Institution Driven Innovation under Industrial Environment Turbulence

The aim of this paper is to investigate how a firm's innovation strategy in response to the institutional incentives and pressures affect its product innovation performance, and how these effects are moderated by industrial environment turbulence. The empirical research is based on a sample of manufacturing firms located at the center of the pearl river delta (PRD) in Guangdong Province of China. Our results revealed that institutional incentive- driven innovation strategy has overall positive effect on a firm's product innovation performance, whereas institutional pressure-driven innovation strategy is negatively related to total product innovations and incremental product innovations yet positively related to radical product innovations. We also found a mutually interfering relationship between the effects of institutional incentive- and pressure-driven innovation strategy, i.e. their interaction is negatively related to product innovation performance. Further investigation showed that institutional incentive-driven innovation strategy is more productive in lower level of industrial environment turbulence, whereas institutional pressure-driven innovation strategy is more efficient in higher level of industrial environment turbulence. These findings extend previous literature by demonstrating the disentangled incentive and pressure effects of institutions, as well as the combined and interaction effects intrinsic within the institutional mixes in the innovation systems. The results furthered our understanding on how a firm strategy and performance is shaped by the joint forces of institutional transitions and industrial environment changes.