Female leadership and innovation in emerging market SMEs: causal evidence from lower-middle income countries
Abstract
Despite growing attention to gender and corporate performance, causal evidence on whether and when female CEO leadership drives firm innovation in developing economies remains scarce. This study addresses this gap using World Bank Enterprise Survey (WBES) data on 44,193 small and medium enterprises (SMEs) across 43 lower-middle-income countries (2007–2022), employing instrumental variables estimation with owner gender as an instrument to overcome selection bias in CEO appointments. We find that female CEOs increase innovation probability by 6.0% points (IV estimate), surpassing the OLS estimate of 4.7% points, indicating that selection bias disadvantages rather than favors women leaders. Critically, institutional quality, captured by the Women, Business and Law (WBL) index, fundamentally moderates this effect: below a threshold of approximately 40 points, female CEOs confer no innovation advantage; above this threshold, effects emerge and peak in moderate institutional settings (WBL 67–75), yielding a 19.8% point increase, a 77% rise over baseline, far exceeding the 6.4% point gain in high-support environments. Medium-sized firms (20–99 employees) benefit most, with 21.2% point gains. This study contributes to the literature in three ways: it provides the first causal evidence on female CEO effects on innovation in lower-middle-income countries, it demonstrates that institutional context is a fundamental moderator rather than merely a control variable, reconciling contradictory prior findings through non-monotonic institutional moderation, and it identifies specific institutional thresholds that offer actionable policy guidance for leveraging female CEO leadership to foster innovation-driven development in emerging economies.