Frontend Innovation And Top Income Inequality: Evidence From Emerging Markets

Abstract This paper contributes to the literature on income inequality, by extending existing models to examine the effect of front-end innovation (FEI) on top income inequality. We use a fixed effect panel regression, on annual country level data for twenty four emerging markets, over a twenty four (1995–2018) year period, and find an insignificant correlation between income inequality, and FEI. The instrumental variable estimates however, shows a significant association between measures of FEI and top income shares. Further, we confirm that FEI is weakly related with broad measures of income inequality. Our instrumentation strategy, and robustness checks, suggests that this correlation partly reflects a causality, from FEI to top income inequality. Finally, we show that FEI is necessary for the survival of new ventures, in the crucial early years. Overall, our findings confirm that FEI, is a significant determinant of increases, in entrepreneurial income share.