Journal of Korea Trade

Korea Trade Research Association (한국무역학회)
권호 표지
DOI QR코드

DOI QR Code

Exploring the Relationship between Foreign Ownership, Innovation and Firm Value: A Korean Perspective

  • Received : 2021.07.22
  • Accepted : 2021.11.09
  • Published : 2021.11.30
Download PDF
⟨ Previous Next ⟩

Abstract

Purpose - This paper's purpose is to investigate how foreign ownership and innovation affect firm value. Design/methodology - Firm innovation is defined as operational efficiency, which is calculated by adopting data envelopment analysis (DEA). Additionally, R&D intensity is included as a measure of innovation in the analysis. We used firm-level data from manufacturing companies in Korea. The sample comprised 3,753 firm-year observations for every year in the period 2003-2017. Findings - We found that foreign ownership and innovation are positively related to firm value (Tobin's Q). Foreign ownership moderates innovation's contribution to firm value, implying that foreign ownership may enhance the value relevance of firm innovation. In addition, we found that firm innovation partially mediates the relationship between foreign ownership and firm value. Originality/value - This highlights the important role of foreign investors' monitoring; wherein foreign investors enhance firm value by facilitating firm innovation. Our results suggest that foreign ownership can be crucial for innovation and may serve to address weak ownership structures.

Keywords

Acknowledgement

This paper was supported by Konkuk University in 2018.

