Innovation in centralized organizations: examining evidence from Soviet Russia

Abstract

Purpose – This study aims to examine the economic factors that determine innovation pattern in centralized and decentralized economies and organizations. Design/methodology/approach – Empirical evidence on innovation in the centralized economy of the Soviet Union is reviewed. Existing theoretical literature in this area relies on the incentives of decision-makers in centralized organizations and on the concept of soft budget constraint in centralized command economies and hard budget constraint in market economies. This study advocates applying the hierarchy/polyarchy model of innovation screening to explain the pattern of innovation in centralized economic systems. Findings – Screening and development of innovation projects can be organized in a centralized or decentralized fashion. The differences in innovation between centralized and decentralized economic systems may be explained by elements of the principal-agent theory, the soft budget constraint model, and the theory of decision-making in hierarchies and polyarchies. Empirical evidence shows a sharp slowdown in both innovation and economic growth in the Soviet economy following the economic decision-making reform of 1965. The theoretical explanation most consistent with this evidence is the hierarchy decision-making model. Originality/value – Comparisons of innovation in centralized and decentralized economies traditionally relied on decision-makers' incentives and the concept of soft budget constraint. Upon analysis of empirical evidence from the centralized Soviet economy, this study advocates explaining innovation patterns based on decision-making theory of hierarchy.