Technological Forecasting & Social Change 165 (2021) 120533

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Technological Forecasting & Social Change

journal homepage: www.elsevier.com/locate/techfore

Digitalization of economy is the key factor behind fourth industrial

revolution: How G7 countries are overcoming with the financing issues?
Shengjun Yuan a, Hammed Oluwaseyi Musibau b, Sema Yılmaz Genç c, Riffat Shaheen d,
Anam Ameen e, Zhixiong Tan f, *
a
School of Business, Guilin University of Electronic Technology, China
b
Tasmanian School of Business and Economics, University of Tasmania, Australia
c
Kocaeli University, Ali Rıza Veziroğlu Vocational School, Kocaeli, Turkey
d
Economics and Management School, Wuhan University, Wuhan, China
e
Lahore Garrison University, Lahore, Punjab, Pakistan
f
School of Public affairs, Chongqing University, China

A R T I C L E I N F O A B S T R A C T

Keywords: The digitalization role in economy has increased over the years, particularly after the arrival of the industrial
Business finance revolution 4.0. This paper aims to examine the impact of digitalization in the economy on technological inno­
Digitalization vation in the presence of business financed R&D expenditures, income, and financial risk for G7 economies for
Industrial revolution 4.0
the time period 1990 to 2017. This endeavor uses recently developed econometric approaches, which are su­
R&D expenditure
Technological innovation
perior to traditional first-generation econometric methods. The results show a long-run stable relationship be­
G7 countries tween technological innovation and its determinants (such as digital economy, bank financing R&D expenditure,
GDP, and financial risk). Moreover, the digital economy, bank financing R&D expenditures, and financial risk are
important factors responsible for technological innovation in G7 countries. This study has meaningful policy
implications for decision-makers in designing their policies related to the digital economy, bank financing, and
technological innovation in G7 countries. The cost of innovation is significantly high, for which bank finance is
sufficiently required. However, due to the high financial risk firms, banks often reluctant to finance innovative
ideas. Hence, for nurturing technology through digitalization in economy and business financed R&D expendi­
ture, financial risk must be minimized.

1. Introduction countries are significantly improving over the years. Besides, these great
seven economies are spending billions of dollars on research and
The digitalization in economy plays a vital role in the economic development (R&D), which has boosted their economic and innovation
growth of a country, and technological innovation is not achievable performance. Therefore, as far as the G7 countries are concerned, it is
without digitalization and plays a significant role in affecting factor necessary to analyze the impact of digitalization and R&D on techno­
productivity. The amazing performance of G7 countries in achieving logical innovation. Thus, the G7 countries account for a large share of
high economic growth is due to an improved degree of technological the world’s net wealth, their technological innovation has increased,
innovation and other factors. In recent years, the digitalization of and they have also made progress in digitalization. The literature on the
economies in the form of advancement in Information and Communi­ determinants of technological innovation is rich. Income, imports,
cation Technologies (ICTs) have changed the business dynamics of G7 human capital, institutional quality, financial development, debt
countries. These digitalization advancements have improved G7 econ­ financing, corruption, knowledge spillovers, and most importantly, R&D
omies in terms of increased productivity, social change, and industrial investment are considered important determinants of technological
development. These great seven countries represent 58% of the global innovation.
net wealth (OECD, 2019). Moreover, the economic performance of G7 However, the digital economy, as a determinant of technological

* Corresponding author.
E-mail addresses: [email protected] (S. Yuan), [email protected] (H.O. Musibau), [email protected] (S.Y. Genç),
[email protected] (R. Shaheen), [email protected] (A. Ameen), [email protected] (Z. Tan).

