One of the most novel aspects of research on the varieties of capitalism (VoC) is the analysis of the way labour markets and vocational training systems shape differences in innovation style across nations.  In their seminal work, Hall and Soskice (2000) argued that liberal market economies (LMEs) with relatively fluid labour markets and weak vocational training systems will be relatively specialised in radical innovation, whereas coordinated market economies (CMEs) with well developed vocational training systems and forms of internal governance assuring employees long-term tenures will be specialised in incremental innovation. Subsequently, a range of evidence has been presented that refutes this hypothesis and some critics have concluded on this basis that domestic institutions do not matter much for the innovation style and performance of enterprises located there.

In this paper I present a multilevel logistic analysis of the institutional determinants of innovation mode for enterprises in EU-27 member nations. While the analysis supports the view that institutions do matter for innovation outcomes, it does not support the notion of ‘comparative institutional advantage’ developed in the VoC literature.  Not only do the results show that institutions supportive of more radical forms of innovation are not distributed across EU-member nations in accordance with the breakdown between LMEs and CMEs, they also show that these institutions are not bundled in a way that is consistent with the VoC conception of institutional complementarities.  I argue that the problems which the VoC literature has in correctly specifying the institutional arrangements that support different types of innovation style across nations are linked to a misunderstanding of the nature of the skills and the forms of internal enterprise governance required for radical innovation.