The Debt Dilemma: Driver or Brake of Innovation in the EU?

Abstract

In the current economic environment, the issue of increasing indebtedness is receiving considerable attention. This article delves deeper into a comprehensive analysis of how different forms of debt – from households to corporations to governments – affect innovation performance within the European Union (EU). Since the EU includes 25 different countries, it provides a rich background for this analysis covering the period from 2013 to 2021. By applying regression analysis techniques on a large dataset, this study offers a new insight into the complex relationship between indebtedness and innovation performance. A key part of this analysis is the Global Innovation Index, widely recognized as a metric for evaluating innovation performance among nations. The empirical findings of this study reveal a subtle dynamic: while government debt appears to be a drag on innovation performance, private sector indebtedness, including both households and non-financial institutions, shows a positive effect. This dichotomy underlines the crucial importance of implementing responsible fiscal policies that prioritize the promotion of innovation without jeopardizing financial stability. In addition, the research highlights the importance of fostering collaboration between the public and private sectors, supporting university research, and developing innovation incubators to create a robust innovation environment. In addition, this study not only clarifies the current status, but also identifies areas requiring further research, such as research into other factors influencing the innovation environment. However, it is important to acknowledge the limitations associated with the current understanding of the relationship between debt and innovation. These limitations underscore the need for continued refinement of methodologies and investigation of other factors that may influence this interaction, thereby providing fertile ground for future research efforts. In conclusion, this study contributes to a deeper understanding of how debt dynamics shape innovation outcomes in the EU context.