The Dark Side of Trust: The Benefits, Costs and Optimal Levels of Trust for Innovation Performance

Abstract

This article explores the positive and negative impact of trust on the innovation performance of firms in industrial districts. A recent explosion of interest in trust has generated a rapidly expanding body of literature demonstrating the importance of trust to economic life, but several authors have noted that the subject has been largely underappreciated in management literature. Discussing trust as an integral part of the strategy formulation process, this article finds that trust is good, but a conditional good. Some level of trust is beneficial because it enables transfer of tacit knowledge and risk taking, but firms that over invest in trust, trust too much, or invest in trusting relationships that have little value for the firm, may be misallocating precious resources and/or taking unnecessary risks that could have substantial negative effects on their innovation performance. Drawing on a sample of 156 manufacturing firms from different industrial districts in Valencia we find, that beyond an optimum threshold level, additional increases of trust bring diminishing benefits and may even decrease innovation returns for the firm involved. By exploring the relationship between trust and firm innovation, this study presents innovative results with implications for both research and practice.