy indirectly affects innovation primarily through information processing rather than pro-market institutions. While gradually or increasingly democratizing states tend to focus on adopting pro-market systems without considering information freedom (e.g., lifting censorship), our results underscore the importance of information processing for strengthening the democracy-innovation relationship. Our study extends the literature on national innovation rates by shedding light on the information processing implications of democratic institutions.