I analyze differences in the innovativeness of domestic firms and subsidiaries of foreign firms operating in the same country. I argue that domestic firms suffer a liability of localness in innovation, or a competitive disadvantage in product innovation relative to subsidiaries of foreign firms. I propose that this liability of localness is driven by the relatively lower levels of multiculturalism in employees of domestic firms in comparison with subsidiaries, which limit the identification, transfer, and integration of a large diversity of knowledge that supports product innovation. I also propose that managers of domestic firms can compensate for this liability of localness in two ways: by investing in the training of their employees and by exporting. Training modifies the mindsets and abilities of employees and enables them to become more cognitively multicultural, which facilitates product innovation. Exporting changes employees’ mindsets as they become exposed to new ideas available abroad, which also facilitates product innovation. I test these arguments on a sample of manufacturing firms and find that, although domestic firms introduce fewer new products than subsidiaries of foreign firms, they introduce more new products than subsidiaries at the same level of investment in language training and of exports.

Using a large hand-collected database of 605 privatized firms from 48 countries, we examine the relationship between the collectivism measure of culture and residual state ownership in privatized firms. We find that the continued role of government in privatized firms is positively related to collectivism. This result is robust to using alternative measures of collectivism and government control, as well as when we address the endogeneity of collectivism. Finally, we examine the economic outcomes of culture at the firm level, focusing primarily on performance, efficiency, risk-taking, and valuation measures. We report that privatized firms with high residual state ownership exhibit lower performance, valuation, efficiency, and risk-taking in collectivist societies. Our results suggest that formal institutions are not, as sustained by previous studies, the main/exclusive constraints on the privatization reform.