How Do Foreign Institutional Investors Enhance Firm Innovation?

Hoang Luong (), Fariborz Moshirian, Lily Nguyen, Xuan Tian and Bohui Zhang

Journal of Financial and Quantitative Analysis, 2017, vol. 52, issue 4, 1449-1490

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 article sheds new light on the real effects of foreign institutions on firm innovation.

Date: 2017
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