Innovation and Social Capital: A Multi-Level Analysis of Enterprise Innovation Performance in Developing Nations

The basic research question addressed in this paper is whether enterprises are more successful in their innovative activities in nations where social capital is more fully developed. Social capital is defined in terms of networks and patterns of social interaction that persist over time, both formal and informal. The paper builds on a large literature demonstrating that in both developed and developing nations networking and interaction among firms supports the development of firm capabilities and innovation. The paper fills a gap by investigating the way social capital at the national level affects the innovation performance of enterprises at the micro-level. In order to undertake this analysis, the paper draws on a unique micro-level data set covering the innovative activities of enterprises of a large number of developing nations in different regions of the world. Micro-level indicators of enterprise characteristics and innovation performance are derived from the World Bank Enterprise Surveys carried out in successive waves between 2002 and 2006. By matching up the sample of countries in the World Bank Survey for which enterprise-level innovation data is available with the sample of countries in the World Values Survey for which indicators of social capital can be constructed, it is possible to undertake a multi-level regression analysis investigating the impact of national-level social capital on enterprise-level innovation outcomes. A basic result of the analysis is that enterprises in general are more likely to innovate in nations where networks and social connections are relatively well developed. Further, the results show that the impact of the firm’s policies in the areas of R&D expenditure and worker training on innovation performance are moderated by the level of social capital.  Networks tend to enhance the positive benefits of R&D expenditures for enterprise innovation performance and this is interpreted as showing that social capital increases the firm’s capacity for absorbing outside sources of scientific and technical knowledge. In the case of workforce training the results shows that social capital acts as a compensator. By increasing the ability of the firm to identify potential recruits on the labour market with needed skills and experience for innovation, networks can to some extent compensate for a lack of in-house workforce training. These moderating role of networks tend to be relatively strong in cases where the in-house creativity and learning requirements for innovation are relatively high.