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In places where rules and regulations are less effective, something unexpected can happen: corruption actually facilitates innovation. At the same time, the cultural values of a society play a significant role in shaping the companies’ innovation achievements.
Navigating innovation through institutional lenses – the paradoxical role of corruption
Innovation drives economic growth and boosts firm productivity, making it a focal point for businesses and policymakers. My research explores how the quality of formal and informal institutions, specifically corruption and culture, influence firm-level innovation, revealing surprising and thought-provoking insights.
In our research, we utilised the World Bank’s Worldwide Governance Indicators data to group the countries that were once part of the Soviet Union into weak, moderate, and strong institutional quality categories. Our results indicate that corruption can, ironically, facilitate innovation in countries with poor institutional quality – such as Uzbekistan, Tajikistan, Kazakhstan, Belarus, Ukraine, and Russia.
When regulations and laws are ineffective, businesses in such environments often resort to bribery to navigate bureaucratic obstacles, acquire necessary permits, and bring new products and processes to market. This phenomenon, known as the “grease-the-wheel” effect, demonstrates that in the absence of strong institutions, corruption can actually spur innovation by reducing barriers and uncertainties that typically impede innovative efforts.
However, this relationship is not universal. The positive link between corruption and innovation disappears in countries with robust institutional frameworks, such as Estonia, Latvia, and Lithuania. Strong institutions provide a stable and predictable environment, eliminating the need for engage in corrupt activities to cut through bureaucratic barriers. This divergence highlights the critical role of institutional quality in shaping how corruption influences firm-level innovation.
Culture and Firm Innovation
Culture also plays a significant role in influencing innovation at the firm level, and various cultural values affect innovation differently. For instance, cultural aspects such as freedom of speech and the possibility to express one’s opinions, freedom to decide how to live one’s life, and the freedom to enjoy leisure are expected to create an environment conducive to innovation.
In such cultural settings, employees are free to explore new ideas and improvements without fearing failure or criticism, resulting in higher levels of entrepreneurship and creativity. However, my empirical findings suggest that the freedom dimension of culture does not have a statistically significant effect on innovation, challenging the conventional wisdom and suggesting that the relationship between freedom and innovation is more nuanced.
On the other hand, a culture that values responsibility, independence, and self-reliance exhibits a positive relationship with innovation. Societies embracing these values encourage risk-taking and responsiveness to market changes, which are critical drivers of developing innovative products and processes. Conversely, cultures dominated by religious faith and traditional values may impede creativity and discourage innovation due to risk aversion and a preference for stability over change.
Implications and Future Directions
The findings from my research offer valuable insights for policymakers and business executives. In countries with ineffective institutional frameworks, strengthening governance could reduce the reliance on corrupt practices for innovation. Simultaneously, fostering a culture that values responsibility and independence can boost the companies’ innovation achievements. Further research is necessary to delve deeper into these relationships, exploring long-term effects and broader cultural aspects.
In conclusion, innovation thrives in environments where formal institutions and cultural values support creative endeavors. By examining the intricate links between corruption, culture, and innovation, my research provides valuable insights that challenge traditional perspectives and offer guidance for fostering innovation in companies. As a compass for policymakers, investors, and companies, the study highlights institutions’ silent yet decisive role in the innovation journey.
Author of this article is Elchin Aghazada from University of Tartu. Editor Jaan-Juhan Oidermaa. Article written for the contest “Science in 3 minutes” organised by Estonian Academy of Sciences and The Estonian Young Academy of Sciences (EYAS). Main sponsor of the competition is Inclusive Financial Technology Foundation.
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