Social Trust and Firm Innovation

We investigate whether social trust improves corporate innovation. Based on a comprehensive firm- level panel dataset of patents filed by companies from 45 countries over 1995–2015, we find that compared with firms in low-trust countries, firms in high-trust countries have higher innovation output as measured by number of patents and citations. We also find that greater trust is associated with i) higher levels of innovation investment, ii) less volatile innovation investment over time, and iii) weaker relation between innovation investment and internally generated cash flow. Finally, we document that greater trust is associated with higher market valuation of innovation investment and more efficient conversion of innovation investment into future sales. Overall, our firm-level evidence indicates that greater social trust improves corporate innovation and its outcomes