National innovation output : what characterises innovative developing and emerging countries?

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University of Amsterdam

Department of Economics and Business

M.Sc. Business Administration – International Management

___________________________________________________________________________

National innovation output: What characterises innovative developing

and emerging countries?

Final Master thesis of:

Sophie Jakobs 11374578 Supervisor: Dr Mashiho Mihalache Second reader: Dr Markus Paukku June 23rd, 2017

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Statement of originality

This document is written by Sophie Jakobs who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

To spur developing and emerging countries’ growth, a shift of these economies from imitation- or catch-up based to a focus on innovation is essential. It is the constant upgrading of technology and of the national knowledge base that has set developed economies apart. In particular, certain contextual factors stand out to have spurred the pursuit of innovation and subsequent growth of developed countries. A knowledge infrastructure in which collaboration is fostered and institutions that provide adequate protection of investments have generally been found to be vital. This paper sets out to investigate whether these factors are also what induces increases in national rates of international patent applications in developing and emerging countries. While there are certain limitations to relying on patent data to measure innovation, this source of data was deemed appropriate given the lack of alternatives that could cover as many countries as achieved in the underlying study. Based on a panel of 72 developing and emerging countries, the results show that the Western elements of a national innovation system, i.e. a developed infrastructure and institutions, are conducive to innovation in an emerging market context. Furthermore, it is shown that the cultural values of uncertainty avoidance and long term orientation moderate these relationships. The implications of the results are important as they elaborate a comprehensive framework in which theory, policy as well as strategy should be formulated if developing and emerging countries are determined to close the gap and reach a level of development comparable to developed nations.

Key words: Innovation; development; national innovation system; developing countries;

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List of figures

Figure 1. Conceptual framework ... 31

List of tables

Table 1. Means, standard deviations and correlations ... 40

Table 2. Hierarchical multiple regression analysis ... 44

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List of abbreviations

CGR Global Competitiveness Report CVS Chinese Value Survey

DV Dependent variable

ILOSTAT International Labour Organization Statistics IPAs International patent applications

IP Intellectual property IPRs Intellectual property rights LTO Long term orientation MNE Multinational enterprise NIS National innovation system PCT Patent Cooperation Treaty R&D Research and development STO Short term orientation UA Uncertainty avoidance

UN United Nations

WEF World Economic Forum

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Acknowledgements

I would like to thank my thesis supervisor Dr Mashiho Mihalache of the Faculty of Economics and Business at the University of Amsterdam for her feedback, comments and suggestions. She consistently allowed this paper to be my own work, but steered me in the right direction whenever she thought I needed it.

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1. Introduction

Over the last decades, emerging economies around the globe have evolved into important markets in the context of international business. Scholars as well as practitioners now more than ever pay attention to these countries (Peng & Khoury, 2008). Seeing that these countries’ economies have been evolving, it is important to accentuate the discrepancies that have emerged in these economies’ institutional as well as infrastructure landscapes. Differences are not only observable in comparison to developed nations, but also among developing economies. The latter’s environments are highly heterogeneous when it comes to their legal framework and infrastructure. As elaborated by Hoskisson, et al. (2013), the differences range from poor institutions, and an insufficient infrastructure and factor market development, to highly developed institutions and a sophisticated infrastructure. While those countries that are endowed with a somewhat decent level of institutional and infrastructure development might be in a favourable position, others that are not might be in predicament. As emphasised by the national innovation system (NIS) literature, both factors are extremely important in fostering innovation (Alcorta & Peres, 1998; Edquist, 2005, 2006; Fagerberg & Srholec, 2008; Furman, et al., 2002).

But why this emphasis on innovation? Because, as posited by Howells (2005), “knowledge and innovation matter when it comes to economic growth” (p. 1223). Innovation, encompassing the creation of knowledge and technological change, is an important growth engine in today’s rapidly changing and highly competitive environment. Throughout the literature, the general picture is that countries which are able to develop an environment conducive to innovation are the ones that spur their respective nations’ economic development. Those that do not, lag behind (Fagerberg & Srholec, 2008; Grossman & Helpman, 1994; Wu, 2013). The gaps between developed and developing countries have grown larger and deeper, and the critical factor that

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divides them resides in these nations’ innovation capabilities. Only through innovation, the constant upgrading of technological capabilities and associated knowledge bases will the more underdeveloped economies be able to catch up with developed ones (Metcalfe & Ramlogan, 2008). As the aforementioned implies, it will not suffice to just import or copy the necessary technologies from abroad, to acquire developed market companies or to reverse engineer what has already been invented, produced and marketed. Developing economies need to innovate themselves (Chang, et al., 2006).

Since scholars and practitioners have come to this realisation, innovation has been very high on developing nations’ agendas. But investment policies and financial subsidies alone are not enough to incentivise indigenous firms to engage in innovation activities. This is mainly due to the fact that the constant upgrading of technology, knowledge, products and processes is immensely knowledge- and capital-intensive (Ernst, 2002; Furman, et al., 2002). Out of this reality emerged the need for an environment that facilitates and enables innovation to be pursued and implemented. As stressed by the NIS literature, a national framework in which developed organisations and institutions are set is key. Furthermore, collaboration among different actors is necessary (Edquist, 2005; Alcorta & Peres, 1998). The accumulation of a wide spectrum of private and public organisations, such as universities, training centres and funding agencies, in combination with effective institutions that enact specific regulations and ensure enforcement, exerts a strong influence on a nation’s propensity to innovate (Alcorta & Peres, 1998; Furman, et al., 2002; Metcalfe & Ramlogan, 2008). Hence, a robust knowledge infrastructure and developed institutional framework are conducive to innovation, and thus of particular importance to emerging economies in their ambition of spurring economic growth (Demirbag & Glaister, 2010; Watkins, et al., 2015).

