Unlocking Firm Innovation in Peripheral Regions: The Critical Role of Local Psychological Openness

Firms in peripheral and less knowledge endowed regions often struggle with innovation, as it is deeply rooted in and influenced by local characteristics. Although recent research highlights the significant, yet complex and hard-to-quantify role of local 'soft factors' such as culture and macro-psychology (e.g., local psychological openness) for firm innovation, we know relatively little about its specific role for firms located in the knowledge periphery. This study examines the hypothesis that favorable local soft factors, such as psychological openness, can compensate for unfavorable local hard factors for innovation of firms located in the knowledge periphery. Drawing upon Schmookler's scissor metaphor, we theoretically elaborate how local psychological openness impacts firm innovation by shaping both the demand and supply sides of the innovation process. In our arguments, we also incorporated the contingent impact of both regional (external) and firm (internal) factors on the relationship between local psychological openness and firm innovation. Our empirical investigation of a large and longitudinal sample of Swedish firms across 2004 to 2018 revealed a compensatory effect of local psychological openness for local 'structural knowledge gaps' in less endowed peripheral regions. Implications for research and policymaking addressing innovation in firms and regions are discussed.