Informal institutions and the geography of innovation: An integrative perspective

Abstract

Integrating the insights from both institutional theory and economic geography, we develop a new conceptual framework to explain how formal and informal institutions in developing countries influence knowledge exchanges within and across geographical locations, thus affecting entrepreneurs’ and firms’ innovative behaviors and outputs. We suggest that the prevalence of informal institutions in developing countries increases the importance of geographic proximity for knowledge exchanges. At the same time, informal institutions provide alternative channels for maintaining non-local social interactions that facilitate knowledge exchanges among geographically distant firms. Using China as the context, we provide theoretical propositions that illustrate these mechanisms in terms of the different innovative behaviors between domestic Chinese firms and multinational companies operating in China. This article provides a fresh perspective on how the geography of innovation is embedded in institutional environments. It enriches the literature by highlighting the important role of informal institutions in influencing innovation and how firms, especially entrepreneurial ones, vary their innovative behaviors depending on the extent of their embeddedness in the informal institutions.