While some authors tend to lump together all countries that are not fully developed under the denomination ‘developing’ countries (Delvenne & Thoreau, 2012; Ernst, 2002), it is important

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to distinguish the latter’s differences in institutional and infrastructure development (Hoskisson, et al., 2013), and the innovation implications they entail. Furthermore, while some authors have a tendency to view institutions as the most important pillar in the innovation literature (Giménez & Sanaú, 2007; Knack & Keefer, 1997; Wu, 2013), others focus predominately on infrastructure (Feldman & Florida, 1994; Robin & Schubert, 2012). Most of these studies also have more of a theoretical perspective and have failed to empirically test specific relationships. More importantly, however, most studies do not incorporate the third contextual pillar that sticks out in the literature: culture (Williamson, 2000). Indeed, several authors examine what effects culture has on innovation (Jang, et al., 2016; Jones & Davis, 2000; Shane, 1992, 1993; Taylor & Wilson, 2012), however, it seems that no study until today has proposed a unified framework of the three pillars in which they directly or indirectly influence the innovation output of a country. Hence, there is a consistent gap that needs to be filled; institutions, infrastructure and culture are too often examined in isolation. Furthermore, most studies do not analyse how cultural values may influence the relationships between institutional development, infrastructure and innovation. As called for by Taylor & Wilson (2012), studies need to focus on culture having a conditional effect. Moreover, empirical studies in any of the areas are limited, especially in the case of emerging economies. Hence, the research question of this paper: To what extent are institutions and a knowledge infrastructure important in

fostering innovation in developing countries, and do certain cultural values influence these relationships? This study adds to the current literature in that it responds to the calls of many

scholars by proposing a unified framework. Finally, by considering culture as having an indirect influence on innovation, this study agrees that firms, organisations and institutions which make up the innovation landscape of a country are embedded in the national culture.

The structure of the paper will be as follows. In a first instance, the current literature on the topics of innovation, institutions, infrastructure and culture will be reviewed. Prior studies and

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findings will be elaborated on, based on which the research gap will be defined. In the following chapter, theory will be developed and hypotheses will subsequently be formulated. The methodology chapter provides information regarding the data collection, sample and operationalisation of all variables. The results of the preliminary and regression analyses will be reported next, leading into the discussion chapter. Eventually, the contributions to theory and practice, the limitations of the study and avenues for future research will be discussed.

2. Literature review

For more than half a century now, innovation has been at the centre of the economic development literature (Furman, et al., 2002). And for more than two decades, scholars have repeatedly been emphasising its role as a major growth engine (Eaton & Kortum, 1997; Ernst, 2002; Fagerberg & Srholec, 2008; Howells, 2005; Hudson & Minea, 2013; Tödtling & Trippl, 2005; Watkins, et al., 2015). Earlier assumptions saw innovation exogenously impacting the development process of countries. This view assumed that every country is endowed with the same capabilities necessary to upgrading its existing knowledge and technology base. Moreover, individuals and firms from any country were assumed to be exposed to the same innovative opportunities, and thus, technological progress would be happening concurrently for all nations. As an outcome, innovation as a major wealth creating and sustaining factor would foster the same economic development across the globe. Contrary to this view, the more recent literature that arose from the 1980s, building on Schumpeter’s insights, recognises innovation’s endogenous character and highlights the key part it plays in fostering economic development (Furman, et al., 2002; Howells, 2005). Innovation, henceforward, defines the reconfiguration of the existing or the generation of something new, be it products, processes or procedures (Edquist, 2005). More precisely, a nation’s innovativeness depends on its ability to either accumulate new knowledge and to develop new technologies, or to reinvent existing ones’

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usability, to assemble them to new means, to upgrade and to reconfigure them (Watkins, et al., 2015). Innovation, in this sense, enhances the productivity and efficiency with which current resources are employed. Moreover, positive side effects are investments made in human and physical capital (Giménez & Sanaú, 2007).

2.1. Innovation as a driver of growth

Taken together, and in coherence with the modern view of innovation, the aforementioned ultimately means that how much a nation has developed until today and will continue to do so in the future, depends on its relative capabilities to innovate (Metcalfe & Ramlogan, 2008). This also implies that countries will not undergo development at the same pace, nor will they do so equally. Viewing innovation as an element to be pursued by central market actors, i.e. local firms and organisations, which, by their investments in technology and knowledge, and allocations of capital and resources, actively contribute to the development process, implies that innovation is more of a private good (Grossman & Helpman, 1994). Moreover, this private nature implicates that the rents generated by innovation cannot be appropriated by just anyone and everyone. Embodied in the form of products, services, processes and the like, innovation will primarily be of value to those who contribute to its creation. As posited by Metcalfe & Ramlogan (2008), only those who initially possess the necessary endowments and capabilities to innovate, firms or countries, will be the ones to grow.

In line with this reasoning, it is not surprising that some countries have developed faster and to a greater extent than others have (Giménez & Sanaú, 2007; Metcalfe & Ramlogan, 2008). As much as innovation is important for any nation to continuously grow, it has also been an important factor in the division of the world into developed and developing economies (Howells, 2005). Indeed, as several cross-country studies show, a strong relationship exists between a country’s level of development, generally expressed in GDP per capita, and its level

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of technological progress and innovation system (Fagerberg & Srholec, 2008; Giménez & Sanaú, 2007; Wang, 2007). Furthermore, these studies show that those economies titled ‘developed’ are the ones to continuously upgrade and extend their technology and knowledge bases, while ‘underdeveloped’ or ‘developing’ economies, depict a level of development that is inferior due to their inability to innovate on a regular basis (Metcalfe & Ramlogan, 2008). Though these developing economies, as the word implies, are indeed evolving and have over the course of time closed the gap to developed countries, they have not fully caught up yet (Hoskisson, et al., 2013). Some economies, specifically underdeveloped ones such as Bangladesh, even seem to lag behind now more than ever (Knack & Keefer, 1997).

2.2. Innovation and emerging countries: a means of catching up

In an endeavour to advance the catching-up, developing economies and emerging market firms have benefitted from strategies such as reverse engineering, licensing and aggressive acquisitions of developed market multinational enterprises (MNEs). However, such strategies have only enabled these emerging economies to imitate developed ones, which, as Chang, et al. (2006) explain, can only be of avail up to a certain point. Having reached a certain threshold of technological sophistication, countries and their firms need to look at other forms of improvement. Reverse engineering might be unfeasible in the light of ever-changing technologies that become more complex by the hour (Chang, et al., 2006). Furthermore, stricter intellectual property rights (IPRs), protections and laws, as well as tighter competition make it only further difficult for emerging market firms to acquire or imitate what developed market MNEs have already done (Furman, et al., 2002; Gorodnichenko, et al., 2010). Lastly, as companies become less inclined to share their technologies and knowledge due to the recognition that the latter pose viable sources of competitive advantages, inward internationalisation cannot be considered as an important source for acquiring complementary knowledge anymore. Hence, emerging economies and their market actors need to innovate

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themselves, in their respective home markets, since being nothing more than an imitator is not going to suffice (Chang, et al., 2006).

