Local Drinking Culture, Government R&D Subsidies, and Firm Innovation

Prior studies accounting for innovation activities in emerging economies have centered on institutional, governance and resource explanations, but less explored is how local culture shapes the way firms obtain innovation resources and produce innovative outcomes. We hypothesize that local drinking culture, by influencing the granting of government subsidies on innovation and related firm incentives, may have given rise to lower efficiency in innovation in the context of China. We argue that the prevalence of a local drinking culture shapes politicians’ willingness to engage frequently and legitimately in informal networking occasions with firms, as well as creates a path dependency for firms to rely on informal networking for gaining access to the government, which lead to enhanced probability of government approval of R&D subsidies. Nonetheless, firms immersed in a heavier drinking culture produce more patents that are less innovative (i.e., falling into the category of the “utility” as opposed to “inventions”). As a result of being indulged in hedonism and short-term enjoyment. We further show how such effects of the drinking culture vary based on the legal development, firms’ political connection as well as technological capabilities. This study contributes to the innovation literature by providing a culture-based explanation. We also discuss the implications of the impact of culture on business activities and the substitution effect between formal institutions and culture.