https://doi.org/10.1016/j.techfore.2020.120533
Received 19 July 2020; Received in revised form 11 December 2020; Accepted 12 December 2020
Available online 6 January 2021
0040-1625/© 2020 Elsevier Inc. All rights reserved.
S. Yuan et al. Technological Forecasting & Social Change 165 (2021) 120533

innovation, has never been analyzed. The research on the link between the years. The amazing performance of G7 countries in achieving high
the digital economy and technological innovation is scarce. By intro­ economic growth is due to an improved degree of technological inno­
ducing digitization as a new explanatory variable, this research fills the vation and other factors. In recent years, The digitalization of economies
gap in the literature. The roots of digitalization in economy date back to in the form of advancement in Information and Communication Tech­
around the 1990s with the emergence of the internet, which transformed nologies (ICTs) have changed the business dynamics of G7 countries.
the economic and industrial structure (Schwab, 2017). Digitalization in These digitalization advancements have improved G7 economies in
economy has increased over the years, particularly after the arrival of terms of increased productivity, social change, and industrial develop­
the fourth industrial revolution. The automation of economy and arti­ ment. Moreover, these great seven economies are spending billions of
ficial intelligence refers to digital technologies, have transformed the dollars on research and development (R&D), which has boosted their
economic and business structure and performance (Su et al., 2020b; economic and innovation performance. Therefore, we analyze the effect
Umar et al., 2020). The concept of digitalization in economy covers of digitalization and R&D on technological innovation in the case of G7
progressive digital technologies, which help to surge the efficiency of countries. To serve this purpose, we constructed the digital economy
social production (Pradhan et al., 2019). The digital economy is based Index by using Principal component analysis (PCA) by considering the
on ideas, knowledge, creativity, and innovation (Johnson, 2019). accessibility of households and industry to the internet and mobile. To
Countries around the globe are transforming their economies through answer whether digitalization in economy has related to technological
digitalization. However, digital technology development has a signifi­ innovation, this study uses recently developed econometric approaches,
cant lag and the time taken to introduce it into markets (Galichkina, which are superior to traditional first-generation econometric methods.
2014). Moreover, there is a significant coordination lag between coun­ The paper is organized as follows: Section 2 provides the literature
tries in the development of digital technologies. In the modern era, the review, and the theoretical framework related to determinants of
world output has increased by manifold due to technological changes in financial development is provided in Section 3. This section also pre­
businesses and institutions. The advancement in Information and sents the methodology used in this paper. Section 4 provides the results
Communication Technologies (ICTs), the internet of things, and digital and discussions. Section 5 presents the concluding remarks and policy
format have changed the business dynamics. Besides, institutional implications.
quality and organizational structure have largely been changed due to
these advancements. The advancement in digitalization in economy has 2. Literature review
improved national economies in terms of an increase in productivity,
social change, and industrial development. Due to these reasons, the The quest for finding potential determinants of technological inno­
phenomenon of digitalization in economy also refers to the new indus­ vation has been a popular topic for researchers and academia. The
trial revolution (Lee et al., 2018). literature in this regard has developed in two somewhat different as­
In recent years, countries worldwide have transformed their econo­ pects: theoretical models and empirical analyses. Moreover, the litera­
mies through liberalization reforms to boost their economic perfor­ ture can also be grouped into two different types of studies: micro and
mance, which has increased the competition among firms (Law et al., macro-level innovation determinants. The revolutionary work of
2018). As a result, firms have increased their spending on research and Schumpeter (1950) provided a base for further decisions on the com­
