Economic Drivers of Innovation and Their Impact on Firm Competitiveness: The Mediating Role of Innovation Performance

Abstract

This study examines how key economic factors exchange rate volatility, tax incentives, and financial market development influence firm competitiveness, with a particular focus on the mediating role of innovation performance. Using primary data collected from a sample of 250 firms across diverse sectors, the research applies structural equation modeling (SEM) to test the conceptual framework. The results indicate that tax incentives and well-functioning financial markets significantly enhance innovation performance, while exchange rate volatility adversely affects it. Furthermore, innovation performance is found to mediate the relationship between these economic variables and firm competitiveness, highlighting its critical role in translating macroeconomic conditions into tangible business outcomes. The findings underscore the importance of stable financial environments and supportive fiscal policies in fostering innovation led competitive advantage, offering valuable insights for policymakers and business leaders alike. Additionally, the study reveals sector-specific variations in the strength of these relationships, suggesting that tailored policy interventions may be necessary to maximize impact. Future research could further explore the longitudinal effects of sustained economic reforms on innovation trajectories and competitiveness over time.