Privacy protection laws, national culture, and artificial intelligence innovation around the world

Abstract A substantial body of research highlights how stringent regulations disrupt innovators’ incentives and increase transaction costs, yet their information processing implication remains understudied. Building on information processing theory, we study how the interplay between formal and informal institutions shapes inventors’ information processing in developing artificial intelligence (AI) innovation. We examine the effect of stringent privacy regulations on AI innovation by exploiting the European Union’s General Data Protection Regulation (GDPR) announcement. We argue that, following the GDPR announcement, GDPR-affected countries experience lower national AI innovation rates than unaffected countries. Further, we postulate that this negative effect is weaker in GDPR-affected countries, marked by higher levels of individualism, masculinity, and indulgence, but stronger in the affected countries with higher levels of uncertainty avoidance, power distance, and long-term orientation. Our difference-in-differences analysis supports the proposed framework. Our research contributes to the international business literature by developing novel theoretical predictions at the intersection of comparative institutional analysis and national culture, explaining how privacy protection laws and cultural factors shape AI inventors’ information processing. Finally, this study provides insights into how inventors and entrepreneurs in countries with stringent privacy laws can leverage national culture to shape their AI innovation strategies and inform strategic decision-making.