development (R&D) expenditures. These developments have large im­ pany’s decisive innovation. Researchers such as (Aghion et al., 2005;
plications for the strengthening of domestic economies as domestic Balasubramanian and Lee, 2008; Grossman and Helpman, 1991; Soui­
goods are now more modernized, attracting domestic buyers. Hence, the taris, 2002; Wolfe, 1994) have identified stock of knowledge, decision
demand for imports has decreased in countries with an increased degree making, industrial sector, business strategy, information processing
of innovation, high R&D expenditures. Business-financed R&D expen­ structure, R&D spending, infrastructure, country environment and
diture is considered an important factor in explaining industrial firms’ access to financial resources as the factors that affect responsible
competitiveness and specialization (Su et al., 2020a). These expendi­ for firm’s rate of innovation. At a macro level, the quest for finding the
tures are vital for creating new products and hence, improve the process factors responsible for innovation at the country level has emerged as
of innovation. Moreover, these R&D expenditures significantly impact one of the policy-makers and researchers’ major concerns. In the liter­
the cost competitiveness of the economy (Curtis et al., 2020). By ature, income, imports, human capital, institutional quality, financial
focusing on R&D expenditures and consistent policies, G7 countries development, debt financing, corruption, knowledge spillovers, and
have transformed their economies from imitating countries to a group of R&D investment are considered as important determinants of techno­
innovative economies. Hence, along with digitalization in economy. logical innovation (Berg et al., 2019; Burhan et al., 2017; Danquah and
Falvey et al. (2006) note the protection of ideas and creativity as another Amankwah-Amoah, 2017; Dincer, 2019; Xin et al., 2019).
important determinant of encouraging innovation. However, for Barro and Lee (1996) argued that the income of the country is vital
nurturing technology through digitalization in economy and business for innovation. The factors such as infrastructure and R&D spending
financed R&D expenditure, financial risk must be minimized. depend are much determined by income. Henceforth, an increase in the
Since the cost of innovation is significantly high for which bank income of the country improves the technological innovation of the
finance is sufficiently required, nevertheless, due to the high financial country. According to (1996), variation in government policies, as
risk of firms, banks often reluctant to finance innovative ideas. Hence, echoed in infrastructure, institutional quality, tax system, and property
high financial risk is considered as an impediment in the way of tech­ rights maintenance degree, are responsible for differences in countries’
nological innovation. To sum up, digitalization in economy and R&D technological level. Harley (2003) also supports Barro by arguing that
expenditures have great implications for technological innovation. the main reason behind the continuous economic growth is the persis­
However, to reap the positive benefits of these factors, financial risk tence of technological change. Falvey et al. (2006) consider ideas
must be minimized. Hence, it is imperative to analyze the linkages be­ creativity as important factors responsible for innovation. The literature
tween digitalization in economy, R&D expenditures, and financial risk on the role of digitalization in economy in affecting economic growth
with technological innovation. This study’s main objective is to inves­ and technological innovation is scant. Only a few empirical studies are
tigate the impact of digitalization in economy on technological inno­ carried out to examine different aspects of the digital economy (Afo­
vation in the presence of business financed R&D expenditures, income, nasova et al., 2019; Galichkina, 2014; Johnson, 2019; Park and Choi,
and financial risk for G7 countries over the period of 1990 to 2017. The 2019). Studies have been conducted in the empirical literature to
main reason for selecting G7 countries is, these great seven countries compare the countries by analyzing the digital economy’s different
represent 58% of the global net wealth (OECD, 2019). Moreover, the components. The digital economy components include the Global
economic performance of G7 countries are significantly improving over Innovation Index (GII), Networked Readiness Index, Internet

