Individualism, pro-market institutions, and national innovation
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Individualism, pro-market institutions, and national innovation Daniel L. Bennett
&
Boris Nikolaev
Accepted: 6 August 2020 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Previous research suggests that both formal institutions (e.g., pro-market institutions) and informal institutions (e.g., individualistic cultural values) are critical drivers of innovation. Most studies, however, consider the independent role of either formal or informal institutions. We contribute to this gap in the literature by exploring the potential interaction between informal institutions, measured by Hofstede’s individualismcollectivism index, and formal institutions, measured by the Economic Freedom of the World index (i.e., pro-market institutions). Using cross-sectional data for a diverse sample of 84 countries, we find that both individualism and pro-market institutions are positively associated with innovation. However, the extent to which pro-market institutions promote innovation depends largely on how individualistic a country is and vice versa. For example, more individualistic countries tend to be more innovative, but even the most individualistic countries have below-average levels of innovation when their formal institutional environment lacks
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11187-020-00396-y) contains supplementary material, which is available to authorized users. D. L. Bennett (*) University of Louisville, One Bear Place #98011, Waco, TX 76798, USA e-mail: [email protected] B. Nikolaev Department of Entrepreneurship, Baylor University, One Bear Place #98011, Waco, TX 76798, USA e-mail: [email protected]
market support. At the same time, our findings suggest that the most innovative countries tend to have both strong pro-market institutions and individualistic cultural values. Keywords Culture . Economic freedom . Individualism . Collectivism . Informal institutions . Innovation . Pro-market institutions JEL classifications L26 . O3 . P16 . Z1
1 Introduction Innovation is increasingly viewed by policymakers, scholars, and practitioners as essential to sustaining the economic competitiveness and prosperity of nations (Acs et al. 2013; Colombelli et al. 2016; Wong et al. 2005). Previous research suggests that culture (i.e., informal institutions) is an important determinant of innovative activity. Most of this literature is focused on the role of individualistic cultural values, which emphasize individual freedom and recognize personal achievement (Hofstede 1980), in fostering innovation (Bennett and Nikolaev 2020; Rinne et al. 2012; Shane 1992, 1993; Taylor and Wilson 2012). A related body of literature suggests that pro-market institutions, which reduce transaction costs and uncertainty of market interactions and shape the relative rewards from productive and unproductive activities (Baumol 1990; Foss et al. 2019; North 1994), are also critical for innovative activity (Bennett and Nikolaev 2019; Bjørnskov and Foss
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