IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v72y2025ics1544612324016180.html
   My bibliography  Save this article

Invisible handcuffs: Nepotism culture and SMEs’ innovation

Author

Listed:
  • Xie, Wenyu
  • Yin, Weijun
  • Tu, Dorothy

Abstract

This paper investigates how nepotism culture affects SMEs’ innovation behavior. Using a large international datasets of small and medium enterprises, we establish the negative effect of nepotism culture on SMEs’ innovation, and observe the heterogeneous impact based on the presence of informal payments, financial constraints, and female ownership. Our results suggest that nepotism culture hinders highly skilled human capital and formal training, both of which are paramount for technological advancement and economic development. The policy implication is that promoting merit-based recruitment and reducing nepotistic practices could enhance innovation capacity, especially by fostering a more competitive environment.

Suggested Citation

  • Xie, Wenyu & Yin, Weijun & Tu, Dorothy, 2025. "Invisible handcuffs: Nepotism culture and SMEs’ innovation," Finance Research Letters, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324016180
    DOI: 10.1016/j.frl.2024.106589
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612324016180
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2024.106589?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Paunov, Caroline, 2016. "Corruption's asymmetric impacts on firm innovation," Journal of Development Economics, Elsevier, vol. 118(C), pages 216-231.
    2. Chang'an Wang & Junqian Wu & Jianqing Ruan & Xiaoqian Liu, 2022. "Language differences, cultural identity, and innovation," Growth and Change, Wiley Blackwell, vol. 53(4), pages 1716-1736, December.
    3. Jie Yang & Jieqiong Ma & Hongxin Zhao & Jim Cater & Mark Arnold, 2019. "Family involvement, environmental turbulence, and R&D investment: evidence from Listed Chinese SMEs," Small Business Economics, Springer, vol. 53(4), pages 1017-1032, December.
    4. Yuriy Gorodnichenko & Jan Svejnar & Katherine Terrell, 2010. "Globalization and Innovation in Emerging Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 194-226, April.
    5. Addis Gedefaw Birhanu & Alfonso Gambardella & Giovanni Valentini, 2016. "Bribery and Investment : Firm-Level Evidence from Africa and Latin America," Post-Print hal-04041950, HAL.
    6. Roland Bénabou & Davide Ticchi & Andrea Vindigni, 2015. "Religion and Innovation," American Economic Review, American Economic Association, vol. 105(5), pages 346-351, May.
    7. Akbari, Mahsa & Bahrami-Rad, Duman & Kimbrough, Erik O., 2019. "Kinship, fractionalization and corruption," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 493-528.
    8. Addis G. Birhanu & Alfonso Gambardella & Giovanni Valentini, 2016. "Bribery and investment: Firm-level evidence from Africa and Latin America," Strategic Management Journal, Wiley Blackwell, vol. 37(9), pages 1865-1877, September.
    9. Ishac Diwan & Philip Keefer & Marc Schiffbauer, 2020. "Pyramid capitalism: Cronyism, regulation, and firm productivity in Egypt," The Review of International Organizations, Springer, vol. 15(1), pages 211-246, January.
    10. Philippe Aghion & John Van Reenen & Luigi Zingales, 2013. "Innovation and Institutional Ownership," American Economic Review, American Economic Association, vol. 103(1), pages 277-304, February.
    11. Yuriy Gorodnichenko & Monika Schnitzer, 2013. "Financial Constraints And Innovation: Why Poor Countries Don'T Catch Up," Journal of the European Economic Association, European Economic Association, vol. 11(5), pages 1115-1152, October.
    12. Anne Marie Knott & Carl Vieregger, 2020. "Reconciling the Firm Size and Innovation Puzzle," Organization Science, INFORMS, vol. 31(2), pages 477-488, March.
    13. Han, Han & Zhao, Xueqing & Wang, Zhibin, 2023. "The effect of stock pledge on corporate fraudulence: Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    14. Maria Guadalupe & Olga Kuzmina & Catherine Thomas, 2012. "Innovation and Foreign Ownership," American Economic Review, American Economic Association, vol. 102(7), pages 3594-3627, December.
    15. Alberto Alesina & Paola Giuliano, 2015. "Culture and Institutions," Journal of Economic Literature, American Economic Association, vol. 53(4), pages 898-944, December.
    16. repec:hal:journl:hal-02313335 is not listed on IDEAS
