Global cultural convergence and its effect on innovation

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Master’s Thesis

MSc. in Business Studies – International Management

Global cultural convergence and its effect on Innovation

Tijmen Remmert de Vries - 5947472

University of Amsterdam - Amsterdam Business School First Supervisor: Erik Dirksen

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This study aims to find an answer to the following question: How does globalization affect the effectiveness of innovation in advanced and emerging economies? Prior research showed that the foundation for effective innovation lies within culture. Literature on the subject showed that power distance and individuality are the most important aspects of a culture to influence innovativeness. Studies done on globalization indicated that for the past 30 years cultures around the globe have been converging towards cultural homogeneity. This study aimed to prove that because of this convergence in cultural values between advanced and emerging economies, the effectiveness of their innovations would also be convergent. To do this, data were collected on the number of patents filled by residents of both emerging and advanced economies. These data points were correlated with their respective GDP over the past 20 years. A clear increase was found in the correlation for emerging economies. While only an almost negligible rise in correlation was found for advanced economies over the past 20 years. This showed that emerging economies are rapidly moving towards the efficiency level of the advanced economies. The study also shows that this had primarily been happening over the past 20 years.

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1 Introduction

“Knowledge is power” this saying has become ever more prominent in our ever advancing society, but how accurate is this saying? Acquiring information has become a lot easier over the past decades by means of the Internet and other sharing facilitating technologies. If this trend continues, in a distant, but plausible future, information will be simply uploaded into ones brain and everyone will posses all of mankind’s information. The reason for the previous example is that it stresses the importance of the following: It’s not what you know, but how you use it. Many present day companies are already implementing knowledge management systems and are investing in their intellectual capital. However, such practices are usually only accessible for large multinationals, which leaves the smaller locally operating companies in a situation where they do not fully utilize their knowledgebase. One could expect this effect to be even stronger in lesser-developed countries because of factors like education, infrastructure and government policy, which in turn, are highly influenced by culture.

As Shane (1992) points out in his own study “The data indicate that some societies do become more or less inventive over time. One weakness of this study is that changes in cultural values could not be examined. Hofstede’s (1980) monumental data-collection effort measured values at one point in time, and his study did not show differences in rankings of cultures across time. It may be that the shifts in the degree of countries’ inventiveness shown in the data may occur in response to shifts in power distance and individualism.” This indicates there are grounds to believe that culture chances. It would be interesting to find if

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these possible cultural chances also have a direct effect on the effective use of knowledge.

This paper will investigate whether it is true that knowledge is used more effectively in advanced economies versus emerging economies. And try to find whether this possible difference in knowledge utilization is static or fluid. The main research question this paper will try to answer is: How does globalization affect the effectiveness of innovation in advanced and emerging economies?

First knowledge and intellectual capital will be discussed, focusing on a difference in types of knowledge and how knowledge is used. Following, the focus will shift towards using knowledge for innovative purposes. The importance of innovation and usability of innovations will be discussed. Next the underlying force, culture, which is the foundation for effective innovation will be explained, including the elements of culture that have the most impact on innovativeness. Here globalization will come into play, and it will be discussed how globalization affects and changes culture over time. On the basis of this cultural diversity and movement, hypotheses will be constructed. The next two chapters will give the methodology and the results. Followed by the discussion in which on the bases of the hypotheses an answer to the main research question will be given. Implications, limitations and future research will also be discussed here.

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2 Knowledge and Intellectual capital

In recent years there has been an abundance of research conducted on knowledge sharing and knowledge creating. This follows the logical progression of the current economic development in which knowledge has become one of the, if not the most important asset companies posses, also called the knowledge economy

(Noe, 2009).

Knowledge sharing and creating research is done on multiple levels, starting with the individual level. On this level, research primarily looks at individual characteristics, culture and climate, managerial support, organizational structure, team diversity and social networks, and how they influence the individuals’ ability and willingness to both share and create knowledge (Noe, 2009). Much of the research done on this level has focused on the reward systems organizations put in place and how these systems affect the knowledge sharing and creating activities of the employees. The main consensus in the current literature on this subject is that the once widely held belief that extrinsic rewards worked best, no longer holds when it comes to knowledge and than intrinsic rewards are a far more effective way of stimulating knowledge sharing and creating behavior (Bock and Kim, 2001).

The second level of knowledge sharing and creating activity is the organization level. By far most of the research conducted on knowledge sharing and creating has taken place on this level. (Foss, Husted and Michailova, 2010). ‘Knowledge governance’ (i.e. choosing organizational structures and mechanisms that can influence the processes of using, sharing, integrating, and

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creating knowledge in preferred directions and towards preferred levels) has recently become a distinct issue in management and organization (Grandori, 1997; Michailova and Foss, 2009). Important constructs at this organization level are for example: capabilities, dynamic capabilities, absorptive capacity, communities of practice, etc. (Michailova and Foss 2009). However, as Foss et al. (2010) point out, “these constructs are not clearly rooted in (micro-) foundations, which, among other things, means that their origin and nature remain unclear”. Hence there appears to be a current trend in the literature where frameworks are being theorized to merge the macro and the micro (individual and organizational) level to find the roots of the constructs (llopis-córcoles, 2011).

