Firm internationalization and propensity to innovation. The moderating role of the rule of law

This paper studies the moderating role of the rule of law in the relationship between firm internationalization and propensity to innovation. An empirical investigation of 24,000 enterprises across 39 countries (data from the Enterprise Surveys, 2018–2020) confirms the importance of international openness and the rule of law for innovation. More importantly, the moderating role of the rule of law is evaluated. The central result is that institutional quality negatively moderates the effect of firm internationalization. With a strict rule of law, the impact of internationalization on innovation is still positive but weaker. To interpret this result, we argue that domestic firms have a lower attitude toward innovation because of their inability to access foreign knowledge and technology. However, a strict rule of law facilitates knowledge circulation and appropriation of value from innovation, acting as a substitute for internationalization and alleviating the relative disadvantage of domestic firms.