How Do Foreign Institutional Investors Enhance Firm Innovation?
Financial Management Association Annual Meeting (2015)
Entrepreneurial Finance and Innovation Conference (2014)
Financial Integrity Research Network Research Topic Group Meeting in Corporate Finance (2013)
84 Pages Posted: 17 Mar 2014 Last revised: 28 May 2017
Date Written: December 1, 2016
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.
Keywords: Foreign institutional investors; Firm innovation; Monitoring; Tolerance for failure; Knowledge spillovers
JEL Classification: G23; G32; G34
Suggested Citation: Suggested Citation