The third level deals with the intra-firm knowledge sharing and creating issues. On this level de focus lies with the knowledge sharing and creating constructs between e.g. business partners, partially owned subsidiaries, acquisitions, and other partnerships. More so than on the previous levels, the issue of different nationalities arises since a lot of out-sourcing is done to countries other than the host country. Although this can also occur on the firm level, it is more prominent on the intra-firm level. Dealing with geographic distance, different cultures and norms and varying government and legal systems bring a whole different set of challenges when it comes to knowledge sharing and creating (Gupta and Polonsky, 2014). The intra-firm level deals primarily with questions such as how information is exchanged in these networks, how cumulative knowledge adds value, and how knowledge is

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company or new partnership absorbs the knowledge of the parent company and visa versa. The absorptive capacity is highly influenced by external factors, but for managerial purposes, the research focuses on the internal factors that can be manipulated. The current research has uncovered many management tools which can be employed to influence absorptive capacity and can hence influence subsidiary business performance (Mahnke et al., 2005).

The final fourth level, which is not as prominent in current literature as the previous three are, is the country level. On this level most studies focus on difference in national knowledge sharing and creating practices and compare these practices. An example of this can be found in the study Chowa et al. (2000) Here they compare the openness of knowledge sharing within organizations between the United States and the People’s Republic of China. Another example of a study where they make a comparison between countries and see how the different cultures effect knowledge sharing and creating activities, is the study by Michailova and Hutchings (2006), who compare China and Russia. There are

many more examples of studies on this level that do the same, and primarily research the effect culture has on knowledge sharing and creating. However, no study has investigated the effect of globalization and cultural convergence on the efficient use of the knowledge gained by either sharing or self-creating. This study will focus on the knowledge creating part, and the effective innovation that follows, and how this evolves overtime between emerging and advanced economies.

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2.1 Knowledge

Knowledge, knowledge generation and the utilization of said knowledge are considered relevant in this study because they create a competitive advantage. In his 1966 paper Polanyi first described the epistemological dimension of knowledge with its two dimensions: tacit knowledge and explicit knowledge. Tacit knowledge, also revered to as “know how”, is related to the knowledge a person possesses and is therefor highly subjective. Tacit knowledge is created by the accumulated experiences and cultural influences. This process of accumulation makes this type of knowledge very difficult to transfer to other people (Nonaka, 1995). Explicit knowledge is based on facts and thus more objective, this makes its easy to transfer through books and the sorts.

Kogut and Zander (1992) have studied the function of knowledge within firms. They demonstrated that knowledge or intellectual capital is the driver behind new market opportunities and growth. Their study also illustrated that firms need to organize their resources and capabilities in such a way to establish knowledge creation and organizational learning. This study will focus on the former.

2.2 Intellectual capital

This study will focus on the knowledge possessed within firms and to adhere to the terminology in recent literature the term intellectual capital (IC) will be used henceforth. Stewart (1997) defines IC as follows: “an aggregation of all kinds of knowledge and competences of employees, which could bring about competitive advantages for firms”. There does, however, still exist some confusion over what

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organizational knowledge is included and the information a firm possesses is not (Denning, 2009). To illustrate with an example: “A notorious example of the confusion is the opening statement of the World Development Report on Knowledge for Development (1998-1999), a document written principally by economists, which begins with the extraordinary and false assertion that knowledge travels at the speed of light. In fact it can be extremely easy and quick to transfer information from one place to another, intellectual capital (knowledge) is often very difficult and slow to transfer knowledge from one person to another.” (Denning, 2002, p. 33).

According to Chen et al. (2004), and other IC researchers, the IC structure is composed of four elements: human capital, structural capital, customer capital and innovation capital (see figure 1). As Chen et al. (2004) states, “it is a fragile structure, which has to be continuously supported by an integral array of the four interrelated and independent elements in order to realize a company’s value.” Meaning that no single element can create true value on its own but all four elements together in the right proportions can.

Figure 1, structure of IC

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Human capital (HC) (see table 1) encompasses the tacit knowledge embedded in the minds of the employees. Chen et al. (2004) define human capital as follows: “a combination of employees competence, attitude and creativity”. Where employee’s competence encompasses elements such as employee’s knowledge, skills, talents and knack. These elements are gained primarily through education and practice but are also linked to certain predispositions an individual possesses. Secondly, attitude includes the employee’s motivation to do their work and the satisfaction they get from work. Finally, creativity is the measure to which the employees can use their knowledge to make innovation continuously.

Wilson & Larson (2002) describe HC as the crucial element to keep a firm innovative. A firm has the ability to increase their HC by hiring new employees with knowledge the firm did not posses previously. However, the firms HC will be lowered when an employee with firm unique knowledge leaves (Grasenick & Low, 2004).

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Table 1, human capital

(Chen et al., 2004, p. 203)

The second element, structural capital (SC) (See table 2), is the framework a firm builds to support and facilitate the other IC elements (Chen et al., 2004). It is imperative that a firm builds a strong SC framework if it wants to fully utilize its IC (Bontis, 2001). This framework consists of the company culture, organizational structure, organizational learning, operational process, and information systems.

Employees

competence - Strategic leadership of the management - Qualities of the employees

- Learning ability of the employees - Efficiency of employee training

- The employees’ ability to participate in policy making and management

- Training of key technical and managerial employees Employees attitude

- Identification with corporate values - Satisfaction degree

- Employees’ turnover rate

- Employees’ average serviceable life Employees creativity

- Employee’s creative ability

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Table 2, structural capital Corporate culture

- Construction of a company’s culture

- Employees identification with a company’s perspective Organizational

structure - Clarification of relationship among authority, responsibility, and benefit

- Validity of enterprise controlling system Organizational

learning - Construction and utilization of inner information net - Construction and utilization of company repository Operation process

- Business process period - Product quality level

- Corporate operating efficiency Information system

- Mutual support and cooperation between employee - Availability of enterprise information

- Knowledge sharing

(Chen et al., 2004, p. 204) The third element, customer capital (CC) (see table 3), is related to the external relationships a firm has. CC deals with the opinions, preferences and loyalty of all external stakeholders in the firm (Chen et al., 2004). This can either benefit or substantially hurt the firm if not well maintained. This element also includes the vital knowledge a firm has about its competitors, and how it uses this knowledge to adapt to a changing external environment.