2
S. Yuan et al. Technological Forecasting & Social Change 165 (2021) 120533

accessibility, ICT Development Index, and High-Technology Exports innovation. Therefore, this research adds to the literature in a mean­
(Richter et al., 2017). ingful way.
Researchers such as Afonasova et al. (2019) compared Russia and EU
countries’ economies by analyzing the components of these countries’ 3. Data, model specification, and methodology
digital economy. Moreover, the authors compared Russia and EU
countries’ economies in terms of the depth of these countries’ digital 3.1. Data
economy. By analyzing the effect of different digital economy compo­
nents on economic growth and social processes, the authors find that Our main objective in this study is to analyze the digitalization in
Russia has a strong position in the digital economy’s two components: economy on technological innovation in the presence of business
Network Readiness and ICT development. However, the country is far financed R&D expenditures, income, and financial risk for G7 countries
behind than EU countries in the production of High-Technology Exports, over the period of 1990 to 2017. According to previous literature, we use
which require high R&D expenditures. Ahmad and Schreyer (2016) many factors that play a decisive role in technological innovation.
studied the digital economy’s statistical challenges, such as measure­ Specifically, in the model, we use the following variables: gross domestic
ment problems. The authors highlighted some of the important mea­ product measured at constant 2010 USD (GDP), Patents both resident
surement challenges, such as the accounting framework for GDP. and non-resident (TI), business financed research and development ex­
Several measurement issues affect the strength of the digital economy, e. penditures (BR&D), digital economy measure as households with
g., measurement of international transactions. (Yoo et al., 2010) internet access (%), Industry internet access, Households with Mobile
contributed to the literature by analyzing the implications of persistent broadband Internet access (%) (DE), and financial risk index is measured
digitalization on innovations. The author argues that an emergence of different value ranges from 0 to 50 (FRI). FRI shows 0 with high risk and
new layered product architecture is possible due to the digitalization of 50 as very low-risk. The data of GDP and TI comes from World Bank
products. Hence, the digitalization of the product and economy is (WDI, 2019),1 BR&D and DE data is obtained from Organization for
essential for achieving technological innovation. On the role of bank Economic Cooperation and Development (OECD),2 and FRI gathered
financing R&D expenditures in affecting technological innovation, the from Political Risk Services (PRS).3
literature is rich (Aghion et al., 1998; Conte and Vivarelli, 2014; Curtis
et al., 2020; Hoppmann et al., 2013; Su et al., 2020a). Moreover, bank
3.2. Model specification
financing R&D expenditures are positively related to innovation. The
theoretical rationale for the positive link between BFR&DE and tech­
This study empirically examines the linkages between technological
nological innovation is that since business financed R&D expenditure is
innovation with its determinants, including the digital economy, bank
considered an important factor in explaining industrial competitiveness
financing R&D expenditures, income, and financial risk in the case of G7
and specialization, these expenditures are vital for creating new prod­
countries. The basic model specification for this study is given as:
ucts and hence, improve the process of innovation. Moreover, these R&D
expenditures significantly impact the cost competitiveness of the econ­ TI,i,t = λ1 DEi,t + λ2 BR&Di,t + λ3 GDPi,t + λ4 FRIi,t + εi,t (1)
omy (Curtis et al., 2020). Firms that are able to finance their R&D in­
vestment through internal funds or external finance, such as banks or Where, TI is technological innovation measured through the number of
other financial institutions, get continuous technological improvements patents for non-residents and residents, BR&D is business financed
through innovation. Hence, financing of R&D through banks is vital for research and development expenditures, DE is digital economy Index
innovation. However, financial risk is an impediment in the way of constructed by using Principal component analysis (PCA). This index is
technological advancement. The theoretical rationale for the link be­ constructed based on (Households with Internet access (%), Industry
tween financial risk and technological innovation is that banks often internet access, Households with Mobile broadband Internet access (%))
reluctant to finance innovative ideas due to the high financial risk of and FRI is a financial risk index.
firms. Hence, high financial risk is considered as an impediment in the Following Afonasova et al. (2019), we expect a positive impact of the
way of technological innovation. High financial risk leads to low ex­ digital economy on technological innovation. The theoretical rationale
pected returns (Isik and Hassan, 2003), which in turn reduce the bank for the link between the digital economy and technological innovation is
financing of R&D expenditures. According to Ali et al. (2011), all that digitization has changed the business dynamics, institutional
financial institutions face financial risks such as market risk, operational quality, and organizational structure. All these structural and institu­
risk, liquidity risk, interest rate risk, credit risk, foreign exchange risk, tional changes have implications for technological innovation. Hence, it
and other business risks. These risks negatively affect the bank financing is perceived that the digital economy is positively related to innovation,
TI
of R&D investment. i.e., λ1 = ∂∂DE > 0. To improve technological innovation through digital
This paper aims to examine the impact of digitalization in economy economy, firms and countries need heavy investment in R&D. To
on technological innovation in the presence of business financed R&D finance these R&D expenditures and cost innovative projects, and firms
expenditures, income, and financial risk for G7 countries over the period need financing. The bank plays an important role in financing R&D
of 1990 to 2017. This study contributes to the existing literature by expenditures. Following Aghion et al. (1998), Hoppmann et al. (2013),
examining a new set of potential determinants of innovation. In the Conte and Vivarelli (2014), and Curtis et al. (2020), we introduce bank
existing literature, income, imports, human capital, institutional quality, financing R&D expenditure as a determinant of technological innova­
financial development, debt financing, corruption, knowledge spill­ tion. Business financing R&D expenditure is considered an important
overs, and most importantly, R&D investment are considered as factor in explaining industrial competitiveness and specialization. These
important determinants of technological innovation. However, the expenditures are vital for creating new products, which improve the
digital economy, as a determinant of technological innovation, has process of innovation. Hence, it is perceived that the variable bank
never been analyzed. Moreover, this study uses bank financing R&D financing R&D expenditures is positively related to innovation, i.e., λ1 =
expenditure as a new determinant of technological innovation. Previous ∂TI
∂BFR&DE > 0. This study includes GDP as an explanatory variable in
studies have used R&D expenditure as responsible for technological model 1, to gage the impact of income on technological innovation. The
innovation. We differentiate between total R&D expenditures and bank
finance R&D expenditures. This study uses recently developed econo­
metric approaches, which are superior to traditional first-generation 1
https://databank.worldbank.org/
econometric methods. Criticism of previous research is based on using 2
https://stats.oecd.org/#
traditional econometric methods to analyze the factors responsible for 3
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S. Yuan et al. Technological Forecasting & Social Change 165 (2021) 120533