Though innovations and technologies are the outputs of individual firms, it is important to view innovation as an endeavour that is pursued by the nation as a whole, as it ultimately fosters national growth. As such, innovation and the consequent upgrading of technology should be a joint effort of different market actors, including the government, public agencies and institutions (Edquist, 2005). Building on the aforementioned concept that innovation is endogenous to national growth, this view also posits that different actors and different institutions are central to this process as well. Only by combining the knowledge and capabilities held by different parties is it possible to efficiently drive new inventions, from their inception to their diffusion across the country, and beyond. These different actors have different backgrounds, and therefore possess varying capabilities and know-how. As such, they can complement each other, a factor found to be of central importance in the innovation literature (Watkins, et al., 2015; Alcorta & Peres, 1998). It is in such an environment that innovation can emerge and develop. Different public and private institutions, as well as their actors, form what has been termed the national innovation system (NIS) of a country. This system constitutes a network of relevant actors who, through their different inputs, spawn, develop, disseminate and facilitate the adoption of new technologies (Demirbag & Glaister, 2010).

2.3. National innovation systems

The concept of a NIS has received extensive attention in the literature (Alcorta & Peres, 1998; Delvenne & Thoreau, 2012; Edquist, 2005, 2006; Sharif, 2006). Several scholars highlight that it is a vital pool of knowledge that innovators can tap into (Edquist, 2005). The development of new technologies is very knowledge-intensive and requires many inputs of the sort. The bundling of knowledge of different sources augments the chances of generating new ideas,

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concepts and more (Furman, et al., 2002). Doing so also enables the different parties to learn from each other. As each of the actors and organisations in the innovation system possesses distinct know-how and capabilities, completion of one another’s knowledge base and learning are entailed (Ernst, 2002; Nooteboom, 2000; Tödtling & Trippl, 2005). However, a central point of the NIS literature is its focus on collaboration and the links that are formed between the different parties (Edquist, 2005; Watkins, et al., 2015). As already mentioned, pursuing innovation is very knowledge-intensive, but it is also very capital-intensive and time-consuming. Conducting research and development (R&D), exploring new ventures, experimenting, developing new technologies and incorporating them into products and processes are activities that are in need of considerable financing, and require the skills and knowledge of an educated and trained labour force. These investments in physical and human capital emphasise how important it is to have a whole network of actors and institutions collaborating with each other and providing the inputs needed by one another. Any firm without the labour inputs of universities and training centres, without the financial subsidies of government agencies and private bodies, and without the knowledge creating inputs of research centres would not be able to develop new technologies or would probably go bankrupt in the pursuit of doing so single-handedly (Ernst, 2002).

The early concept of a NIS arose out of observations of countries that have successfully developed into well-functioning economies, i.e. most Western economies and Japan. The concept was conceived to explain the gaps that were arising between different economies. As such, Western systems posed exemplary to those nations that lagged behind in their development (Watkins, et al., 2015). However, it should be noted here that there does not exist such a thing as one optimal national innovation system (Edquist, 2005). Nonetheless, comparison with something that is efficient and using it as reference can definitely bear valuable insights (Arocena & Sutz, 2000). Thus, by applying the concept to underdeveloped

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and developing countries, practitioners soon realised that every national innovation system has certain peculiarities that are different from others. Yet, many NISs also share common features, e.g. the intervention of the government and an educational system engaged in bringing up a knowledgeable and trained labour force. However, it became apparent that the different institutions and actors of emerging market economies are largely operating in isolation.

This lack of linkages is substantial and explains these economies’ sluggish development, as demonstrated by the works of Alcorta & Peres (1998) and Arocena & Sutz (2000) in Latin America and the Caribbean. In their studies, developing countries’ NISs are found to be more a crowding of different organisations, government institutions and public bodies, all trying to pursue innovation on their own, largely isolated from one another. The results are unfulfilled aspirations of technological advancement, partially due to remote investments in capital, and public policies that have no effect since they are not coherently implemented by the necessary parties. Consequently, the analysed countries’ innovativeness is not enhanced and economic growth is not observed. As argued by Watkins, et al. (2015), however, one could say that the NISs of these countries are not ill-performing; they are merely differently compiled and their internal system is operating differently from what has long been assumed to be the role of the national innovation system. It should be reminded here that national innovation systems should be seen in the light of the peculiarities of their respective countries, and the residing institutions and organisation they exhibit. As such, there is no optimal prescribed set of actors, organisation and institutions that should be a part of it (Edquist, 2005, 2006). Moreover, adopting presumable best practices from developed nations does not guarantee success. The same organisations and institutions have different agendas and different roles depending on the country they are situated in (Arocena & Sutz, 2000; Chang, et al., 2006).

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2.3.1. Institutions and infrastructure

The aforementioned is particularly true with respect to the more formal institutions such as IPRs, but also informal ones such as customs. At this point it is necessary to clearly define the different actors and parties that are commonly present in a nation’s system of innovation, and what role they hold, as there is much disagreement on this subject in the literature (Coriat & Weinstein, 2002; Edquist, 2006). Public and private organisations, e.g. firms but also universities, training centres, research facilities and funding agencies (Tödtling & Trippl, 2005), are market actors that perform certain roles and tasks, and together make up the infrastructure of a country (Coriat & Weinstein, 2002; Edquist, 2006). Their main purpose is to generate new knowledge, and to foster its development and diffusion so that all relevant parties of the system have access to it and can benefit from it (Tödtling & Trippl, 2005). But these organisations also provide economic inputs needed to conduct activities related to innovation, i.e. human and physical capital, and financial resources. In this instance, it is important to distinguish between a nation’s infrastructure and institutional environment, as proposed by Hoskisson, et al. (2013).