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Table 3, customer capital Basic marketing capability

- Construction and utilization of the customer database

- Customer service capability

- Identifying ability of customer’s needs

Market intensity

- Market share - Market potential - Unit sales to customer

- Brand and trademark reputation - Construction of sales channel Customer loyalty indices

- Customer satisfaction - Customer outflow

- Investment on customer relationship

(Chen et al., 2004, p. 206) The fourth and most important element for this study is innovation capital (INC) (see table 4). Chen et al. (2004) describe the element as follows:

“Innovational achievements are the new products, patents and technologies obtained through the technical innovation. They reflect the historical information of the innovation capital of a company.

For the sake of the effective innovation, a company should be provided with a sound innovational mechanism involving the investment mechanism, the operation mechanism, the cooperation mechanism, and the motivation mechanism. It has been indicated that the effective innovation needs the sufficient investment in both human and material resources, the resolute strategic policy-making of the top levels of the company, the good cooperation between R&D, marketing and manufacture departments, and the good cooperative relationship with outside to win the technical support.

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Innovation culture is the foundation of a sound innovational mechanism. All the companies renowned for innovation such as 3M, INTEL have their strong innovational culture. Such a culture can drive a company to make adjustments in its strategy, organization and personnel according to the specific unfavorable conditions in the innovation process in order to ensure the company to hold its ground at the forefront in innovational management.”

Furthermore, Chen et al. (2004) state, “With the increasing importance of knowledge, innovation capital has become the core of IC providing a powerful drive for a company’s continuous development.” The conclusion that can be derived from the previous quotes is that culture is the foundation for effective utilization of innovations within firm. In the following chapter innovation will be discussed.

Table 4, innovation capital

Innovation achievements Average quantity of patents of employees

Percentage of new developed product sales in total sales (the last

three years)

Numbers of new developed technologies (the last three years)

Innovation mechanism Percentage of R&D investment in total sales Quality and quantity of R&D employees

Interface cooperation between R&D, manufacture and market

departments in innovation

Cooperation with external innovation force Management ability of innovation projects Incentives for innovative employees

Innovation culture Corporate culture’s support and encouragement to employees’

Innovation

High management support to innovation (Chen et al., 2004, p. 206)

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3 Innovation

The question ‘what is innovation’ seems to be a straightforward one. However there exist many different definitions in the literature. For the sake of this research the most comprehensive and most applicable definition to this study has been selected.

– Community Innovation Survey (Fagerberg et al, 2005, p. 164)

This is a very long and descriptive definition, but for this study it is imperative that the definition includes the aspect of implementation. This is because the

Scope and impact of technological innovation and innovation activity of the enterprise Technological innovations comprise implemented technologically new products and processes and significant technological improvements in products and processes. An innovation has been implemented if it has been introduced on the market (product innovation) or used within a production process (process innovation). The product or process should be new (or

significantly improved) to the enterprise (it does not necessarily have to be new to the relevant market). Technological innovation requires an objective

improvement in the performance of a product or in the way in which it is

produced or delivered. The following changes are not technological innovations: - improvements of products that make them more attractive to the purchasers without changing their technological characteristics,

- minor technological changes of products and processes or changes which do not have the sufficient degree of novelty,

- changes of products and processes, where the novelty does not concern the use or objective performance characteristics of the products or the way they are produced or delivered, but rather their aesthetic or subjective qualities. Innovation activities are all those steps necessary to develop and implement technologically new or improved products. A technologically new product is a product whose technological characteristics or intended uses differ significantly from those of previously produced products. Such innovations can involve radically new technologies, can be based on combining existing technologies in new uses, or can be derived from the use of new knowledge (e.g. in Business Review Weekly, 2006:42: Pfizer’s Listerine PacketPaks, … did not originate in Pfizer’s New Jersey R&D lab. They were based on a confectionery technology long used in Japan. A technologically improved product is an existing product whose performance has been significantly enhanced or upgraded. A simple product may be improved (in terms of better performance or lower cost) through use of higher performance components or materials, or a complex product which consist of a number of integrated technical subsystems may be improved by partial change to one of the subsystems. Figure 2.1: Defining technological innovation

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focus will be on economic gain from innovation. The second point it incorporates, which is important to this study, is the fact that it also includes the innovations in the production process. This part also has impact on economic growth and can therefor not be absent. Now that a definition has been set, we will look at the importance of innovation.

3.1 Innovation in the individual firm

For the individual firm, innovation is a means to accomplish a sustained competitive advantage (Johannessen et al, 2001). A competitive advantage explains the difference between 4 aspects in a firm, namely whether a firm survives or growths, and whether a firm makes profit or rents (Stoelhorst, 2006).

