Disentangling regional innovation capability: What really matters?

Where does innovation come from? And do all regions innovate similarly? We deal with these questions by highlighting the complexity of the concepts of innovation capability and performance, and by testing their association at the European Union regional level. We disentangle inputs of innovation capability, and consider regional heterogeneity in institutional quality, to understand the relative endowment of what innovation inputs is associated with higher relative innovation performance. We find that ‘formal’ inputs–public and business R&D expenditure–do not work unconditionally and everywhere, and that less ‘formal’ ones–e.g., non-R&D expenditure and firms collaborating for innovation–matter particularly in regions with relative low-quality institutions. Moreover, institutional quality emerges as an innovation productivity-enhancing factor.