Institutional Capacity and the Productivity of R&D: Evidence from Patent Outcomes Across Countries

Innovation is a key driver of economic growth. However, countries with similar research and development spending show very different patent outputs. This raises questions about what makes innovation efficient. This study examines whether government effectiveness affects the relationship between R&D spending and patent production in different countries. Using panel data from 111 countries from 2000 to 2020, we use two-way fixed effects models and System Generalized Method of Moments estimation to address potential issues of innovation persistence and reverse causality. The main variable we are looking at is the natural logarithm of one plus resident patent applications. The main independent variables are R&D expenditure as a percentage of GDP and the government effectiveness index, both measured two years earlier. The results show that R&D investment significantly increases patent activity. Specifically, a one percentage point increase in R&D intensity is associated with about a 39% increase in patent output. Conversely, the relationship between research and development (R&D) and governmental efficacy is both negative and statistically significant, suggesting that the incremental impact of R&D on patent output decreases as the quality of governance improves. This unexpected result probably reflects technological catch-up processes; nations with less robust institutions tend to experience swift patent expansion during periods of capacity building, whereas advanced economies characterized by strong governance increasingly prioritize quality over sheer volume. Dynamic models demonstrate considerable persistence in patenting behavior, as evidenced by a lagged dependent variable coefficient of 0.623, thereby validating path-dependent innovation processes. These observations imply that effective innovation policy requires aligning research investments with institutional capacities and the prevailing developmental context, rather than prioritizing either independently. This research provides empirical support for the influence of governance capacity on national innovation systems.