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)
October 11, 2016
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 between 2000 and 2010, we show that foreign institutional ownership has a positive, causal effect on firm innovation. We further explore three possible underlying mechanisms through which foreign institutions affect firm innovation: foreign institutions act as active monitors, provide insurance for firm managers against innovation failures, and promote knowledge spillovers from high-innovation economies. Our paper sheds new light on the real effects of foreign institutions on firm innovation.
Number of Pages in PDF File: 64
Keywords: Foreign institutional investors; Firm innovation; Monitoring; Tolerance for failure; Knowledge spillovers
JEL Classification: G23; G32; G34
Date posted: March 17, 2014 ; Last revised: October 13, 2016