income of the country is a necessary condition for technological inno­ method (Pedroni, 2001).
vation. Barro and Lee (1996), in his study, he argues that the income of
the country is vital for innovation. Factors such as infrastructure and 4. Results and discussions
R&D spending depend on national income. Hence, an increase in the
income of the country improves the technological innovation of the The cross-sectional dependency results demonstrate that there are
∂TI > 0. Following Isik and Hassan (2003) and Ali
country, i.e., λ3 = ∂GDP ample shreds of evidence that all variables are cross-sectionally depen­
et al. (2011), this study includes financial risk as an explanatory variable dent. A shock in a variable in one of the G7 countries has implications for
in the empirical model. High financial risk is considered as an impedi­ other G7 countries. The cross-sectional dependency is evident from all
ment in the way of technological innovation. High financial risk leads to four tests (such as BP-LM, PS-LM, BCS-LM, and P-CD). The lower part of
low expected returns, which in turn reduces the bank financing of R&D Table 1 provides the results of the slope heterogeneity test. The signif­
expenditures. Hence, we expect a negative impact of FRI on TI, i.e., λ4 = icant values of Delta-tilde (DT) and Adjusted delta-tilde (ADT) confirm
∂TI the existence of slope heterogeneity in the model.
∂FRI > 0.
Table 2 provides the results of panel unit root tests. We employ first
and second generations unit root tests. However, we rely on the second-
3.3. Methodology
generation CIPS unit root test results because it considers the panel data
problems (mentioned in Table 1). The CIPS test results show that all
There are six steps in the estimation procedure. First, this study
variables are stationary at the first difference, i.e., I(1).
employs the cross-sectional dependence (CD) test introduced by
Table 3 provides the results of the panel cointegration test. We
(Pesaran, 2004). CSD is an indispensable issue in panel data econo­
employ the Westerlund cointegration test. The results show that tech­
metrics and can cause severe problems such as dimensional distortion
nological innovation is cointegrated with its determinants, such as the
and unit root test error. This study uses the Lagrange multiplier (LM)
digital economy, bank financing R&D expenditures, GDP, and financial
test, scaled LM test, bias-corrected scaled LM test, and CD test developed
risk. Group and panel statistics’ significant values support our claim
by Breusch and Pagan (1980), Baltagi et al, (2012), Pesaran et al.
about the long-run relationship among variables in model 1.
(2008), and Pesaran (2004), respectively. Second, to test the slope ho­
To empirically analyze the impact of the digital economy, bank
mogeneity, this study utilizes the test homogeneity test popularized by
financing R&D expenditures, GDP, and financial risk on technological
(Pesaran and Yamagata, 2008). The ability to measure panel-specific
innovation, this study used CMG and AMG econometric methods. The
heterogeneity is vital in analyzing panel data (Hao et al., 2021; Ji
results suggest that GDP, digital economy, bank financing R&D expen­
et al., 2020). When the panel is heterogeneous, a slope homogeneity
ditures, and financial risk are important factors responsible for techno­
supposition will result in misleading outcomes (Ahmad et al., 2020; Gu
logical innovation in G7 countries. Except for the financial risk index, all
et al., 2020; Li et al., 2021).
other variables are positively related to technological innovation. We
Third, for stationary analysis, this study further uses the cross-
inferred some interesting results: First, bank financing R&D expendi­
sectional augmented Im, Pesaran, and Shin (CIPS) test introduced by
tures (BR&D) are positively related to technological innovation. By
Pesaran (2007). The test deals with CSD and slope heterogeneity.
focusing on R&D expenditures and consistent policies, G7 countries
However, for a robustness check, we employ several other
have transformed their economies from imitating countries to a group of
first-generation tests. The general equation for CIPS (2007) is given
innovative economies. Business financing R&D expenditure is consid­
below:
ered an important factor in explaining industrial competitiveness and
p
∑ p
∑ specialization. These expenditures are vital for creating new products,
ΔYi,t = φi + φi Xi,t− 1 + φi Y t− 1 + φil ΔYt− l + φil ΔYi,t− l + τit (2) which improve the process of innovation. These results are similar to the
findings of (Conte and Vivarelli, 2014; Curtis et al., 2020; Hoppmann
l=0 l=1

