Informal institution and corporate innovation: From the perspective of social trust

Purpose: This study examines how social trust, as an informal institution, creates a cooperative and honest atmosphere to improve managers' willingness for firm innovation. This study also addresses that the informal system may substitute for the formal institutions in promoting corporate innovation. Design/methodology/approach: This study opts a sample of Chinese listed firms over the period of 2007-2014. We obtain the detailed patent application information from the official website of China Patent and Intellectual Property Office. The social trust information is based on the results of Chinese Enterprise Survey System. Findings: The results indicate that firms located in regions of high social trust tend to have more innovation output, and is robust to a battery of sensitivity tests. The authors further document that this effect is more pronounced for firms with poor short-term financial performance, which are located in regions with weak legal environments and firms having lower information transparency. In addition, the authors also demonstrate that social trust can help firms to get adequate funds to reduce financial pressure and encourage firms to pay more attention to long-term benefits, alleviating investors as well as management myopia. Research limitations/implications: Limited by the data sources, when measuring innovation activity, the authors only use patent numbers represent for innovation output. Then, this study measures the patent quality through classifying patent categories (invention patent or others), since in China, the citation data are imperfect and inadequate. Practical implications: The results suggest that social trust means a good culture of honesty and cooperation can promote firm's innovation engagement. Especially, in emerging markets, where formal mechanisms are relatively less effective, informal institutions can serve as an alternative system for alleviating information asymmetry. Originality/value: This study contributes to the literature in two ways. First, this study finds the positive effect of social trust on corporate innovation, which provides a new perspective for deepening the understanding of the influence factors of innovation. Second, this study further clarifies the mechanism of social trust promoting firm innovation, indicating that social trust can effectively alleviate outsiders' concern about moral hazard risk. Then the stakeholders are more willing to provide financial support and pay more attention to the firm's long-term performance.