Kieu-Trang Nguyen, London School of Economics and Political Science
“Trust and Innovation within the Firm: Evidence from Matched CEO-Firm Data”
This paper provides evidence on the effect of trust on innovation within firms. I build a new matched CEO-firm-patent dataset covering 5,753 CEOs in 3,598 large US public firms and 700,000 patents during 2000-2011.
To identify the effect of CEO's trust, I exploit variation in generalized trust across the countries of CEOs' ancestry, inferred from their last names using deanonymized historical censuses, as well as variation in CEOs' bilateral trust towards inventors.
First, one standard deviation increase in CEO's generalized trust following a CEO turnover is associated with over 6% increase in firm's future patents. Second, changes in CEO's bilateral trust towards inventors in different countries (i.e., different R&D labs within multinational firms) or from different ethnic origins in the same firm have comparable effects on inventors' patenting, controlling for CEO and other stringent fixed effects.
Trust-induced improvements in innovation are driven entirely by higher-quality patents, consistent with a model in which CEO's trust incentivizes researchers to undertake high-risk explorative R&D. Finally, I show that across and within firms, CEO's generalized trust is strongly correlated with a broader corporate culture of trust, as measured from the text analysis of one million online employee reviews. The evidence provides a micro-foundation for the well-known macro relationship between trust and growth.
Contact person: Jakob Roland Munch