Governance

Law, culture, and innovation

Law, culture, and innovation

Many aspects of motivating innovation are painfully obvious, but much research on the topic is segmented depending on the particular issue of interest and the available data for examining that issue.

A review of the literature shows that national comparative studies in finance and economics journals focus on the legal determinants of innovation but tend to not account for culture in the impacts on innovation. This focus on the legal determinants is likely due to the high correlation between national law and national culture, and the dearth of events that enable identification strategies associated with finding a causal link between culture and innovation. Put differently, the legal factors that affect innovation change over time, while culture is rather static. Unlike economics and finance journals, interdisciplinary and management journals more often consider the cultural determinants of innovation, while paying less attention to specific events, to econometrically identify factors that have a clear and clean causal impact on innovation. Because culture has not experienced major shifts over time, it has received a comparative dearth of attention in the literature on factors that affect innovation. In our paper, we discuss the literature that has identified the relation between national culture and innovation. We also refer to some related literature on corporate culture and innovation, but our focus is on national culture and innovation. In addition, we introduce a snapshot of the data that shows a strong negative correlation between uncertainty avoidance and innovation, and a positive correlation between long-term orientation and innovation.

We show that strong intellectual property rights, high long-term orientation, and low uncertainty avoidance are strong predictors of innovative activity. Using data from the World Intellectual Property Index, we show that a simple regression model that uses the natural log of the number of patent applications from a country with only intellectual property rights as an explanatory variable explains over 20% of the variability across the 100 different countries in the sample. Similarly, a simple regression model that uses the natural log of the number of patent applications from a country with only uncertainty avoidance as an explanatory variable explains roughly 3% of the variability across all countries, but this effect is insignificant in the subsample of Southeast Asian countries. A simple regression model that uses the natural log of the number of patent applications from a country with only a long-term orientation variable explains over 20% of the variability across countries, and this effect is similar for the subset of Southeast Asian countries.

Future research is needed on the role of organizational culture within a firm in different national cultural environments and the differential impact on innovation. Does corporate culture become irrelevant in the presence of a strong national culture? Or does the impact of national culture become mitigated in the presence of a strong corporate culture? For example, is the impact of tolerance for failure within a firm or its investments on innovation mitigated in the presence of national cultures with short-term orientation? Does national culture have a causal influence on corporate culture? Does culture get transferred across borders in multinational firms in different ways depending on the national and corporate cultural environment? And how do these interactions affect innovation? Investigation of these and other related questions would shed light on the importance of national public policies that try to shift culture, and the role of policy makers for encouraging the international transmission of culture through policies related to immigration and exporting.

Future research could examine the differential role of law and culture on innovation for public versus private firms. It could also examine the extent to which the political environment mediates any connection between law, culture, and innovation. For example, as the 2016 United States election showed, legal institutions are subject to some instability, which may affect innovation efforts and expenditures in different industries and in different ways. These topics are likely to be the subject of active research in the coming years.

Photo: raynabauman (“Hands Colorful Paint Splatters Painting Friendship“). Licensed under CC0 1.0 Universal (CC0 1.0)

Douglas Cumming

About the Author

Douglas Cumming is Professor of Finance and Entrepreneurship and Ontario Research Chair at the Schulich School of Business, York University.

Sofia Johan

About the Author

Sofia Johan is Adjunct Professor of Finance and Entrepreneurship at the Schulich School of Business, York University.

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