The importance of innovation for the individual firm is very well described by Meliezer (2008, p. 8) and is as follows. “Competitive advantages allow firms to meet their objectives, be they profit generation, growth, increased market share, or increased employee remuneration and job security. Firms compete successfully when they offer new, better, and/or cheaper products and services that their markets and customers require, and that their competitors cannot provide. Competitive advantage therefore derives from the ability to make and do things more cheaply and better, or to make and do new things (Dodgson, 2000). To be more specific, Blois (2000) states that companies will risk their very survival without successful innovation. The reason is that the average life of products is becoming shorter, as customers continue to demand novel and better products, and as competitors, armed with new and rapidly

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in the product life cycle, decline will follow maturity and that innovation is necessary to break this cycle or start a new one. The second assumption is that innovation will bring costs down and/ or differentiation (value) up. Competitive advantage has a relative dimension: competitive advantage derives from the activities of firms compared to those of their competitors. It also has an absolute dimension: there has to be a market for what the firm does. Innovation plays a central role in improving productivity and developing new products and services, and in providing comparative and absolute advantages (Dodgson, 2000).”

Meliezer (2008) does leave out an important topic, does innovation affect every industry the same? According to Thornhill (2006), although innovation is more prevalent in highly dynamic industries, like the high-tech sector, his research showed that the effect of innovation on firm performance is not moderated by industry dynamism. This means that innovation is imperative for a sustained competitive advantage regardless of the dynamism of the industry the firm is in. Another distinction that needs to be made is whether innovation is achieved in the same way for both manufacturing companies and service companies. “Tether (2005) finds that while manufacturers are more likely to innovate through using in-house R&D and collaborations with universities and research institutes, service firms are more likely to make use of collaborations with customers and suppliers, especially where they have an organizational orientation to their innovation activities.” (Mansury and Love, 2008). This indicates that innovation is achieved in multiple ways across different business sectors. However, the importance of innovation to achieve a sustained competitive advantage is prevalent in all sectors.

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3.2 Innovation on a global scale

In the previous chapter the main focus was on the individual firm and how innovation effected said firm. For this thesis the wider consequences and importance of innovation are more valuable, this will be discussed later. As the national, regional, and firm levels are all interrelated in relation to innovation the firm level is still of significance. But to be able to test the main research question posed in the introduction, the global importance and mechanisms of innovation are essential to discus.

Again, Meliezer (2008: 7) describes the global importance of innovation very well. “Joseph Schumpeter (1883-1950) held technological competition (competition through innovation) to be the driving force of economic development. For example, America gets more than half its economic growth from industries that barely existed a decade ago (The Economist, 1999). Schumpeter extended an earlier line of argument, dating back to Karl Marx, about the role of innovation in long run economic and social change. In this view economic development is seen as a process of qualitative change driven by innovation. Therefore, if one firm successfully introduces an innovation, it will be rewarded by a higher rate of profit and will then attract imitation and subsequent innovations. The core of the argument is that technological competition is the major form of competition under capitalism (and firms not responding to these demands will fail). Innovations open up possibilities for new business opportunities and innovations in the future, and in this way set the stage for continuing change (Fagerberg, 2003). There is disagreement, however,

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(Fagerberg et al, 2005). Dodgson (2000) notes that measuring the relationship between innovation and economic growth is difficult because of data shortcomings and the complexity of innovation itself (it is not a discrete activity, but rather involves a number of interactions over a lengthy period). Freeman (1994 in Dodgson, 2000) argues that while it is difficult to measure the precise contribution of technical change to the growth of industries and countries, no one doubts that innovation is essential to this process. What we do know is that expenditure on Research and Development (R&D) and patenting activity is positively associated with growth in productivity and exports and that the use of advanced manufacturing technology is linked to increased employment, higher wages, and more secure jobs (Dodgson, 2000). The conclusion must be that although there are different frameworks for the analysis of the relationship, they all acknowledge the importance of innovation for growth (Fagerberg et al, 2005). In the words of Metcalfe (1998 in Fagerberg, 2003: 13) “innovation introduces novelty (variety) into the economic sphere. Should the stream of novelty (innovation) dry up, the economy will settle down in a ‗stationary state‘ with little or no growth”.”.

The previous paragraph is quite a comprehensive overview of the importance of innovation on a global scale. However, when we look back at the IC framework, and then specifically the ICN element, we see that Innovation achievements are only the tip of the iceberg. Meliezer (2008) also discusses R&D expenditure, which is part of the second element, innovation mechanism, but he completely ignores the underlying culture. And the innovation culture is the foundation of a sound innovation mechanism, which in turn determines the effectiveness of innovation within both countries and firms (Chen 2004).

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In conclusion, Meliezer (2008) convincingly argues that innovation is of crucial importance for national economic growth. And if this is the case, the foundation for this growth is even more important, namely an innovative culture (Chen 2004). In the next chapter Culture will be discussed and which elements of culture affect innovativeness of countries and firms.

4 Culture

There is an abundance of literature written about culture, so only the parts relevant to this study will be discussed here. When culture is discussed one cannot ignore the 1980 study of Hofstede who found that culture differs substantially on four dimensions: power distance, individualism, masculinity, and uncertainty avoidance. Later two more dimensions were added, called long term orientation and indulgence (Hofstede, 2010). For clarification a short description of each dimension will be given below.

- Power distance: “This dimension expresses the degree to which the less powerful members of a society accept and expect that power is distributed unequally.” (Hofstede, 2010).

- Individualism: “A society's position on this dimension is reflected in whether people’s self-image is defined in terms of “I” or “we.”” (Hofstede, 2010).

- Masculinity: “The Masculinity side of this dimension represents a preference in society for achievement, heroism, assertiveness and

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- Uncertainty avoidance: “The Uncertainty Avoidance dimension expresses the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity.” (Hofstede, 2010).

