Ripple effects of innovation: How does peer influence shape corporate innovation across countries?

Abstract

Using a large firm-level dataset encompassing 41 countries spanning from 2000 to 2019, and employing an instrumental variables approach to address endogeneity, we find significant positive peer effects on investments in innovation. Notably, these peer effects are more pronounced in emerging countries, where firms use peer benchmarking or mimicking to overcome institutional constraints. However, our findings suggest that the mechanisms driving imitative behaviour in innovation vary between developing and developed countries. Furthermore, we find that mimicking peer firms’ innovation positively correlates with shareholder value, particularly in emerging economies with weak institutions, where imitative strategies may be more beneficial. Overall, our study highlights the influence of institutions on how firms respond to the investment strategies of their peers and how such responses impact shareholder value.