Does National Culture Matter for Nature and Quality of Innovation?

Abstract

This study examines how one important dimension of national culture, individualism-collectivism, affects firms’ nature and quality of innovation. In doing so, we explain how individualism gives rise to agency relationships and how collectivism facilitates stewardship relationships between shareholders and managers. We then argue that individualism is more likely than collectivism to cause short-termism behavior of managers. That is, managers in individualistic culture tend to pursue more predictable short-term oriented activities, such as exploitation, rather than risky long-term oriented activities, such as exploration. In contrast, managers in collectivist culture act as stewards and conduct more explorative innovation than those in an individualistic culture. As a result, we find that firms in a collectivist culture tend to generate higher quality innovations than those in an individualistic culture. We, therefore, claim that culture matters for a firm’s pursuit between two different types of innovative activities and affects the quality of innovation as well.