How Do Foreign Institutional Investors Enhance Firm Innovation?
Luong Hoang Luong
University of New South Wales (UNSW) - School of Banking and Finance
Institute of Global Finance, UNSW Business School
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)
November 1, 2015
Kelley School of Business Research Paper No. 2014-04
We examine the effect of foreign institutional investors on firm innovation. Using a difference-in-differences approach that relies on plausibly exogenous variation generated by a quasi-natural experiment as well as an instrumental variable approach, we find that foreign institutional ownership appears to have a positive, causal effect on firm innovation. We further explore three possible underlying mechanisms through which this observation occurs: foreign institutions appear to act as active monitors, to provide insurance for firm managers against innovation failures, and to promote technology transfers from high-innovation countries. Our paper sheds new light on the real effects of foreign institutions.
Number of Pages in PDF File: 65
Keywords: Firm innovation; R&D investment; Institutional investors; Foreign investment
JEL Classification: G23; G32; G34
Date posted: March 17, 2014 ; Last revised: July 25, 2016
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