The irrational process of private market innovation | A MSc thesis by M. A. Grootveldt
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Abstract: Private market innovative efforts, through the channels of firm R&D and entrepreneurship, play a major role in technological advancement and the endurance of comparative advantages of an economy. The success rate and efficiency with which such efforts can be executed is likely correlated with the economy’s position along the business cycle. Economic confidence sentiments(‘Animal spirits’) have been shown to affect the strength of the business cycle movements. This study aims to examine whether such sentiments affect private market innovative efforts both indirectly, through this effect on the business cycle, as well as in a direct way controlling for the business cycle effects. Quantitative analysis on a dynamic panel dataset of 12 EU member states using both a Fixed-effect model with Driscoll Kraay standard errors, as well as an Arellano-Bond GMM model is performed. The individual results for entrepreneurship and R&D are somewhat mixed, however when combined, signs of a significant and sizable effect seem to emerge. Such findings seem to be a novelty within the literature and could help improve the innovation-targeting policy efforts of governmental institutions as well as our broader understanding of the interrelatedness of economic and societal phenomena.