Where and shows cross-section averages. Similarly, the CIPS equation is et al., 2013). Second, the variable digital economy positively affects
provided as: innovation, supporting the earlier findings (Afonasova et al., 2019). The
digital economy in the form of automation of economy and artificial
∑ intelligence has transformed the economic and business structure and
n
̂ = 1
CIPS CADFi (3)
N i=1 performance. The positive impact of digitalization on technological
innovation has great implications for G7 countries. G7 countries are
In Eq. (3), CADF refers to a cross-sectional augmented dickey fuller.
transforming their economies through digitalization. Digitalization in
Fourth, this study uses the (Westerlund, 2007) cointegration test,
economy has changed the business dynamics, institutional quality, and
which has the power to deal with both CSD and slope heterogeneity. The
organizational structure of these countries. All these structural and
test is constructed by using four test statistics such as Gt , Gα , PT and Pα .
institutional changes have implications for technological innovation.
∑ ′
∑ ′

Where, Gt = N1 Ni− 1 α ′ , Gα = N1 Ni− 1 ′Tαi are for group statistics and Third, the variable GDP positively affects innovation, which supports
SE(αi ) αi (1)
′ ′
PT = α
′ and Pα = Tα are for panel statistics.
SE(α) Table 1
Fifth, to estimate the long-run coefficients, this study uses the Cross-sectional dependency and slope heterogeneity tests.
augmented mean group (AMG) method developed by Eberhardt (2012).
Variables BP-LM PS-LM BCS-LM P-CD
AMG method is robust as compared to other methods. The AMG equa­
DE 468.69*** 69.08*** 68.95*** 21.53***
tion is provided as:
FRI 106.53*** 13.19*** 13.06*** 4.70***
∑
T GDP 528.07*** 78.24*** 78.11*** 22.93***
ΔYi,t = θ1,i + θ2,i ΔEVi,t + θ3,i UCFi + θ4,t TDt + εi,t (4) TI 159.64*** 21.39*** 21.26*** 6.23***
t=2 BR&D 419.45*** 61.48*** 61.35*** 20.26***

In the equation, the dependent variable is denoted by Yi,t, EVi,t is for Heterogeneous/Homogeneous slope Coefficient Test
Delta-tilde (DT) Adjusted delta-tilde (ADT)
all explanatory variables, Unobservable common factors represent by
UCFi,t and TD is a time dummy. 8.681**** 8.028*p**
Lastly, the Common Correlated Effects Mean Group (CCEMG) esti­ Note: ***, **, * is for 1%, 5% and 10% statistical significance level. BP-LM
mators (Pesaran, 2006) were implemented for long-run evaluations. The (Breusch-Pagan Lagrange multiplier (LM)), PS (Pesaran Scaled LM), BSC (Bias-
robustness check was done by the Fully Modified Least Square (FMOLS) Corrected Scaled LM) & P-CD (Pesaran cross-section dependence (CD)).