- Long term orientation: “Societies who score low on this dimension prefer to maintain time-honored traditions and norms. Those with a culture which scores high take a more pragmatic approach” (Hofstede, 2010). - Indulgence: “Indulgence stands for a society that allows relatively free

gratification. Restraint stands for a society that suppresses gratification.” (Hofstede, 2010).

According to the literature power distance, individuality, and cultural tightness-looseness (TL) are the three dimensions, which mostly determine how innovative a culture is (Shane, 1992, Gelfand et al., 2006). A more recent study done by Taylor and Wilson (2012) confirms the results of Shane (1992) on the individuality dimension. They do however suggest that certain types of collectivism (e.g. patriotism and nationalism) can foster innovation on the national level (Taylor and Wilson, 2012). However, their main conclusion is that high individualism correlates strongly with innovativeness (Taylor and Wilson, 2012). Another paper confirming Shane’s (1992) findings concludes the following: “Our analyses show a strong negative relationship between Hofstede’s dimensions of power distance and the global innovation index (GII) innovation scores as well as a strong positive relationship between individualism and GII innovation scores.” (Rinne et al., 2012).

A large power distance implies a more hierarchical structure, which according to Thompson (1976, in Shane 1992) is detrimental to innovation. Also

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the lack of informal communication between higher and lower levels within organizations, which is prevalent in high power distance cultures, has a negative effect on innovative abilities (Shane, 1992). A third aspect, which highly influences innovation, is the centralization of power (Aldrich, 1979). Hofstede (1980) found that in countries with high power distance, people believed in centralized authority and decision-making. A fourth characteristic of power distant countries is the lack of trust in subordinates (Hofstede, 1980). Quinn (1979, in Shane 1992) found that trust in subordinates is of high importance for innovation on the organizational level. Next, successfully innovating firms accept and embrace change as their way to grow and prosper, in power distant countries the tendency is to do the complete opposite because of a fear of having to relinquish control (Shane, 1992). Finally, Shane (1992) argues that power distant countries emphasize strict rules and detailed instruction. These mechanisms negatively influence the ability to innovate according to Thompson (1967, in Shane 1992) and Burns and Stalker (1961, in Shane 1992).

According to Shane (1992) the individuality dimension represents six believes that have been found to encourage innovation. The first one is freedom, this because entrepreneurial managers need to freedom to work on their personal projects. The same holds true for the most successful scientists in R&D (Twiss, 1980, in Shane 1992). Schwartz (2012) theory of basic human nature identifies self-direction as human values that promote innovation. As Schwartz (2012) puts it: “Self direction values foster creativity, motivate innovation, and promote coping with challenges. Behavior based on these values is intrinsically

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threatens positive social relations.”(p. 15). These values fall perfectly under an individualistic society.

Second is a cosmopolitan orientation, because an outward orientation is important for innovativeness. Next is the tendency of people in an individualistic society to prefer smaller firms over large ones. Research in the US has found that smaller firms are more innovative than bigger ones (Charpie 1967; Gellman 1976; Goldman 1985 in Shane 1992). Fourth is the aspect of the importance to people to be compensated for doing more that others. “Research has shown that financial remuneration, social prestige, and personal fulfillment motivate innovators (Gee and Tyler 1976).”(Shane, 1992). Fifth, Hofstede (1980) found that in individualistic countries people believe that in order to advanced in a firm it is more important to know influential people as opposed to only skill. In research it is also extremely important to know the right people in order to get funding or access to the right materials and facilities (shane, 1992). Finally, collectivistic societies exhibit trades of conformity, which greatly hinders creativity and diversity in thoughts (shane, 1992). Schwartz (2012) also identified the human values of conformity to hinder innovation. “These values are usually acquired in response to demands and sanctions to avoid risks, control forbidden impulses, and restrict the self” leading to the emphasis being on maintaining the status quo which is in direct contrast with innovation (Schwartz, 2012, p.15)

Cultural tightness-looseness (TL) is the third dimension that impacts innovation (Gelfand et al., 2006). TL is a unique but complementary cultural dimention because it “relates to how behavior is influenced by the strength of social norms and sanctioning” (Gelfand et al., 2006, p. 9). The key outcomes of

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their study are as follows: “Key outcomes associated with tightness include order and efficiency, conformity, and low rates of change. Key outcomes associated with looseness include social disorganization, deviance, and innovation and openness to change” (Gelfand et al., 2006, p. 2). From these outcomes can be concluded that a society that has less stringent social norms and sanctioning is more like to innovate.

Shane (1992) concludes his paper with the following statement: “Countries that are inventive at one point in time appear to remain inventive, whereas those that are not inventive remain uninventive. This relationship tends to hold even when inventiveness is adjusted for wealth. Moreover, the values of individualism and lack of power distance appear to explain differences in national rates of inventiveness. Since rates of inventiveness were measured as much as eight years after values, the causal link appears to run from values to inventiveness, not the other direction.”.

Shane’s (1992) study used data from 1967 till 1980. Research shows that cultural convergence or cultural homogenization did not really take off until the turn of the twentieth century (Ritzer, 2011). Because Shane’s (1992) data is missing this crucial period, it is very likely that the first part of his statement about countries not being able to change their innovativeness is no longer true. In order to further this argument, I must first discuss the turn of the twentieth century globalization.

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5 Globalization

Globalization has really taken off since the industrial revolution (Ritzer, 2011). However in this period it focused mainly on international trade and the availability of homogeneous products worldwide (Ritzer, 2011). Later on globalization also started impacting global politics and economics. However, only since the late 1980ies beginning of the 1990ies globalization has also really started to impact culture (Ritzer, 2011).

