How Do Foreign Institutional Investors Enhance Firm Innovation?
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
Financial Management Association Annual Meeting (2015)
Kelley School of Business Research Paper No. 2014-04
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
Abstract
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