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| Mechanisms of Dialect Diversity and Enterprise Innovation in China |
| ZHANG Jie, WANG Wenkai
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| Institute of China's Economic Reform & Development/ School of Economics, Renmin University of China |
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Abstract Studies of the relationship between informal institutions—especially culture—and corporate innovation are a hot topic in the cultural and industrial economics literature. However, scholars encounter the following problems. First, how can the cultural differences in different regions be measured？ Many sociologists believe that language is the main object of culture because it has the dual functions of creating society and improving cognition, while culture is an internally unified organic whole. Therefore, differences in dialects can be used to measure cultural differences. Second, how should the endogenous problem be solved？ We use dialect diversity to represent culture. Although the problem of reverse causality is not serious and can be quantified, there is no doubt that measurement errors exist. We begin with the perspective of dialect formation and choose the average terrain slope as the instrumental variable for dialect to ensure the credibility of our test results. Third, we identify the mechanism between dialect diversity and corporate innovation, which not only helps us understand how dialects (culture) affect enterprise innovation, but also allows us to make corresponding policy recommendations based on this mechanism. This maximizes the impact of culture on enterprise innovation.
Through our theoretical analysis, we consider dialect as a kind of identity. People who speak the same dialect often quickly remove their barriers to trust. In regions with more dialects, the probability of sharing an identity based on dialect is lower than in regions with fewer dialects, which has a negative impact on social trust. In enterprise management, innovation investments are characterized by high investment and high risk. Therefore, the lower the degree of trust, the higher the cost of communication and coordination in investors' decision making. In areas with more dialects, the increase in communication and coordination costs caused by the decline in social trust inhibits enterprises' innovative decision-making practices.
Second, from the perspective of enterprise innovation investment, innovation outsourcing is an important method for enterprises to improve their innovation capabilities and competitiveness. On the one hand, attempts at innovation outsourcing experience an information asymmetry between the outsourcing party and the contractor, with high related transaction costs. In this case, the cultural characteristics represented by dialect enable people who speak the same dialect to share the same information and cultural concepts, which helps reduce the information asymmetry between the two parties and their transaction costs. On the other hand, speaking the same dialect is also conducive to alleviating commercial disputes between the two parties, which also reduces transaction costs. Therefore, as the number of dialects increases, the transaction costs for enterprises' innovation outsourcing also increase. This causes a more prominent obstacle for enterprises' innovation outsourcing, which leads to a decline in their innovation investments.
Finally, enterprises' independent innovation carries high investment costs and high risk, which requires a large amount of human and material capital. In this case, dialect diversity has a significant inhibitory effect on the cross-regional flow of production factors and technologies, which leads to market segmentation between different dialects. According to Foellmi and Zweimüller's (2006) demand-induced innovations theory, market segmentation is detrimental to enterprise-level innovation activities.
We use the corporate innovation survey database and instrumental variable method to represent culture with dialects and empirically test the relationship between dialect diversity and corporate innovation. Dialect diversity shows a significant inhibitory effect on corporate innovation investments. On average, if the population-weighted dialect diversity index increases by 1%, the per capita private innovation investment in enterprises drops by 1.18%. We also find that the influence of dialect diversity on corporate innovation investment is mainly in the trust effect based on cultural identity rather than the cultural exchange effect. Moreover, dialect diversity increases the transaction costs in enterprises' innovation outsourcing process, which in turn significantly inhibits their innovation investments. Finally, dialect diversity strengthens the inhibitory effect on corporate innovation investments through market segmentation.
We contribute three findings to the literature. First, based on the unique “culture and innovation” scenario, we reveal that informal institutions possibly hinder economic growth. Second, the uniqueness of the mechanism not only helps us to understand how dialect diversity affects corporate innovation, but also helps to alleviate its negative effects on economic growth. Third, the literature shows that dialect diversity is not conducive to urban economic development, while we find that it is not conducive to corporate innovation. Innovation is the core factor in maintaining economic growth; therefore, our results provide micro-level evidence and explanations for these macro results.
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Received: 29 April 2020
Published: 25 April 2022
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