The McDonaldization thesis (Ritzer 1997, 2008) is often used to describe this latest period in the globalization process. It is based on Max Weber ’ s classic, turn - of - the - twentieth - century theory of the rationalization of the West (Ritzer, 2011). As Ritzer (2011) states it: “The McDonaldization thesis brings the theory into the twenty - first century, and views rationalization extending its reach into more sectors of society and areas of the world than Weber ever imagined. Of greatest concern here is the fact that McDonaldization is a force in global cultural homogenization.”

Another effect of globalization on culture is theorized by Pieterse (2015) and is called a cultural hybrid. This theory suggests that cultures don’t necessarily converge but that they incorporate parts of each other to form a hybrid culture having elements of many different cultures (Pieterse, 2015). Since it is still a relatively new theory, there hasn’t been much research done into hybrid cultures. However, observing the ever-increasing technological dependency of the world, it is safe to assume that cultures would incorporate elements from other cultures that stimulate the development of technology. If this assumption holds true, than for the sake of this study both cultural

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homogenization and hybridity have the same effect. The will both transform cultures to be better equipped to effectively innovate.

As previously mentioned, because Shane’s (1992) data was from a period before cultural homogenization his statement about cultures not being able to change their innovativeness might no longer hold true. The studies by Wu (2006) and Beugelsdijk et al. (2013) give indication that cultures have indeed changed. Wu (2006) reexamined the Hofstede cultural dimensions for Taiwan and the US in 2001. He found that “when the political, societal, and economic environments change, people's cultural values also change” (p. 33). Most interestingly for the purpose of this study is that Wu’s (2006) results show that the US and Taiwan seem to be moving closer to the same value on every cultural dimension. This is in line with the McDonaldization thesis and hence cultural homogenization. Beagelsdijk et al. (2013) conclude the following: “we find that national cultures have changed. Specifically, results show that societies have become on average more Individualistic, more Indulgent / less Restrained, and less hierarchical, as reflected in the lower score on Power Distance” (p. 3). These results show that the two most important cultural dimensions for innovation are globally on the rise.

In conclusion, both studies indicate that most change was found on individuality and power distance. Where countries that used to have high power distance seem to move to lower power distance. And countries with low individuality seem to move to higher individuality.

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6 Hypotheses

The main research question of this thesis is as follows: How does globalization affect the effectiveness of innovation in advanced and emerging economies? In order to test for the effective use of knowledge we look at the effect that innovation has on economic growth.

As can be found in the prior discussion, power distance and individuality highly effect the innovativeness of cultures. When we look at the Hofstede (2001) dimensions, we find that power distance and individuality are still respectively lower and higher for countries in advanced economies. Hence the first hypothesis goes as follows

H1: innovation will have a stronger effect on economic growth in advanced economies than in developing economies

However, as the studies by Wu (2006) and Beugelsdijk (2013) indicate, power distance is on the decline in developing countries. And also individuality is on the rise in these countries. So the second hypothises will test if this also translates to how innovation affects economic growth.

H2: the effect of innovation on economic growth will have grown more for emerging economies than for advanced economies over the pas 10 years compared to the previous 10 years.

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H2a: the effect of innovation on economic growth will have grown for emerging markets over the pas 10 years compared to the previous 10 years.

H2b: the effect of innovation on economic growth will have grown for advanced economies over the pas 10 years compared to the previous 10 years.

Finally, as the McDonaldization theory suggests, there is a trend toward cultural homogenization (Ritzer, 2011). This would indicate that advanced and emerging economies are growing ever more together, at leased on the cultural level. And as the INC element in the IC framework suggests, this should than also translate to the convergence in effective innovation. In order to test this, the following hypothesis has been constructed.

H3: The effect that innovation has on economic growth in advanced and emerging economies is convergent

7 Methodology

Data collection

To test the hypotheses and untimely answer the main research question this study first looks at the innovativeness of countries. To measure this innovativeness data was collected on the number of patents filed by residents of the selected countries. Using this measurement for innovativeness is supported by many authors including, but not limited to Day (1990), Kuznets (1959)

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critique on using the one-measure to capture all innovation, however there is no other variable better directly comparable across countries (Shane, 1992). So also for lack of a better alternative, patent data is the best indicator to compare innovativeness across countries.

The data for the independent variable, patent filings, was collected from the Worldbank database, for the years ranging from 1994 till 2013. This was done for both advanced economies and emerging economies. A comprehensive list of the countries adhering to either of those groups can be found in appendix 1.

In order to test the effectiveness of the innovativeness of countries on their economic growth, their total gross domestic product (GDP), the dependent variable, was also collected from the world databank. This was also done for the time period between 1994 and 2013. All data was then paired up on both yearly basis and per country.

After collection the data points have been sorted in 4 series to create Model 1. Each series contains 2 variables which represent a time period of 10 years; Emerg9403 (EmergPat9403 EmergGDP9403), Emerg0413 (EmergPat0413 EmergGDP0413), Advan9403 (AdvanPat9403 AdvanGDP9403), Advan0413 (AdvanPat0413 AdvanGDP0413). The numbers in the variable indicate the time span they represent. These series make it possible to compare regression lines between them and are needed to test the hypotheses. After data was collected and sorted, checks were run for missing values and reliability. Then as a final step, additional variable had to be created to test the hypotheses.

