Country Digitalization, Trade Openness, and Innovation

Abstract

Digital transformation programs at the national level had a significant impact on innovation. However, there is a lack of understanding as to whether this dynamic is compounded by the higher exposure to international trade, thanks to digitalization. Thus, the objective of this chapter is to demonstrate that a nation's spending on digital transformation may encourage local organizations to expand their business beyond national borders, which could enhance their innovation potential. Drawing on recent secondary data compiled for 115 countries, the effect of digital readiness on a country's innovation index was tested with path analysis using AMOS software. The findings confirm the positive and significant effect of country digital readiness on both, trade openness and innovation. However, these results show that trade openness negatively mediates the relationship between a country's digitalization and innovation capacity. This result may be explained by the insufficient absorptive capacity of newly internationalized firms and the cultural hindrance in cross-border collaborations.