Do Foreign Institutional Investors Enhance Firm Innovation?
Luong Hoang Luong
University of New South Wales (UNSW) - School of Banking and Finance
University of New South Wales (UNSW) - Institute of Global Finance, Australian School of Business
Lily H.G. Nguyen
La Trobe University - La Trobe Business School - Department of Finance; Financial Research Network (FIRN)
Indiana University - Kelley School of Business - Department of Finance
University of New South Wales (UNSW) - School of Banking and Finance; Financial Research Network (FIRN)
March 16, 2014
Kelley School of Business Research Paper No. 2014-04
We examine the effect of foreign institutional investors on firm innovation. Using firm-level data across 26 non-U.S. economies for the 2000-2010 period, we show a positive relation between foreign institutional ownership and firm innovation. To establish causality, we use a difference-in-differences approach that relies on plausibly exogenous variation in foreign institutional ownership generated by a quasi-natural experiment, as well as an instrumental variable approach. Our identification tests suggest a positive, causal effect of foreign institutional ownership on innovation. We further explore three possible underlying mechanisms through which foreign institutional investors promote innovation: foreign institutions appear to act as active monitors, to provide insurance against innovation failures to firm managers, and to promote technology transfers from high-innovation countries. We provide new insights into the real effects of foreign institutions.
Number of Pages in PDF File: 47
Keywords: Firm innovation; R&D investment; Institutional investors; Foreign investment
JEL Classification: G23; G32; G34
Date posted: March 17, 2014
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