Having said that, institutions have a rather important bearing since they make up the framework of human and organisational conduct in the business environment. They define the boundaries and rules to which market actors have to abide. Formal constraints such as laws and regulations imposed by governments, and informal constructs such as norms compose the unique environment in which organisational functions are defined. The institutional environment is a regulative, normative and cognitive framework that puts human and organisational actions in context (Peng, et al., 2009). These formal constraints and informal structures either specifically dictate, socially oblige or instinctively guide individuals and firms in what is lawful, socially accepted or taken for granted. This politically, economically and socially structured environment determines the magnitude to which companies can operate profitably in a specific

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market, which costs are incurred and to what extent their activities are limited (Peng & Khoury, 2008). In the midst of the innovation system, institutions provide the legal and corporate governance environment that shapes the relations among the different actors, defines IPRs and ensures their enforcement (Coriat & Weinstein, 2002). Thus, the institutional framework of a country specifies which actors, and the extent to which they have access to the necessary resources, and in how far their innovation outputs and accompanying rents are proprietary (Giménez & Sanaú, 2007; Williamson, 2000; Wu, 2013).

With regards to developing nations, their infrastructure as well as institutional environments are highly heterogeneous. However, they are in no way comparable to those of developed economies. While some countries such as Russia and Thailand show a somewhat decent level of infrastructure development, others have an infrastructure that is utterly underdeveloped, e.g. Angola (Hoskisson, et al., 2013; World Economic Forum, 2015). Similarly, such diversity is also observable with regards to the institutional environments of these nations. Even though most countries have adopted some forms of property rights protections, many have ineffective laws, and enforcement is not guaranteed (Wu, 2013). Institutions are supposed to provide contextual safety; they reduce the uncertainty of conducting business in a certain environment (Peng & Khoury, 2008). Economies characterised by institutional voids are restrained to innovate as the necessary actors are unable or unwilling to commit the necessary inputs due to the uncertainties that prevail in these environments (Bouet, 2015; Knack & Keefer, 1997; Wu, 2013). Any advantage emerging economies might have in pursuing innovative activities gets nullified under the condition of insufficient institutions (Knack & Keefer, 1997). Indeed, several studies have found a positive relationship between a country’s institutional development, usually expressed in intellectual property (IP) protection, and innovation (Chen & Puttitanun, 2005; Furman, et al., 2002; Giménez & Sanaú, 2007; Gould & Gruben, 1996; Park & Ginarte, 1997). Others, however, put forth the possibility that strong IPRs might have

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a negative effect on innovation, especially in emerging countries (Sweet & Maggio, 2015). Particularly in the short run, higher IP protections can have negative effects on a country’s economy as it increases the prices of goods and services (Bouet, 2015). Furthermore, higher IP protection can be a drain on the diffusion of technology and knowledge, something that is of vital importance in developing economies (Sweet & Maggio, 2015).

2.3.2. Culture

A developed infrastructure and strong institutions are, however, only two factors that influence innovation (Bouet, 2015). Culture is another important pillar that makes up the context in which individuals, firms, organisations and the more formal institutions interact. More precisely, the aforementioned are embedded in a nation’s cultural environment, and thus interact with it but are also influenced by it (Williamson, 2000). As every country depicts a diverse environment that requires adapted conduct, societies learnt how to cope with their environment and developed distinct behavioural patterns expressed in values and customs, making up the distinct cultural values reigning in the respective countries (Shane, 1993). Culture, as described by Hofstede (1983), in “its essence is collective mental programming: it is that part of our conditioning that we share with other members of our nation, […] but not with members of other nations […]” (p. 76). Moreover, the distinct national cultural values are reflected in organisations and institutions, and as such, spawn human and corporate actions that are different in every country (Shane, 1993). Similarly, they can have an influence on firms’ strategies, e.g. their endeavours to pursue innovation and to conduct R&D. Since national culture and the reigning cultural values exert such a strong influence, companies might be reluctant or hampered in pursuing certain objectives when these do not match the former (Taylor & Wilson, 2012). In this context, Hofstede’s (1983) four dimensions, individualism, masculinity, uncertainty avoidance and power distance, are often drawn on to link national culture and innovation (Shane, 1993). In the literature, predominantly the question of whether a more

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individualistic or a more collectivistic society has a greater influence on innovation has been examined (Shane, 1992, 1993; Taylor & Wilson, 2012; Tiessen, 1997). Individualistic societies are more open towards creativity and investigating new avenues. They allow individuals to pursue their particular interests and tolerate “would-be innovators” (Taylor & Wilson, 2012, p. 237). Additionally, they even offer the necessary incentives to pursue such entrepreneurial behaviour. As this influences the behaviour of different actors, across different firms, organisations and institutions, it ultimately has an effect on the innovation process overall (Taylor & Wilson, 2012). While some studies analyse the relationship between certain cultural values and innovation directly (Shane, 1993), not many assume a moderating effect to be present, at least not in the context of institutional and infrastructure development.

2.4. Research gap

From the abovementioned theoretical review, it becomes clear that innovation happens in a context and through the joint effort of several parties. However, even though the literature recognises this fact, scholars have largely focused on either firms, organisations or institutions; they have failed to analyse their implications in an integrated manner (Chang, et al., 2006; Coriat & Weinstein, 2002). Institution-based theory overly stresses the importance of formal and informal institutions, and thereby neglects to incorporate the fundamental inputs of a knowledge infrastructure and culture (Chang, et al., 2006). As acknowledged by Nama, et al. (2014), it is important to examine cultural and institutional influences on innovation in conjunction, as previous studies have majorly studied them in isolation. However, these authors also failed to incorporate infrastructure into their study. Conversely, other authors find empirical evidence confirming the necessity of a strong knowledge infrastructure, but neither in the context of a broader innovation system nor in the international business literature (Feldman & Florida, 1994).

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Furthermore, the literature has not yet reached a consensus on whether institutional development, more precisely IPRs, have a positive, negative or curvilinear effect on firms’ innovation performance (Bouet, 2015; Chen & Puttitanun, 2005; Gould & Gruben, 1996; Hudson & Minea, 2013; Kanwar, 2007; Park & Ginarte, 1997; Sweet & Maggio, 2015). Especially in emerging countries where IPRs are lacking, enforcement of the respective laws is not guaranteed, corruption and bribery are common, and capital markets are underdeveloped, the effect of such institutional voids on innovation needs to be determined (Wu, 2013). Hence, the literature in this domain has left many questions open (Chang, et al., 2006).

