How Does a Country’s Institutional Environment Shape the Relationship between Firm Risk & Innovation

Abstract

In this study, I propose a theoretical link between risk and innovation. Using arguments grounded in prospect theory and agency theory, I propose a model that conceptualizes the firm level risk as an antecedent to innovation. I then anticipate that the institutional environment will influence the relationship between risk and innovation, so that greater firm level risk will negatively impact innovation. I further expect that certain institutional environment factors will moderate the negative relationship between risk and innovation such that the effect will be weaker in the context of strong pro-market orientation of the country vs. strong pro-social orientation. I test the proposed model in a sample of 1037 firms from countries in the EU and North America.