    17. Dongmin Kong & Jialong Wang & Yanan Wang & Jian Zhang, 2022. "Language and innovation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(1-2), pages 297-326, January.
    18. Dollar, David & Fisman, Raymond & Gatti, Roberta, 2001. "Are women really the "fairer" sex? Corruption and women in government," Journal of Economic Behavior & Organization, Elsevier, vol. 46(4), pages 423-429, December.
    19. Asatryan, Zareh & Baskaran, Thushyanthan & Birkholz, Carlo & Gomtsyan, David, 2021. "Favoritism and firms: Micro evidence and macro implications," ZEW Discussion Papers 21-031, ZEW - Leibniz Centre for European Economic Research.
    20. Hyun Ju Jung & Seung-Hyun Lee, 2023. "The Impact of Bribery Relationships on Firm Growth in Transition Economies," Organization Science, INFORMS, vol. 34(1), pages 303-328, January.
    21. Perez-Alvarez, Marcello & Strulik, Holger, 2021. "Nepotism, human capital and economic development," Journal of Economic Behavior & Organization, Elsevier, vol. 181(C), pages 211-240.
    22. El Ghoul, Sadok & Gong, Zhaoran (Jason) & Guedhami, Omrane & Hou, Fangfang & Tong, Wilson H.S., 2023. "Social trust and firm innovation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    23. Hervás-Oliver, José-Luis & Parrilli, Mario Davide & Rodríguez-Pose, Andrés & Sempere-Ripoll, Francisca, 2021. "The drivers of SME innovation in the regions of the EU," Research Policy, Elsevier, vol. 50(9).
    24. Wellalage, Nirosha Hewa & Fernandez, Viviana & Thrikawala, Sujani, 2020. "Corruption and innovation in private firms: Does gender matter?," International Review of Financial Analysis, Elsevier, vol. 70(C).
    25. Guoli Chen & Raveendra Chittoor & Balagopal Vissa, 2021. "Does nepotism run in the family? CEO pay and pay‐performance sensitivity in Indian family firms," Strategic Management Journal, Wiley Blackwell, vol. 42(7), pages 1326-1343, July.
    26. Burhan, Omar K. & van Leeuwen, Esther & Scheepers, Daan, 2020. "On the hiring of kin in organizations: Perceived nepotism and its implications for fairness perceptions and the willingness to join an organization," Organizational Behavior and Human Decision Processes, Elsevier, vol. 161(C), pages 34-48.
    27. Guillermo Wated & Juan Sanchez, 2015. "Managerial Tolerance of Nepotism: The Effects of Individualism–Collectivism in a Latin American Context," Journal of Business Ethics, Springer, vol. 130(1), pages 45-57, August.
    28. Francesco Cinnirella & Jochen Streb, 2017. "The role of human capital and innovation in economic development: evidence from post-Malthusian Prussia," Journal of Economic Growth, Springer, vol. 22(2), pages 193-227, June.
    29. Dawei Fang & Thomas Noe, 2022. "Less Competition, More Meritocracy?," Journal of Labor Economics, University of Chicago Press, vol. 40(3), pages 669-701.
    30. Shainaz Firfiray & Cristina Cruz & Ionela Neacsu & Luis Gomez-Mejia, 2018. "Is nepotism so bad for family firms? A socioemotional wealth approach," Post-Print hal-02001706, HAL.
    31. Jonathan F Schulz, 2022. "Kin Networks and Institutional Development," The Economic Journal, Royal Economic Society, vol. 132(647), pages 2578-2613.
    32. Houston, Joel F. & Lin, Chen & Ma, Yue, 2011. "Media ownership, concentration and corruption in bank lending," Journal of Financial Economics, Elsevier, vol. 100(2), pages 326-350, May.
    33. Machokoto, Michael, 2024. "The impact of cultural orientation towards secrecy on innovation," Economics Letters, Elsevier, vol. 234(C).
    34. Boubakri, Narjess & Chkir, Imed & Saadi, Samir & Zhu, Hui, 2021. "Does national culture affect corporate innovation? International evidence," Journal of Corporate Finance, Elsevier, vol. 66(C).
    35. García-Quevedo, José & Pellegrino, Gabriele & Vivarelli, Marco, 2014. "R&D drivers and age: Are young firms different?," Research Policy, Elsevier, vol. 43(9), pages 1544-1556.
    36. Antonia Madrid‐guijarro & Domingo Garcia & Howard Van auken, 2009. "Barriers to Innovation among Spanish Manufacturing SMEs," Journal of Small Business Management, Taylor & Francis Journals, vol. 47(4), pages 465-488, October.
    37. González-Loureiro, Miguel & Pita-Castelo, Jose, 2012. "A model for assessing the contribution of innovative SMEs to economic growth: The intangible approach," Economics Letters, Elsevier, vol. 116(3), pages 312-315.
    38. Barth, James R. & Lin, Chen & Lin, Ping & Song, Frank M., 2009. "Corruption in bank lending to firms: Cross-country micro evidence on the beneficial role of competition and information sharing," Journal of Financial Economics, Elsevier, vol. 91(3), pages 361-388, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Machokoto, Michael, 2024. "The impact of cultural orientation towards secrecy on innovation," Economics Letters, Elsevier, vol. 234(C).
