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Individualism, pro-market institutions, and national innovation

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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 individualism-collectivism 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 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.

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Fig. 1
Fig. 2

Notes

  1. For exceptions, see: (1) Li and Zahra (2012), who find that venture capital activity is higher in countries with better governance institutions, as measured by the World Governance Index, but the effect is weaker in more uncertainty avoiding and collectivistic societies; and (2) Lehmann and Seitz (2017), who find that personal freedom, as proxied by the Gay Travel Index, is positively associated with innovation (i.e., per capita patents and trademarks), while controlling for measures of social capital and trust in some specifications.

  2. According to Coleman’s (1990) “bathtub” model, macro-level factors such as formal institutions and culture create constraints on individual-level behavior. In turn, individuals make choices under those constraints, and individual-level actions accumulate at the macro-level. For example, higher levels of regulation at the macro-level can create constraints that prevent individuals from taking advantage of business opportunities (Boudreaux et al. 2019). In turn, fewer people will engage in entrepreneurial action, leading to overall lower levels of new start-ups at the macro-level. In this paper, we are interested in exploring macro-macro level linkages.

  3. Specifically, the marginal effect is given by \( \frac{\partial Innov}{\partial Individualism}={\beta}_1+{\beta}_3 EFW. \) Setting the marginal effect equal to zero, we solve for the threshold level of EFW at which the marginal effect of individualism on innovation changes from negative (β1 < 0) to positive (β3 > 0). In other words, \( EFW=-\frac{\beta_2}{\beta_3} \).

  4. We use 100 bootstrap replications to obtain the variance-covariance matrix and set the random number generating seed at 5.

  5. We provide analogous contour graphs for the two innovation output pillars in Appendix C.

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Authors and Affiliations

  1. University of Louisville, One Bear Place #98011, Waco, TX, 76798, USA

    Daniel L. Bennett

  2. Department of Entrepreneurship, Baylor University, One Bear Place #98011, Waco, TX, 76798, USA

    Boris Nikolaev

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  1. Daniel L. Bennett
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  2. Boris Nikolaev
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Correspondence to Daniel L. Bennett.

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Bennett, D.L., Nikolaev, B. Individualism, pro-market institutions, and national innovation. Small Bus Econ 57, 2085–2106 (2021). https://doi.org/10.1007/s11187-020-00396-y

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