On the nexus of innovation, trade openness, financial development and economic growth in European countries: New perspective from a GMM panel VAR approach

This paper examines the four-way linkages between innovation, trade openness, financial development and economic growth using panel-VAR approach for 11 European countries over the period 2001-2016. Most importantly, the findings revealed that there is a unidirectional relationship between economic growth and financial development, between trade and economic growth and between innovation and financial development. The findings also revealed a negative relationship between innovation and economic growth and between trade and economic growth. The paper concludes that further regulation of financial systems and the quality of funding are important ingredients to foster economic development. The paper also concludes that country-specific characteristics can play an important role in fostering innovation and productivity. Furthermore, policymakers should improve institutional quality and improve the regulatory environment in order to benefit more from trade openness. Also, policy makers need to use innovation incentives for local companies in order to counteract the negative effects induced by market opening.