The Effect of Government Policy Consistency on Firm Innovation

This paper investigates the impact of government policy consistency on firm innovation. We utilize the information about the firm’s self-evaluation of the government policy consistency in the World Bank Enterprise Surveys only available from 2002 to 2006. Controlling for endogeneity problem, our regression results show that the effects of government policy consistency on innovation decisions are heterogeneous in terms of firms’ size and location classified by the income level and region. These findings indicate that in countries with a high prevalence of small and medium-sized enterprises (SMEs) and lower income levels, a flexible policy mix that maintains consistency while promoting adaptability is more effective in fostering firm innovation. This is particularly crucial for supporting technological advancements and responding to dynamic market conditions in these regions.