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Missing values

The first step is a check of frequencies to find any errors in the data; no errors were found. After, the data were examined for missing data points because the research needs all data in couples (patents filings and corresponding GDP, per country per year) the missing cases were dismissed. Meaning that if either of the data points were missing the corresponding value for the coupled variable was discarded as well.

Reliability

A normality check revealed that none of the variables were normally distributed and had reasonable high skewness and Kurtosis, however “with reasonably large samples, skewness will not make a substantive difference in the analysis” (Tabachnick & Fidell, 2001, p. 74). “Kurtosis can result in an underestimate of the variance, but this risk is also reduced with a large sample” (200+ cases: Tabachnick & Fidell, 2001, p. 75). The variables that will be directly correlated have far more than 200 data points so both kurtosis and skewness will both have limited impact on the analysis. To still control for the violation of the normality assumption the relevant regressions will incorporate bootstrapping. The significance level of the bootstrap will be more reliable than from the regular regression analysis.

Computing additional variables

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EmergPat9403 and 0 for EmergPat0413. Advanced and Patent will follow the same pattern. After the creation of these dummy variable 3 moderation variables will be created which will be the product of the dummy variable and respectively EmergPat, AdvanPat and PatentTot. These variables will be called respectively Emerging2, Advanced2 and Patent2.

8 Hypotheses testing and results

Correlations

From the correlation matrix (table 1) we can already see that EmergPat041 has more predictive power over EmergGDP0413 (r=0.853, p<0.01) than EmergPat940 has over EmergGDP940 (r=0.529, p<0.01). This gives an indication that the effect of innovation on economic growth has increased in the second 10 year period. Secondly we can see that AdvanPat0413 is more strongly correlated with AdvanGDP0413 (r=0.985, r<0.01) than EmergPat940 is with EmergGDP940 (r=0.529, p<0.01). This indicates that innovation still has a stronger effect on economic growth in advanced economies versus emerging economies. Finally if we compare the correlation between EmergPat9403 and EmergGDP9403 (r=0.529, p<0.01) and AdvanPat9403 and AdvanGDP9403 (r=0.982, p<0.01) with the correlation between EmergPat0413 and EmergGDP0413 (r=0.853, p<0.01) and AdvanPat0413 and AdvanGDP0413 (r=0.985, r<0.01) we can see that the difference in r value has decreased which gives indication that the effect that innovation has on economic growth is convergent.

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Table 1, correlation matrix

A multitude of regression analyses have been conducted in order to be able to compare the regression coefficients of different variables. First three H0 have been set up which need to be rejected to be able to compare the relative adjusted R-values. Further more, the Anova test for every analysis showed a significance level of p<0.01. Also the Bootstrap analysis showed no difference in significance level of p<0.01.

Hypothesis 1

For the first hypothesis H0 is Bte=Bta, where Bte is the regression coefficient

between EmergPat0413 and EmergGDP0413 and Bta is the regression coefficient

between AdvanPat0413 and AdvanGDP0413. In Output 1 H0 is tested by looking at the variable Patent2 which has t=74.382 (p<0.01). This indicates that Bte is

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p<0.01). This means significant support for H1 has been found meaning that innovation has a stronger effect on economic growth in advanced economies versus emerging economies.

Model 1

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Hypothesis 2

To test H2 first H2a and H2b need to be tested.

For H2a H0 is Be0413=Be9403, where Be0413 is the regression coefficient between

EmergPat9403 and EmergGDP9403 and Be9403 is the regression coefficient

between EmergPat0413 and EmergGDP0413. In Output 2 H0 is tested by looking at the variable Emerging2 which has p=0.079 and t=-1.761. This indicates that Be0413 is significantly different from Be9403 when the confidence level is set at 90%

and H0 is rejected. The change from the normal 95% confidence level is acceptable because of the large difference in R-value. Because of the large difference the results will still be significant at a confidence interval of 90%. This is a weakness in the research, which could be mended if more valid data points were collected for EmergPat9403 and EmergGDP9403.

Output 2

For H2b H0 is Ba0413=Ba9403, where Ba0413 is the regression coefficient between

AdvanPat9403 and AdvanGDP9403 and Ba9403 is the regression coefficient

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at the variable Advanced2 which has p<0.01 and t=10.801. This indicates that Ba0413 is significantly different from Ba9403 so H0 is rejected.

Output 3

With results of H2a and H2b we can now compare the regression coefficients in Model 1 to find support for H2. Looking at the adjusted R2_{we see}

that the difference between Advan9403 (adj R2_{=0.964, p<0.01) and Advan0413}

(adj R2_{=0.969, p<0.01) is 0.005, which is smaller than the difference between the}

adjusted R2_{between Emerg9403 (adj R}2_{=0.276, p<0.01) and Emerg0413 (adj}

R2_{=0.726, p<0.01), which is 0.450. This supports H2 by showing that the effect of}

innovation on economic growth has risen stronger for emerging markets over the past 10 year.

Hypothesis 3

To test H3 we only need Model 1 because we already determined there was a significant difference for the regression coefficients between Emerg9403 and Emerg0413 in H2a as well as between Advan9403 and Advan0413 in H2b. In table 1 we see that the difference in the Adjusted R2_{between Emerg9403 (adj}

R2_{=0.276, p<0.01) and Advan9403 (adj R}2_{=0.964, p<0.01) is 0.688. We can also se}

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and Advan0413 (adj R2_{=0.969, p<0.01) is 0.243. Seeing as this difference has}

become smaller over the past 10 years compared to the previous 10 years support for H3 is found. This means that the effect of innovation on economic growth in emerging and advanced economies is converging.

