The Impact of Institutions on Innovation

We study the impact of inclusive institutions on innovation using novel, hand-collected, county-level data for Imperial Germany. We use the timing and geography of the French occupation of different German regions after the French Revolution of 1789 as an instrument for institutional quality. We find that the number of patents per capita was more than twice as high in counties with the longest occupation as in unoccupied counties. The impact of institutions on innovation is stronger in counties with a highly developed financial sector, suggesting that financial development and inclusive institutions are important complements for the production of innovation. We show that the increase in patenting activity due to better institutions translates into higher economic growth. Our findings highlight inclusive institutions as a first order determinant of innovation