The Role of Research and Development in Fostering Innovation and Economic Growth in Developing Economies

This study investigates the mechanisms through which research and development (R&D) influences economic growth in developing countries. Using nine indicators drawn from three main categories in the World Economic Forum database, the analysis covers 32 lower-middle-income countries for the year 2019. Grounded in an R&D ecosystem framework, the study incorporates key components institutions, human capital, capital markets, R&D, and innovation that jointly shape economic development. Structural equation modeling (SEM) is employed to construct and test a path model capturing the interrelationships among these components. The results show that R&D activities and capital market institutions significantly enhance innovation performance; however, neither R&D nor innovation exhibits a direct or significant effect on economic growth. Consistent with a Schumpeterian institutional perspective, the findings suggest that innovation-driven growth mechanisms may be constrained in middle-income economies. The absence of a significant link between innovation and growth implies that, although R&D and capital markets foster entrepreneurial innovation, their contribution is insufficient to translate into sustained economic expansion. Overall, the results provide additional empirical support for the existence of a middle-income trap in developing economies.