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Individualism, pro-market institutions, and national innovation

Daniel Bennett, PhD Nikolaev, B.
Small Business Economics. September 19, 2020

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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.