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S. Yuan et al. Technological Forecasting & Social Change 165 (2021) 120533

Table 2
Results of panel unit root tests.
Var.list First-Generation Unit Root Tests at Level
(Levin et al., 2002) (Im et al., 2003) ADF-Fisher PP-Fisher
Int Int & Tr Int Int & Tr Int Int & Tr Int Int & Tr

DE 9.39 4.45 11.64 7.64 0.553 1.91 1.247 5.88

FRI 5.25 9.75 − 0.52 0.51 12.35 6.41 33.6*** 271.1***
GDP − 4.10*** 0.937 − 0.64 0.530 13.28 5.84 7.084 12.52
TI − 2.24** − 0.24 − 1.49* − 0.41 18.58* 14.88 8.68 3.020
BR&D 0.112 3.17 1.86 − 0.066 5.97 10.12 7.33 9.52
First-Generation Unit Root Tests at First Difference
D(DE) 1.40 2.66 − 1.86** − 3.54*** 28.92** 36.09*** 125.4*** 321.4***
D(FRI) 22.8 30.1 − 1.39* − 1.028 18.04 16.29 130.8*** 361.2***
D(GDP) 3.31 6.51 − 0.84 − 0.52 13.55 10.18 100.6*** 130.5***
D(TI) 0.781 2.79 − 1.24 − 1.89 16.35 19.46* 63.64*** 56.21***
D(BR&D) 2.26 5.44 − 2.40*** − 2.84*** 27.20** 30.18*** 73.18*** 63.72***

Second-Generation Unit Root Test

Var.list Level First-Difference
Int Int & Tr Int Int & Tr

DE − 1.452 − 1.871 − 4.110*** − 4.276***

FRI − 1.551 − 1.683 − 3.991*** − 4.368***
GDP − 1.959 − 2.459 − 4.056*** − 4.128***
TI − 1.590 − 2.70 − 4.863*** − 4.921***
BR&D − 1.695 − 1.660 − 4.002*** − 4.523***

Note: ***, **, * is for 1%, 5% and 10% statistical significance level.

consistent with the findings of AMG and CMG methods (Tables 4 and 5).
Table 3
Cointegration analysis.
5. Conclusion and policy implications
Statistic Gt Ga Pt Pa

