Foreign Expansion and Corporate Innovation: Cross-Country Evidence

Abstract

Using novel and comprehensive data on the timing of subsidiary establishment, we examine how firms' foreign expansions influence their ability to innovate. We find that after an expansion, especially into a highly innovative country, a firm significantly increases innovation output and its patents are more likely to cite those originating from the host country. To address endogeneity, we focus on plausibly exogenous breakthrough inventions and show that they mainly benefit firms with a subsidiary presence in the country where such an innovation shock occurs. An expansion is also followed by an increase in equity ownership of institutional investors, including those from host countries, suggesting that the improvement in innovation is incentivized by appropriate shareholder monitoring. Overall, we add new evidence on one important reason for why multinationals tend to be highly innovative firms: they achieve significant agglomeration economies by efficiently exploiting the spatially concentrated knowledge capital around the world.

Keywords: Corporate Innovation, Foreign Expansion, Knowledge Spillovers, Institutional Investors

JEL Classification: G15, G30