Institutional Frictions in the Business Environment and Enterprise Innovation: A Grounded Theory Study of Firm Responses in the Yangtze River Delta

Abstract

This study examines how firm-experienced institutional frictions shape enterprise innovation and firm responses. Drawing on 35 hours of semi-structured interviews with 49 middle- and senior-level managers in 13 innovation-driven firms in the Yangtze River Delta, and using grounded-theory analysis, the study develops a firm-level transmission-and-coupling account. The findings show that regulatory complexity, policy uncertainty, institutional gaps, compliance conflicts, demand mismatches, global–local adjustment pressures, and funding and talent bottlenecks affect innovation when managers perceive them as misaligned with requirements for speed, experimentation, commercialization, appropriability, coordination, or resource recombination. These perceived misalignments translate into judgments about project feasibility, downside risk, expected returns, and resource adequacy, shaping the timing of innovation, market entry, project scope, and resource commitments. Firms respond through coupled strategic and organizational adjustment, including risk screening, digital process integration, market diversification, compliance coordination, learning routines, and collaborative innovation. The study contributes by explaining the conditional conversion of familiar external constraints into innovation-specific consequences and by clarifying how strategic adjustment and organizational adaptation jointly organize firm responses.