We are in it together: Communitarianism and the performance-innovation relationship

The relationship between firm performance and innovation behavior has been widely studied, yet theoretical and empirical findings still widely diverge. We investigate this inconsistency through the lens of informal institutions, specifically communitarianism, the degee to which group goals are considered more important than individual goals. We do this through an analysis of a firm-level dataset covering 31,860 firms across 56 countries. We find evidence for a 'cushion effect', where firms in highly communitarian settings benefit from informal insurance in order to engage in innovation activity when their performance is below their aspirational value. Firms experi-encing performance above aspirational value are also more likely to engage in innovation activity in highly communitarian settings due to a 'pay-it-forward' mechanism, using innovation activities to contribute to com-munity challenges. Both effects are conditional on firms being sufficiently embedded in their direct business environment. We discuss the direct and wider implications for the literature on performance-innovation behavior and provide guidance for policy makers and practitioners.