Paper short abstract:

There is little evidence in the literature on the three-way relations between innovation, structural change and inclusion. With a structural model for a short panel of developing countries over 13 years, we advance a first exercise in this direction.

Paper long abstract:

Structural change can be both, a cause or a consequence of innovation, while structural change and innovations are usually accompanied by short-term outcomes of social inclusion or exclusion. Inclusion may in turn have an impact on further innovations. Yet, the authors find little evidence in the literature on the three way relations between innovation, structural change and inclusion. This paper advances a first exercise in this direction. Given the multidimensionality of each (innovation, structural change, and inclusion), the authors extract the underlying unobserved common factor structure from various well-known macro indicators. With a structural vector auto regression model for a short panel of developing countries over 13 years, the authors find the following main results. First, the authors confirm the virtuous cycle between innovation and structural change, aligning with existing literature. Second, the strongest result is the positive effect of inclusion on both innovation and structural change, that suggests policy to improve inclusion beyond poverty and inequality. Third, on decomposing the innovation index (formal, firm-level and ICT), the authors find each related differently to both structural change and inclusion, that suggests specific policy roles in their influence on inclusion and structural change.