    2. Pascal L. Ghazalian & Ali Fakih, 2017. "R&D and Innovation in Food Processing Firms in Transition Countries," Journal of Agricultural Economics, Wiley Blackwell, vol. 68(2), pages 427-450, June.
    3. Wu, Yan & Yang, Yong & Mickiewicz, Tomasz, 2023. "Corruption, the digital sectors, and the profitability of foreign subsidiaries in emerging markets," Journal of Business Research, Elsevier, vol. 161(C).
    4. Hao, Jing & Lu, Yue & Zhang, Jing & Bai, Hengyu & Wu, Ji (George), 2024. "Does provincial gambling culture affect corporate innovation? Evidence from China," Journal of Economic Behavior & Organization, Elsevier, vol. 228(C).
    5. Dombi, Ákos & Grigoriadis, Theocharis N. & Zhu, Junbing, 2024. "Antiquity, capitalism & development: The finance-growth perspective," Emerging Markets Review, Elsevier, vol. 59(C).
    6. Shigang Li & Kexin She & Li Zhang, 2024. "Bureaucratic Culture and Innovation," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 32(3), pages 31-66, May.
    7. Gaygysyz Ashyrov & Helery Tasane, 2024. "The roles of foreign and domestic ownership in the corruption–firm innovation nexus," Bulletin of Economic Research, Wiley Blackwell, vol. 76(1), pages 167-202, January.
    8. Jiasi Fan & Zhexiong Tao & Jana Oehmichen & Hans Ees, 2024. "CEO career horizon and corporate bribery: a strategic relationship perspective," Asia Pacific Journal of Management, Springer, vol. 41(2), pages 701-717, June.
    9. Fei Xie & Bohui Zhang & Wenrui Zhang, 2022. "Trust, Incomplete Contracting, and Corporate Innovation," Management Science, INFORMS, vol. 68(5), pages 3419-3443, May.
    10. repec:ris:msuecw:2020_013 is not listed on IDEAS
    11. Xu, Jian & Liu, Yu & Abdoh, Hussein, 2022. "Foreign ownership and productivity," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 624-642.
    12. Jérémie Bertrand & Paul-Olivier Klein & Fotios Pasiouras, 2024. "National culture of secrecy and firms’ access to credit," Post-Print hal-04691594, HAL.
    13. Ge, Jianjun & Li, Donghui & Ni, Yingzhao & Yang, Shijie, 2022. "Inflexibility and corporate innovation: Cross-country evidence," Journal of Multinational Financial Management, Elsevier, vol. 64(C).
    14. Bertrand, Jérémie & Klein, Paul-Olivier & Pasiouras, Fotios, 2024. "National culture of secrecy and firms’ access to credit," Journal of Banking & Finance, Elsevier, vol. 168(C).
    15. Michael Machokoto & Tesfaye T. Lemma & Ouarda Dsouli & Rebecca Fakoussa & Eghosa Igudia, 2024. "Coupling men‐to‐women: Promoting innovation in emerging markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3656-3677, July.
    16. Nirosha Wellalage & Sujani Thrikawala, 2021. "Does bribery sand or grease the wheels of firm level innovation: evidence from Latin American countries," Journal of Evolutionary Economics, Springer, vol. 31(3), pages 891-929, July.
    17. Machokoto, Michael & Omotilewa, Oluwatoba James, 2024. "The impact of borrowing concentration on innovation: When is one not just enough?," Economics Letters, Elsevier, vol. 236(C).
    18. Wellalage, Nirosha Hewa & Fernandez, Viviana & Thrikawala, Sujani, 2020. "Corruption and innovation in private firms: Does gender matter?," International Review of Financial Analysis, Elsevier, vol. 70(C).
    19. Jiangyong Lu & Seong-jin Choi & Alfredo Jiménez & Secil Bayraktar, 2023. "Bribery in emerging economies: an integration of institutional and non-market position perspective," Asia Pacific Journal of Management, Springer, vol. 40(1), pages 205-242, March.
    20. Liu, Lihua & Weng, Danyan & Zhang, Qin, 2023. "Unintended consequences of tax enforcement on corporate innovation: Evidence from a natural experiment in China," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1292-1309.
    21. Valencia Caicedo, Felipe & Dohmen, Thomas & Pondorfer, Andreas, 2023. "Religion and cooperation across the globe," Journal of Economic Behavior & Organization, Elsevier, vol. 215(C), pages 479-489.

    More about this item

    Keywords

    Nepotism; SMEs; Innovation; Informal institution; Human capital;
    All these keywords.

    JEL classification:

    • Z10 - Other Special Topics - - Cultural Economics - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:72:y:2025:i:c:s1544612324016180. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.