Value − 4.394*** − 22.543*** − 15.124*** − 33.141*** Digitalization in economy plays a vital role in the economic growth
Z-Value − 6.214 − 4.711 − 8.561 − 9.781 of a country, and technological innovation is not achievable without
P-Value 0.000 0.000 0.000 0.000
digitalization and plays a significant role in affecting factor productivity.
Note: *** is for a 1% statistical significance level. Digitalization in economy plays a significant role in affecting factor
productivity and has increased over the years, particularly after the
the earlier findings of (Barro and Lee, 1996), who argue that the income arrival of industrial revolution 4.0. The amazing performance of G7
of the country is vital for innovation. Factors such as infrastructure and countries in achieving high economic growth is due to an improved
R&D spending depend on national income. Henceforth, an increase in degree of technological innovation and other factors. In recent years, the
the income of the country improves the innovation of the G7 countries. digitalization of economies in the form of advancement in Information
Fourth, the results show that the financial risk index negatively affects and Communication Technologies (ICTs) have changed the business
innovation, which supports the findings of (Isik and Hassan, 2003) and dynamics of G7 countries. These digitalization advancements have
(Ali et al., 2011). High financial risk leads to low expected returns, improved G7 economies in terms of an increase in productivity, social
which in turn reduces the bank financing of R&D expenditures. Due to change, and industrial development. Hence, G7 countries have a sig­
the high financial risk of firms, banks often reluctant to finance inno­ nificant share in World’s net wealth, improved degree of technological
vative ideas. Hence, high financial risk is considered an impediment in innovation, and at the same time, have made advancement in digitali­
technological innovation in G7 countries. For nurturing technology zation. This paper aims to examine the impact of digitalization in the
through digitalization in economy and business financed R&D expen­ economy on technological innovation in the presence of business
diture, G7 countries must minimize the financial risk. To sum up, digi­ financed R&D expenditures, income, and financial risk for G7 countries
talization in economy and R&D expenditures have significant over the period of 1990 to 2017. This study contributes to the existing
implications for technological innovation. However, to reap the positive literature by examining new determining factors of innovation.
benefits of these factors, G7 countries need to minimize the financial Contrary to previous studies, which use used R&D expenditure, this
risk. For robustness checks, we use the FMOLS method and results are study uses bank financing R&D expenditure as a new determinant of
technological innovation. We differentiate between total R&D expen­
ditures and bank finance R&D expenditures. This study uses recently
Table 4 developed econometric approaches, which are superior to traditional
Empirical results. first-generation econometric methods. The econometric estimation
Variables CMG AMG Signs provides robust results: i) there is ample evidence of CSD and slope
heterogeneity; iii) all variables are stationary at first difference; iv)
BR&D 0.34*** 0.36*** >0
[0.125] [0.101]
DE 0.016*** 0.019*** >0
[0.002] [0.003] Table 5
GDP 0.38*** 0.39*** >0 Fully modified OLS (robustness results).
[0.112] [0.115]
Variable Coefficient Std. Error t-Statistic Prob.
FRI − 0.013*** − 0.018*** <0
[0.003] [0.001] BRD 0.37**** 0.051 7.25 0.000
Constant 0.91*** 0.80*** >0 DE 0.017*** 0.002 8.50 0.000
[0.141] [0.086] GDP 0.35*** 0.067 5.22 0.000
Wald-Test (CMG) Wald-Test (AMG) RMSE (CMG) RMSE (AMG) FRI − 0.0143*** 0.001 − 14.30 0.000
15.231*** 17.761*** 0.013 0.016 Constant 0.82*** 0.113 7.26 0.000

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Fundamental Research Funds for the Central Universities of Chongqing of carbon emission in China: how good is green investment? Sustain. Prod. Consum.
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global financial system. Technol. Forecast. Soc. Change 120450. https://doi.org/10 competencies in international trade and Finance, Health and Resource Economics, Energy
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Marketing and Advertising, Kocaeli University, Kocaeli, Turkey. Her Interests include
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Economic Theory, Economic History, Behavioral Economics, History of Economic
evidence from China. J. Bus. Econ. Manag. 20, 841–859.
Thought, and Economic Methodology.
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Organizing Logic of Digital Innovation: An Agenda for Information Systems
Research. Information Systems Research 21 (4), 724–735. https://doi.org/10.1287/ Riffat Shaheen is a Ph.D. student at Wuhan University and did her MS from Pakistan. She
isre.1100.0322. has published a paper in the journal of public affairs in 2020. Her research interest is
mainly focused on financial markets, financial economics, and finance environment nexus.
Shengjun Yuan is a professor in the school of Business at Guilin University of Electronic
Technology, China. He has 13 years of research experience in different Academic and Anam Ameen is a senior lecturer in the Department of Management Sciences, Lahore
Research Institutions. His research interests focus on brand management, family con­ Garrison University. She has more than eight years of experience teaching in Higher ed­
sumption, digital economy. He presided over two National Natural Science Foundation ucation Institutes. Her research interests include broadly Total Quality Management and
Projects, published more than fifty papers in professional academic journals. Supply Chain Management.

Hammed Oluwaseyi Musibau is a casual lecturer and doctoral researcher at the Uni­ Zhixiong Tan is an associate professor at the School of Public Administration, Chongqing
versity of Tasmania, Australia. He earned his PhD and MSc (Economics) from the School of University, with a Ph.D. in Technical Economics and Management. His research interests
Economics, Finance & Banking, Northern University of Malaysia, AACSB globally are in sustainable development planning policies, environmental economics, and indus­
accredited and Eminent Management University in Malaysia. He has professional trial economics.