Outside Directors and R&D Investment: An Experience after the Corporate Governance Reform in Korea

Abstract

This paper explores how the structure and composition of the board of directors influence crucial decisions made in the firm, especially in the early years after a massive corporate governance reform towards an Anglo-Saxon system. With a sample of large Korean firms in 2000-2003, this study examines the impact of board independence and demographic diversity on R&D investment. After controlling relevant variables, the ratio of outside directors as well as the diversity in educational and functional backgrounds among outside directors was positively related to R&D intensity. This study also considers the effects of ownership structure to find that board independence was more strongly, positively related to R&D investment when institutional ownership is higher rather than low. Implications and future research direction are discussed.

Keywords: outside directors, R&D decisions, corporate governance reform, Korean firms