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 ofthe French occupation of different German regions after the French Revolution of 1789 asan instrument for institutional quality. Wefind that the number of patents per capita incounties with the longest occupation was more than double that in unoccupied counties.Among the institutional changes brought by the French, the introduction of the Code civil,ensuring equality before the law, and the promotion of commercial freedom through theabolition of guilds and trade licenses had a stronger effect on innovation than the abolitionof serfdom, which increased labor market mobility, and agricultural reforms that broke upthe power of rural elites. The effect of institutions on innovation is particularly pronouncedfor high-tech innovation, suggesting that innovation might be a key channel through whichinstitutions ultimately affect economic growth. Ourfindings highlight inclusive institutionsas afirst-order determinant of innovation.