9 Discussion

Globalization has for a long time been a driving factor behind standardization of trade, economics and politics around the globe (Ritzer, 2011). However, it has only started to significantly influence global culture for the past 20 to 30 years (Ritzer, 2011). As discussed in this study, culture is the foundation of innovation. National culture, in turn, affects the culture within firms. In order to effectively and efficiently innovate and implement innovations it is crucial that a firm has the right culture to support these processes. “According to institutional theory, organizations conform to the prevailing institutional structure of the environment in which they operate (Granovetter 1985) and exhibit the values and norms of their societies (Zucker 1977).” (Shane, 1992).

The results of this study show that there has been a sharp increase in the effect of innovation on economic growth in emerging markets. This is in line with the cultural development seen in these countries by Wu (2006) and Beugelsdijk (2013). The study shows that low power distance and high individuality not only increase the innovativeness in emerging markets, but also increases the economic effectiveness of the innovations.

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the third hypothesis shows, they are converging. This, again, is in line with the trend of cultural globalization, which is moving toward cultural homogenization. It is likely that if globalization continues on its current course, developing economies will at one point use their knowledge as efficiently as advance economies do.

“Khandwalla (1977) writes that in a creative, risk-taking organization, management is flexible and adaptive, leading to innovativeness. By contrast, when management is conservative, the advantage lies in efficiently producing true and tried products or services. Since efficiency lies in standardizing procedures and the like, conservatism and a mechanistic mode make good bedfellows” (Shane, 1992). This might have been the case for many of the countries that today are considered emerging economies. However, as this study shows, the correlation between inventions, made by people who are from these countries, and economic growth is rising tremendously. This indicates that these countries are moving away from their conservatism and mechanistic ways and toward a more flexible, adaptive, leading and innovative way of doing business.

The main theoretical implication of this study is to prove that national culture is fluid and because it is fluid, it will try to flow to the lowest point, in this case the most dominant global culture. However, this is a very recent process, and has only really shown itself in the past 30 years. Therefore, much literature on the subject has not incorporated this trend. It is my personal belief that this trend is exponential, just like two magnets whose attraction becomes stronger the closer they are together. For example, European consumer cultures have gone from moderately different to basically the same in a very short time span because they were already very similar. Now more recently we see the European

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countries also move to a common business and political culture with the formation of the European Union. On the other hand, the Asian cultures have long stayed very different from the western cultures. But in the past 30 years we have seen them change faster and faster towards a more western consumer and business culture. And the closer the Asian culture comes to the western culture, the more the western culture starts to adopt from the Asian culture.

A more practical implication of this study is that because the results show that emerging economies are starting to use their knowledge more efficiently and are therefore likely moving towards a knowledge economy. It could be that the current advanced economies will find themselves outpaced soon by the emerging economies. Because these economies have far larger populations and also still retain the manufacturing capabilities that most advanced economies have outsourced to the emerging economies.

A less global practical implication of this study would be for managers deciding which business units to place where. Traditionally manufacturing would go to the emerging economies, and R&D would be based in an advanced economy. However, observing the trend the results of this study show, we could soon see a rapid increase in the outsourcing of R&D to emerging markets. At this time this happens on a small scale and primarily for programming work, but as the emerging economies increase their effective innovation ability, we could see more and more complex R&D go oversees. Of course many variables need to be considered with a decision like this. But the results of this study show that innovativeness of the country and its people’s attitude towards it might no

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9.1 Limitations

A major limitation of this study is the fact that it can only look at relative effects, not at absolute effects. So we can say that the effect of innovation on economic growth is stronger for advanced economies than for emerging economies. But we can’t determine exactly how much influence innovation has on economic growth for advanced or emerging economies. It would be very interesting to be able to set such a direct causal relationship. However, it would take a monumental amount of data, which was out of this study’s scope.

A second limitation is the amount of data that was available especially for the countries from the emerging economies. With a more complete dataset the relative effects could have been determined with greater accuracy and significance. Non-the less do the results give a more than fair estimation of the true differential values. With more data it would also be possible to go back further in time. By doing this one could find the exact time when the cultural convergence within companies began and what type of pattern it follows.

Also the incorporation of “frontier economies” into this study would have been very interesting, but these countries suffered from extreme lack of data. For this study collecting this data was too time consuming and far beyond its scope. Especially in terms of cultural globalization it would be very interesting to see where these countries stand today.

A final limitation is that this study only uses national data. Looking at firm data as well would increase the validity of the results and make them instantly applicable on the organizational level. Now the implications of this study can only be theoretically linked to the organizational level. How ever strong this

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theoretical link might be, it would still be stronger to have a direct causal relationship with the organizational level.

10 Conclusion

The main research question for this thesis was: How does globalization affect the effectiveness of innovation in advanced and emerging economies? The results show, while possessing limitations, that because of the converging or hybridization of global cultures, so does the effective use of knowledge converge between emerging and advanced economies. Meaning that emerging economies are becoming ever-more innovative and are approaching the innovation levels of the advanced economies.

By looking at the cultural drivers behind innovation the literature showed that power distance, individuality and tightness-looseness of cultures are the driving dimensions behind the innovativeness of cultures. These dimensions were and are still more favorably present in advanced economies, but are on the rise in emerging economies. If this trend from the past 20 years continues we will soon see the emerging economy’s innovativeness match that of the advanced economies. If and when this happens is still open to debate, but the results of this study show it to be a real possibility.

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Global cultural convergence and its effect on innovation

Master’s Thesis