With regard to the extensive body of the NIS literature, the main limitation is that it leaves out the greater socio-political, i.e. cultural, landscape. This seems problematic, especially for developing economies where culture holds a predominant position (Delvenne & Thoreau, 2012). Moreover, many papers dealing with the NIS do so in a theoretical, qualitative or case study manner, but do not proceed to test their assumptions empirically (Alcorta & Peres, 1998; Arocena & Sutz, 2000; Edquist, 2005, 2006; Metcalfe & Ramlogan, 2008). Studies analysing the relationship between innovation, its underlying innovation system and economic growth only focus on the United States or other Western economies, i.e. developed countries (Eaton & Kortum, 1997; Feldman & Florida, 1994; Furman, et al., 2002; Robin & Schubert, 2012). Finally, in the same instance as before, culture has been studied as an influential factor in isolation, and the results are inconclusive (Shane, 1992, 1993; Taylor & Wilson, 2012; Tiessen, 1997). Scholars have called for cross-national studies analysing the effect it could have on innovation in relation with other contextual, i.e. institutional and organisational, factors (Jang, et al., 2016; Nama, et al., 2014; Taylor & Wilson, 2012; Unger, et al., 2014).

To summarise, one can say that there is need for a unified framework. As the previous paragraph highlights, institutions, knowledge infrastructure and culture have all been recognised to play an important part (Bouet, 2015). However, to my best knowledge, no empirical study has yet

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attended to put them in relation to each other and none has examined what combined influence they have on countries’ innovativeness. Furthermore, while innovation is continuously linked to economic growth, there is still missing consensus on the factors that are essential to innovation in the first place (Furman, et al., 2002). The present study attends to these shortcomings by aiming to complement and add to the current literature and body of theory. Leaning on Williamson (2000) and the different levels of social analysis, this study recognises that multiple factors are at play at varying degrees. While some factors such as institutions and infrastructure exert a direct influence, others, i.e. national cultural values, exert an indirect influence on the underlying concept of national innovation. The study thus meets the request of peers to coherently frame the subject of innovation in the context of institutions, knowledge infrastructure and culture, analysing their effects in combination instead of analysing them in isolation (Bouet, 2015).

Having said that, developing countries are largely missing from most examination. Empirical analyses thus far are predominately focused on developed countries, mainly North America and Europe (Delvenne & Thoreau, 2012). Yet, as posited by Knack & Keefer (1997), the insufficient development of institutions and infrastructure are the very impediments that prevent developing economies from innovating, ultimately slowing their overall development. To close the gap to developed economies, it is crucial to determine whether the aforementioned factors are indeed major obstacles to innovation and if their further development spurs innovation in developing countries as well. Policy makers and governments would benefit knowing what impediments they face and would be able to respond by taking appropriate measures. In relation to innovation’s endogenous character as highlighted above, if development is a process that should emanate from within a country, then innovation needs to be at the centre of this developmental process (Metcalfe & Ramlogan, 2008). As posited by Metcalfe & Ramlogan (2008), “economies only develop through their people becoming more

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knowledgeable” (p.434). The aforementioned entails an important implication: if people are the actors that guide and manage businesses, organisations and institutions, then the cultural values that these actors adhere to will ultimately have an impact on how the economy’s resources are generated and deployed (Mendonca & Kanungo, 1996). The impact of national cultural values is that they motivate or refrain economic actors from engaging in certain behaviours and activities (Sanda & Kuada, 2016), such as investments made in technology and knowledge base upgrading. This paper acknowledges culture’s role in the economic context, but believes it to act through the different firms, organisations and institutions. As such, it is believed to exert a moderating effect on the relationships between infrastructure, institutional development and innovation. Hence, in how far institutions and a knowledge infrastructure are conducive to innovation is conditioned by the overall cultural context in which these relationships are embedded (Unger, et al., 2014). Therefore, the purpose of this study will be to answer the following research question: To what extent are institutions and a knowledge infrastructure

important in fostering innovation in developing countries, and do certain cultural values influence these relationships?

3. Theory and hypotheses development

By reviewing the literature, it becomes clear that innovation is important to foster national economic growth. Furthermore, three factors emerge independently from each other as having an influence on the level of innovation that is present in an economy: knowledge infrastructure, formal and informal institutions as well as national cultural values. In the subsequent section, theory will be advanced and the corresponding hypotheses will be developed to test whether these factors, and more importantly their development, have an impact on innovation.

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3.1. Knowledge infrastructure and innovation

Looking back at history, many of the technologies and innovations that disrupted our societies and came to shape them originated from or had at least been developed in conjunction with infrastructural organisations. These organisations, universities, research facilities, training centres, and governmental and public agencies make up the knowledge infrastructure of a country (Smith, 2005). What emanates herefrom is that the partial formation of a NIS seems to be inherently effected, at least to some extent, by the agglomeration and collaboration of such infrastructural organisations. While this argument certainly holds true for most developed economies, it seems doubtful regarding developing economies (Delvenne & Thoreau, 2012). Many emerging countries are characterised by having a shallow knowledge base that is insufficient to drive innovation. In addition, support organisations are largely missing, and as such, it is hard to pool the required knowledge and resources (Ernst, 2002; Pietrobelli & Rabellotti, 2011). Moreover, as is the case in Latin America, the concerns of emerging country industries do not yet involve the upgrading of technology. As such, there is no immediate need for the different actors of these economies to engage in scientific research. As a consequence, private and public investments in human capital and resource upgrading are scarce, if not only effected by the government (Delvenne & Thoreau, 2012). The fact that many companies in these economies are controlled by and integrated into the global value chains of developed country MNEs, whose agenda does not foresee the development of local innovation power but only the export of goods, serves as another barrier to the successful development of an efficient NIS (Metcalfe & Ramlogan, 2008). Moreover, as financial markets are quite volatile and either underdeveloped or inefficient, there is not sufficient financing to foster firms’ innovation aspirations (Ernst, 2002). The natural development of a NIS witnessed in developed economies might thus not happen in developing countries, posing an important impediment to these countries’ national rates of innovation and subsequent growth.

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This lack of an appropriate knowledge infrastructure is problematic and detrimental to innovation in several ways. First, these infrastructural organisations contribute diverse and valuable inputs to the development and diffusion of innovations, foremost knowledge. This is extremely important, considering that innovation only emerges out of and develops based on knowledge. Importantly, not all knowledge needed to innovate is readily and freely available, nor is it always accessible. Most knowledge is indeed developed, held and distributed individually by various organisations (Smith, 2005). What makes these organisations’ knowledge contribution so valuable is that this knowledge is new and opens up opportunities for inventing, and thus innovation (Feldman & Florida, 1994). For example, the main purpose of universities, public research facilities and laboratories in this regard is to develop novel, scientific knowledge that is then published and made available to others (Robin & Schubert, 2012).

