Comparing borrower-based and institution-based tools: Regulatory trade-offs in the pursuit of innovation-led growth

Agus Salim (Faculty of Economy and Business, Universitas Ahmad Dahlan)
Lestari Sukarniati (Faculty of Economy and Business, Universitas Ahmad Dahlan)

Optimum: Jurnal Ekonomi dan Pembangunan
Vol. 16 No. 2 (2026)

This study examines the "stability paradox" in 18 Asian economies (1990-2024), focusing on how rules like Reserve Requirements (RR) and Loan-to-Value (LTV) affect the innovation-growth relationship. Using FE-DK and FE-2SLS methods to ensure reliability, the results identify a paradox between innovation and growth, where new patents initially slow growth due to high catch-up costs. Most importantly, tightening financial rules—especially RR—triggers a stability paradox by weakening the synergy between innovation and progress. This occurs because RR drains the pool of available lending and causes risk filtering, in which banks favor safe sectors over innovative ones. These findings suggest that Asian authorities must balance financial safety with economic renewal to avoid stifling long-term technological progress.