From Disruption to Opportunity: The Role of Non‐Linear Global Innovation and Uncertainty in Bank Performance

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Abstract
This study investigates the non‐linear impact of the Global Innovation Index (GII) on the performance of banks in the MENA region from 2010 to 2023. Focusing on three key performance metrics—Return on Equity (ROE), Tobin's Q (TQ), and Stock Market Returns no (SR)—the analysis reveals that while innovation initially boosts performance, excessive levels of innovation may lead to diminishing returns, particularly for Tobin's Q and Stock Market Returns. The non‐linear relationship between innovation and ROE shows a U‐shaped pattern, where performance first declines before improving at higher levels of innovation. Further analysis reveals that larger banks and those in high‐GII countries derive stronger benefits from innovation, though these advantages vary across performance measures. Our findings underscore the need for balanced innovation strategies and stable policy environments to maximize bank performance in the MENA region. Policymakers should prioritize reducing uncertainty, while banks must tailor innovation investments to their specific contexts to avoid overexposure to diminishing returns.

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