Besides scientific and technological knowledge, research centres and public agencies also collect valuable market and consumer information necessary to determine how demanding a population is and what it requires. Furthermore, private and public funding agencies ensure that inventions are actually translated into products, processes or services that generate income by providing the necessary financial incentives (Feldman & Florida, 1994). Most importantly, however, all these types of different knowledge are likely to complement each other and together constitute a necessary base to pursue innovation (Nooteboom, 2000). Different organisations working together bring variety to the knowledge accessible and employable. Without ever considering external sources, companies run the risk of becoming locked into outdated information and inappropriate knowledge. Organisations external to a company’s strategies and procedures, an outsider with different expertise and background, might be able to provide new and interesting insights and opportunities (Nieto & Santamaría, 2007).

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On another note, each of these organisations is likely to be somewhat specialised and experienced in producing the inputs it provides, thereby ensuring that the innovation output is of higher quality and able to respond to the demanding standards of consumers (Feldman & Florida, 1994). Additionally, the specialised knowledge provided by universities, for instance, comes at relatively low cost (Belderbos, et al., 2004). Important to note here is that even if companies cannot or are unwilling to cooperate with other external organisations, they are probably still able to benefit from the knowledge spillovers that result from these different organisations engaging in research and producing new knowledge. While knowledge spillovers can be found in any location, one can only access them if located with the organisations that produce them as they only flow over into their closest environment (Fritsch & Franke, 2004). Apart from the creation of knowledge, the different organisations of the infrastructure play an important part in training and educating the workforce needed to handle complex knowledge; valuable knowledge is of no use if firms’ personnel are unable to interpret, convert and employ it efficiently into products, processes and more (Smith, 2005). Universities and training centres thus equip a country’s labour force with the necessary know-how (Pianta, 2006). Since a country’s labour force is highly mobile, it diffuses the knowledge developed by one party across and among all others. Therefore, all public and private organisations need to contribute in shaping and training people. In that sense, collaboration is required but in a way also given as each individual organisation profits from the outputs of all others (Smith, 2005).

Finally, time is of the essence when it comes to innovating. Introducing something new to consumers implies being first in doing so. The ongoing exchanges happening between the organisations of a developed knowledge infrastructure ensure that information flows quickly and efficiently to the necessary parties. Moreover, by readily offering the necessary inputs, these different organisations ensure that firms have timely access to the resources and knowledge they require, thus preventing them from losing time (Ernst, 2002). Probably even

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more important is the fact that companies rely on other organisations to collaborate, not just for cost reasons. Markets are inefficient and induce high transaction costs. One way to bypass these problems would be for companies to internalise the respective transactions. However, organisation costs of coordination and communication can also grow out of proportions. In such cases, collaborative arrangements and partnerships are valid solutions. Companies, by relying on a network of supporting organisations and partners, can efficiently procure the inputs they need but are unable to produce themselves or purchase via the market (Nieto & Santamaría, 2007). In addition, partnerships guarantee the parties involved greater control and supervision than market transactions, whilst being effective in preventing opportunism since the parties involved are engaged in a to-way relationship in which they are mutually dependent on each other’s resources (Belderbos, et al., 2004). Altogether, this leads to the following hypothesis:

Hypothesis 1: The less developed the knowledge infrastructure of an emerging country, the more it impedes this country’s national innovation output.

3.2. Institutions and innovation

Institutions, both formal and informal, “are the humanly devised constraints that structure political, economic and social interaction.” (North, 1991, p. 97). Even though many studies dealing with innovation and institutions primarily focus on formal institutions, e.g. property rights (Bouet, 2015; Hudson & Minea, 2013; Sweet & Maggio, 2015; Van Waarden, 2001), this study will take a more extensive approach, incorporating also informal institutions. While formal institutions comprise laws, regulations and policies, and thus make up the legal framework of a country, informal institutions such as codes of conduct, norms, conventions and ethics determine what behaviour is generally accepted or expected of different market actors (Peng, et al., 2009), e.g. disclosure and ethical practices as opposed to corruption and bribery (Sartor & Beamish, 2014). When analysing what effects institutions might have on innovation

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it is important to incorporate both types. Even though formal institutions are extremely important, they only make up a small portion of the institutional environment. Informal institutions complement or even substitute formal ones, especially when the latter are lacking (Peng, et al., 2009).

The knowledge base of a country is highly susceptible and exposed to the larger institutional framework of the respective country. Legal and governance measures can foster or impede investments made in capital, resources and technology upgrading (Waguespack, et al., 2005). As already mentioned, developing and emerging market institutions are highly heterogeneous. While some developing countries are characterised by what has been termed ‘institutional voids’, i.e. having insufficient legal protection with ambiguous laws whose enforcement is not ensured, other countries’ market and economic activity are heavily regulated and controlled for, with much government intervention and bureaucracy (Wu, 2013). Nonetheless, developing economies are often marked by high levels of political instability (Khilji, 2001). Under such circumstances, investors refrain from making heavy investments that could lose their value or be expropriated; investments in foreign currencies, bonds or gold seem then safer and more promising. Furthermore, resources are not efficiently allocated (Feng, 2001). Political instability emerges by implication out of frequent changes in the political and institutional landscape. Changes in political and governmental leadership entail institutional changes, including the withdrawal from and repeal of current regulations and practices (Khilji, 2001). These changes entail uncertainty. Again, this ambiguity refrains investors from making investments needed to spur innovation since the outcomes of their actions and the respective returns are highly unpredictable (Feng, 2001).

The main purpose of institutions is to reduce the above outlined uncertainty in a market and to compile an environment in which certain rules need to be followed and in which individual as well as corporate actions are confined. In turn, market actors are assumed to make rational

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choices, freed of clouded judgement (Peng, et al., 2009). Asymmetric information, moral hazard and opportunism are some of the causes why market transactions are often inefficient or failing, thus incurring costs for the respective companies. When these costs become too substantial and cannot be clearly foreseen, market actors tend to refrain from actions that include such risk and uncertainty. Innovation, by definition, means to renew, and as such entails uncertainty and risks (Van Waarden, 2001). In a first instance, innovating is a knowledge-intensive task and requires much information from different sources. However, markets are hardly ever perfect and thus, its actors only possess incomplete and insufficient information. Institutions provide much of the information needed and help reduce related search costs. For instance, patent laws give clarity about appropriation possibilities and norms of debt repayments allow for effective time management (Edquist & Johnson, 2005). Common activities of innovation, e.g. experimenting, testing and probing all require the innovator to take certain risks without ever knowing what the outcomes may be. Furthermore, as innovations are new to the market, demand is hard to predict and one can never know if a new product, service or process is needed and will find utilisation. As a consequence, firms cannot be certain to generate returns on their investments. Since the financial and resource requirements to pursue innovation are considerable, firms might thus be even more reluctant to commit to innovation-related investments (Van Waarden, 2001).

