Industrial diversity, formal, and informal institutions: a configurational moderation of the innovation input-output relationship

This study seeks to uncover configurations of industrial diversity and institutions that act as boundary conditions in the conversion of innovation inputs into outputs. Specifically, we analyse how industrial diversity, rule of law, open markets, power distance, and individualism combine to influence countries’ transformation of innovation inputs into innovation outputs. A novel, two-stage fuzzy-set qualitative comparative analysis is used to identify configurational moderation on panel data from 66 countries. Results revealed three distinct equifinal combinations of conditions that moderate the innovation input-output relationship: (1) the presence of open markets and individualism, coupled with the absence of power distance; (2) the presence of industrial diversity, open markets, and individualism; and (3) the presence of rule of law and power distance. These configurations support the presence of high innovation outputs, even when innovation inputs lose importance. This study reconciles the literature on industrial structure with institutional theory and embeds them in the NSI approach. Furthermore, it helps to clarify the current discussions of whether innovation benefits more from industrial diversity or specialisation, or through one cultural profile or another. Thus, the study sheds light on previous inconsistencies in the literature by harmonising different approaches to innovation.