Decentralization and Innovation of Hungarian Firms

Abstract: In this paper we study the interrelation between decentralization, involvement in innovation and success of innovation activity of firms that operate in an environment with weak institutions. We argue that decentralization has a significant potential to enhance innovation at firms through promoting more efficient use of information, enhancing motivation of employees, generating more pro-creative work environment. We suggest that the value that decentralization can bring to firms’ innovation potential can be so important, that decentralized firms can be more innovative and more successful in innovation activity even in an environment with weak institutions. We test our hypothesis empirically using data on firms from Hungary. Our empirical results demonstrate that decentralized Hungarian firms are more likely to innovate. Moreover, decentralized Hungarian firms are more successful in innovation in a sense that they are more likely to bring to the market innovative products that are new not only to the firm, but also to the market. The gap in involvement in innovation and success of innovation activity between the decentralized and centralized Hungarian firms is very significant. Our results contribute to better understanding of potential of decentralization of firms even in an environment with weak institutions.