Apart from these direct uncertainties and risks, innovation also entails indirect ones. As already mentioned, innovation is hardly ever the effort of one single company but usually requires the inputs of different actors. In this regard, innovation makes the different parties dependent on each other, exposes them to each other and to the market failures outlined above. In response, institutions have been established. In situations of uncertainty and risk, institutions through their binding or legitimising character, help market actors to determine others’ intentions and prospective behaviour (Van Waarden, 2001). Moreover, rules and regulations have a

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preventative character in that they provide a common and clearly defined ground for the different partners. As a consequence, conflicts can be avoided or at least resolved. This is crucial when one remembers that partnerships are prone to conflicts due to misunderstandings, coordination and communication problems as well as differing interests. However, conflicts can also arise internally. For example, conflicts of interest between departments are common and can delay or even jeopardise the realisation of a project. Organisational restructurings are another cause of tension. Innovations often require companies to rethink current business models and strategies, or to restructure internal processes. Furthermore, new offerings ultimately mean that old product lines are given less attention and will eventually be discontinued. All of these modifications are likely to bring shifts in task assignments, project management and resource allocation. Accordingly, they entail shifts in responsibility, power and prestige. In this instance, certain formal rules but especially organisational norms bring clarity and efficiency (Edquist & Johnson, 2005).

Another positive aspect of institutions, especially formal ones, is that they are often enacted to impose specific standards on businesses and their operations. More specifically, and related to innovation, they require companies to meet certain quality standards. In order to fulfil these requirements, firms need to be creative, experimental and inventive to find a solution that is adequate for the market and in line with such quality standards. Even more important, however, is that governments enact such standard regulations and laws or change current ones continuously. As such, firms are inevitably required to change too, to upgrade or renew their products, services and processes on a regular basis. For example, newly introduced, low carbon emission standards required car manufacturers to rethink their current models and to develop new ones that could meet the standards imposed. Apart from cleaner air, those standards ultimately fostered innovation (Van Waarden, 2001). In general, apart from regulating and structuring social and economic life, institutions incentivise companies to invest and innovate.

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Property rights, for instance, guarantee an inventor a monopolistic position for some time during which he is able to appropriate resulting rents (Edquist & Johnson, 2005). Norms of cooperation provide the necessary motivation for companies to enter into partnerships, thus fostering innovation and the diffusion thereof (Watkins, et al., 2015). Government rulings stimulate innovation by efficiently and sufficiently allocating the necessary resources, especially financial ones (Edquist & Johnson, 2005). Finally, IPRs induce innovation since they provide the necessary protection to firms to safeguard their investments and to appropriate the profits made. As already mentioned, pursuing innovation is a risky undertaking, not least because expropriation, theft of intellectual capital and forgeries pose considerable threat. IPRs limit imitation and as such provide incentives for firms to engage in innovation (Bouet, 2015). While institutions provide contextual safety and stability necessary to innovation, they can also inhibit innovation. Today’s economic and technological environments are changing rapidly and constantly. Institutions, however, have been found to evolve rather slowly, hence usually lacking behind current developments. This creates a mismatch between companies’ operations and ambitions, and the formal and informal institutions that accompany them. Such under- or mis-developed institutions rather halt than foster innovation. Institutions that lack behind promote policies that are unfit and unable to properly organise economic activity. Consequently, resources are inefficiently allocated and the status-quo is favoured over potential disruptions, especially with regards to technologies (Edquist & Johnson, 2005).

Another potential barrier to innovation arises when institutions become too restrictive and overregulate. Experimentation, testing and inventing, and ultimately innovation, need some freedom to develop. When institutions go as far as regulating everything into the smallest detail, the costs and bureaucratisation of pursuing innovation become substantial, thus steering companies away from it (Van Waarden, 2001). For instance, if the rules and costs of appropriation become too severe and cannot be met, knowledge will become locked into the

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organisations and actors that initially produce it, and will therefore not be diffused (Woolthuis, et al., 2005). Indeed, IPRs have a rather important bearing in protecting inventors and their intellectual capital, but by providing the owners with a monopolistic position that is too strong, they can prohibit competition (Gould & Gruben, 1996; Kanwar & Evenson, 2003; Sweet & Maggio, 2015). Furthermore, as already elaborated, cooperation between different actors pursuing innovation is vital. However, institutions that intervene too much or too little in promoting such collaboration are counterproductive (Woolthuis, et al., 2005).

The aforementioned highlights that institutions matter for innovation. However, it also becomes clear that they can have differing effects, depending on their level of development. On the one hand, weak institutions are not able to provide the positive aspects outlined above, such as reduced uncertainty, conflict avoidance and resolution, investment incentives and security. On the other hand, too much restriction and regulation can prohibit innovation as well (Wu, 2013). As a consequence, an inverted U-shaped relationship is expected between institutional development and innovation. Hence, the hypothesis:

Hypothesis 2: The relationship between institutional development and innovation is nonlinear, with low levels of national innovation output when emerging market institutions are underdeveloped or too restrictive, and high levels of national innovation output when emerging market institutions are at a medium stage of development.

3.3. Culture and innovation

For some time now, scholars have argued that national culture has an influence on a nation’s innovativeness (Shane, 1993). Aspects of performance that cannot be explained by general economic conditions and factors, nor by organisational ones, are commonly attributed to cultural influences (Wilkinson, 1996). Thus, differences in national innovation outputs can be ascribed to, amongst other things, different cultural influences (Shane, 1993).

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Relating to Williamson (2000), cultural values are found on the highest level of social structuring in which individuals, firms, organisations and institutions are embedded. This embeddedness of organisations and institutions into national culture puts constraints on them, and influences their functioning and the effects they have. In this instance, culture ought not to be confused with informal institutions. While institutions are a direct driver of economic activities, culture exerts a more passive influence by shaping the broader social framework in which everything is embedded (Sartor & Beamish, 2014). Consequently, the actors of a country that guide and direct economic activity are influenced in their decisions and behaviour by the larger cultural context they find themselves in. Even though economic decisions are theorised to be made by rational people, individuals unconsciously adhere to certain values and norms that in turn guide their behaviour and influence their decision-making. These individuals navigate and manage the different national organisations and institutions. As such, they have access to and control over valuable resources and determine their employment. Hence, only a national culture that fosters entrepreneurial and innovative behaviour will be conducive to improved national rates of innovation, and ultimately economic growth (Lee & Peterson, 2000; Mendonca & Kanungo, 1996).

When it comes to framing innovation, economic and organisational growth, terms such as profit maximisation and self-fulfilment are the premise. While such assertions might hold true for most Western societies, they are highly arguable when it comes to emerging economies. In these economies, values such as maintaining the status quo, building and relying on networks, or a tendency towards the collective stand out and deviate from the more capitalist values of developed countries. It is important to recognise culture’s differing posture in society in general, and the business landscape in particular in developing countries (Bruton, et al., 2008). Since these countries differ greatly in their culture, it may be that the effects of a knowledge infrastructure and institutions on national rates of innovation are distinct and subject to the

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respective national values. Furthermore, scholars have found culture to have a predominant position in developing countries, as opposed to developed ones. While in the latter, citizens are found to be more rational in their thinking and behaviour, developing country nationals seem to think in terms of associations instead and make context related decisions, e.g. taking into account familyism or religiosity instead of rationally evaluating cause and effect, and choosing the option with the highest value for money (Mendonca & Kanungo, 1996).

While many prior studies have analysed what effects individualism and power distance have on innovation rates (Shane, 1992, 1993; Taylor & Wilson, 2012; Tiessen, 1997), this study focuses on two other of Hofstede’s five dimensions, namely uncertainty avoidance (UA) and long term orientation (LTO). The latter value seems especially important to analyse in the current study as it is found to strongly correlate with national economic growth (Hofstede & Minkov, 2010). A most influential part of people’s life is time. Through its pervasiveness, time is a parameter that exerts an immense influence on many aspects of how personal and economic life are structured. However, how people value and ascribe to the notion of time is culturally defined. Thus, decisions on a same matter can differ substantially, depending on the underlying culture. As such, differences in how people adhere to the past, present and future, and how they conceive the prominence and duration of specific events are visible (Bearden, et al., 2006). Furthermore, these contrasting attitudes have particular effects on innovation. Where the past is valued, change is avoided and the status-quo is preserved; future-orientated societies, however, embrace change and foster development. In the latter case, innovation and the ongoing upgrading of knowledge are likely centre points in society and the economy (Jones & Davis, 2000). The cultural value of long term orientation versus short term orientation (STO) is a valuable measure to identify the extent to which nations vary on the aforementioned aspects (Bearden, et al., 2006). On another note, entrepreneurial activity and innovation implicate first and foremost a great deal of uncertainty. This first barrier needs to be overcome for novelties

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to be invented and to be subsequently pursued. A society that ranks high on uncertainty avoidance will not be able nor willing to invest what is needed to even initiate entrepreneurial behaviour and innovation activities, which then acts as a primary restraint on innovation (Lee & Peterson, 2000).

3.3.1. Uncertainty avoidance and innovation

The cultural value of uncertainty avoidance expresses how the population of a country deals with the fact that the future is highly uncertain. While some societies do not feel threatened by this reality, others do and will try to outrun it. In low uncertainty avoidance societies, individuals are less risk-averse and willing to take a chance if an opportunity presents itself. That is because they tolerate differences and do not get upset by them (Hofstede, 1983). As a consequence, pioneers and first movers tend to be supported and rewarded for their creativity and forward-looking behaviour (Mueller & Thomas, 2001). High uncertainty avoidance societies, however, feel a lot of anxiety towards the future since it is relatively unknown and hard to foresee (Hofstede, 1983). The fear that the future brings change and deviation from the present is considerable, and as such, any related behaviour is regarded with suspicion and likely to be prohibited (Jones & Davis, 2000). In addition, as the fear of failure is predominant, individuals as well as organisations tend to be risk-averse and unambitious, favouring security over striving (Mueller & Thomas, 2001). In such societies, individuals as well as economic and political actors do everything to beat this uncertainty, e.g. by establishing organisations and institutions that help them to do so (Hofstede, 1983).

Pursuing innovation is per se a risky undertaking since the outcome cannot be defined in advance. By experimenting with a given set of means, one cannot distinctively determine what will be the final output. Moreover, innovating does not stop with an invention; the latter needs to be marketed and turned into a profit. However, whether a certain invention will find demand and turn a profit is highly uncertain (Shane, 1995; Swierczek & Ha, 2003; Van Waarden, 2001).

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People willing to take these risks when an opportunity to innovate presents itself are entrepreneurs. Common character traits among those people are ambition, the need for achievement and self-fulfilment, and creativity. High uncertainty avoidance societies, however, value the status-quo. They are sceptical towards people and activities that are deviant from traditional, social behaviour (Mueller & Thomas, 2001; Swierczek & Ha, 2003). Developing countries have generally been found to score quite high on uncertainty avoidance, not least because of their political and economic landscapes (Khilji, 2001). In conjunction with the generally high power distance and high collectivism of these economies (Mendonca & Kanungo, 1996), individuals but also organisations tend to refrain from making important changes that involve a considerable amount of risk and uncertainty. The prospects of certain returns and security for all parties involved are favoured. Of course, such attitudes and behaviour are an impediment to entrepreneurship and innovation (Khilji, 2001). It is thus argued here that whatever the circumstances in which individuals and organisations find themselves, the ones based in high uncertainty avoiding societies will be less inclined to pursue innovation. Hence the hypotheses:

Hypothesis 3a: High uncertainty avoidance negatively moderates the relationship between knowledge infrastructure and national innovation output.

Hypothesis 3b: High uncertainty avoidance negatively moderates the curvilinear relationship between institutional development and national innovation output.

3.3.2. Long term orientation and innovation

While some societies are living in the past and present, others are more forward-looking; i.e., while some societies have a short-term view, others are long term orientated. In short term orientated societies, the past takes an important position in people’s lives and is highly valued. Resultant, traditions are preserved and serve as an anchor to provide social and economic