References

  1. Aggarwal, R., I. Erel, M. Ferreira and P. Matos (2011), "Does Governance Travel around the World?", Journal of Financial Economics, 100, 154-181. https://doi.org/10.1016/j.jfineco.2010.10.018
  2. Aghion, P., R. Blundell, R. Griffith, P. Howitt and S. Prantl (2009), "The Effect of Entry on Incumbent Innovation and Productivity", Review of Economics and Statistics, 91, 20-32. https://doi.org/10.1162/rest.91.1.2
  3. Ahuja, G. and C. Lampert (2001), "Entrepreneurship in the Large Corporation: A Longitudinal Study of How Established Firms Create Breakthrough Inventions", Strategic Management Journal, 22, 521-543. https://doi.org/10.1002/smj.176
  4. Banker, R. D., H. Chang and R. Cunningham (2003), "The Public Accounting Industry Production Function", Journal of Accounting and Economics, 35, 255-281. https://doi.org/10.1016/S0165-4101(03)00021-1
  5. Banker, R. D., A. Charnes and W. W. Cooper (1984), "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis", Management Science, 30, 1078-1092. https://doi.org/10.1287/mnsc.30.9.1078
  6. Banker, R. D. and R. Natarajan (2008), "Evaluating Contextual Variables Affecting Productivity Using Data Envelopment Analysis", Operations Research, 56, 48-58. https://doi.org/10.1287/opre.1070.0460
  7. Barker, V. L. and G. C. Mueller (2002), "CEO Characteristics and Firm R&D Spending", Management Science, 48, 782-801. https://doi.org/10.1287/mnsc.48.6.782.187
  8. Baron, R. and A. Kenney (1986), "The Moderator-Mediator Distinction in Social Psychological Research", Journal of Personality and Social Psychology, 51, 1173-1182. https://doi.org/10.1037/0022-3514.51.6.1173
  9. Black, B. S., W. Kim, H. Jang and K-S. Park (2015), "How corporate governance affect firm value: evidence on a self-dealing channel from a natural experiment in Korea", Journal of Banking and Finance, 51, 131-150. https://doi.org/10.1016/j.jbankfin.2014.08.020
  10. Cameron, G., J. Proudman and S. Redding (2005), "Technological Convergence, R&D, Trade and Productivity Growth", European Economic Review, 49, 775-897. https://doi.org/10.1016/S0014-2921(03)00070-9
  11. Caves, D. W., L. R. Christensen and W. E. Diewert (1982a), "Multilateral Comparisons of Output, Input, and Productivity Using Superlative Index Numbers", Economic Journal, 92, 73-86. https://doi.org/10.2307/2232257
  12. Caves, D. W., L. R. Christensen and W. E. Diewert (1982b), "The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity", Econometrica, 50, 1393-1414. https://doi.org/10.2307/1913388
  13. Chaney, P. K. and T. M. Deviney (1992), "New Product Innovations and Stock Price Performance", Journal of Business Finance & Accounting, 19, 677-695. https://doi.org/10.1111/j.1468-5957.1992.tb00651.x
  14. Chang, S. and D. Xu (2008), "Spillovers and Competition among Foreign and Local Firms in China", Strategic Management Journal, 29, 495-518. https://doi.org/10.1002/smj.674
  15. Charnes, A., W. W. Cooper and E. Rhodes (1978), "Measuring the Efficiency of Decision-Making Units", European Journal of Operational Research, 2, 429-444. https://doi.org/10.1016/0377-2217(78)90138-8
  16. Che, L., O. Hope and J. Langli (2020), "How Big-4 Firms Improve Audit Quality", Management Science Articles in Advance, 66, 1-21.
  17. Chen, V. Z., J. Li, D. Shapiro and X. Zhang (2014), "Ownership Structure and Innovation: An Emerging Market Perspective", Asia Pacific Journal of Management, 31, 1-24. https://doi.org/10.1007/s10490-013-9357-5
  18. Chen, Y., E. Podolski and M. Veeraraghavan (2015), "Does Managerial Ability Facilitate Corporate Innovative Success?", Journal of Empirical Finance, 34, 313-326. https://doi.org/10.1016/j.jempfin.2015.08.002
  19. Chi, J., J. Liao and J. Yang (2019), "Institutional Stock Ownership and Firm Innovation", Journal of Multinational Financial Management, 50, 44-57. https://doi.org/10.1016/j.mulfin.2019.04.003
  20. Coles, J., N. Daniel and L. Naveen (2006), "Managerial Incentives and Risk-Taking", Journal of Financial Economics, 79, 431-468. https://doi.org/10.1016/j.jfineco.2004.09.004
  21. Cooper, W. W., L. M. Seiford and K. Tone (2007), Data Envelopment Analysis (2nd ed.), New York, NY, Springer.
  22. Cui, H. and Y. Mak (2002), "The Relationship between Managerial Ownership and Firm Performance in High R&D Firms", Journal of Corporate Finance, 8, 313-336. https://doi.org/10.1016/S0929-1199(01)00047-5
  23. Driver, C. and M. Guedes (2012), "Research and Development, Cash Flow, Agency, and Governance: UK Large Companies", Research Policy, 41, 1565-1577. https://doi.org/10.1016/j.respol.2012.04.003
  24. Drucker, P. (2015), Innovation and Entrepreneurship (1st ed.) New York, NY, Harper Collins.
  25. Ettlie, J. E. (2011), "Service versus Manufacturing Innovation", Journal of Product Innovation Management, 28, 285-299. https://doi.org/10.1111/j.1540-5885.2011.00797.x
  26. Fare, R., S. Grosskopf, M. Norris and Z. Zhang (1994), "Productivity Growth, Technical Progress, and Efficiency Changes in Industrialised Countries", American Economic Review, 84, 66-83.
  27. Feldman, R. and M. Lemley (2015), "Do Patent Licensing Demands Mean Innovation?", Iowa Law Review, 101, 137-189.
  28. Ferreira, M. and P. Matos (2008), "The Colours of Investors' Money: The Role of Institutional Investors around the World", Journal of Financial Economics, 88, 499-533. https://doi.org/10.1016/j.jfineco.2007.07.003
  29. Gillan, S. and L. Starks (2003), "Corporate Governance, Corporate Ownership, and the Role of Institutional Investors: A global Perspective", Journal of Applied Finance, 13, 4-22.
  30. Greene, H. (2000), Econometric Analysis (4th ed.) New Jersey, Prentice-Hall.
  31. Griliches, Z. (1958), "Research Costs and Social Returns: Hybrid Corn and Related Innovation", Journal of Political Economy, 66, 419-431. https://doi.org/10.1086/258077
  32. Griliches, Z. and J. Mairesse (1984), Productivity and R&D at the Firm Level, Chicago, IL, University of Chicago Press.
  33. Guadalupe, M., O. Kuzmina and C. Thomas (2012), "Innovation, and Foreign Ownership", The American Economic Review, 102, 3594-3627. https://doi.org/10.1257/aer.102.7.3594
  34. Gujarati, D. N. and D. C. Porter (2009), Basic Econometrics, New York, NY, McGraw-Hill.
  35. Hall, B. H., Z. Griliches and J. A. Hausman (1986) "Patent and R&D: Is there a Lag?", International Economic Review, 27, 265-283. https://doi.org/10.2307/2526504
  36. Horngren, C. T., S. M. Datar and M. V. Rajan (2012), Cost Accounting: A Managerial Emphasis (14th ed.), London, Pearson.
  37. Hu, Y. and S. Izumida (2008), "Ownership Concentration and Corporate Performance: A Causal Analysis with Japanese Panel Data", Corporate Governance: An International Review, 16, 342-358. https://doi.org/10.1111/j.1467-8683.2008.00690.x
  38. Iacobucci, D., M. Schneider, D. Popovich and G. Bakamitsos (2016), "Mean Centring Helps Alleviate 'Micro' but not 'Macro' Multicollinearity", Behaviour Research Methods, 48, 1308-1317. https://doi.org/10.3758/s13428-015-0624-x
  39. Jensen, M. C. and W. H. Meckling (1976), "Theory of Firm: Managerial Behaviour, Agency Costs and Ownership Structure", Journal of Financial Economics, 3, 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
  40. Jovanovic, B. (1982), "Selection and the Evolution of Industry", Economica, 50, 649-670.
  41. Kalinowski, T. and H. Cho (2009), "The Political Economy of Financial Liberalization in South Korea: State, Big Business, and Foreign Investors", Asian Survey, 49, 221-242. https://doi.org/10.1525/as.2009.49.2.221
  42. Kim, Moontae and Seung-Su Ma (2016), "A Study on Earnings Management in the KONEX", Korean Accounting Journal, 25, 511-533.
  43. Koh, P.-S. and D. M. Reeb (2015), "Missing R&D", Journal of Accounting and Economics, 60, 73-94. https://doi.org/10.1016/j.jacceco.2015.03.004
  44. Koji, K. B. Adhikary and L. Tram (2020), "Corporate Governance and Firm Performance: A Comparative Analysis between Listed Family and Non-Family Firms in Japan", Journal of Risk and Financial Management, 13, 215. https://doi.org/10.3390/jrfm13090215
  45. Kor, Y. (2006), "Direct and Interaction Effects of Top Management Team and Board Compensations on R&D Investment Strategy", Strategic Management Journal, 27, 1081-1099. https://doi.org/10.1002/smj.554
  46. Lee, P. M. and H. M. O'Neill (2003), "Ownership Structure and R&D Investments of US and Japanese Firms: Agency and Stewardship Perspectives", Academy of Management Journal, 46, 212-225. https://doi.org/10.2307/30040615
  47. Lee, H. and J. Stone (1994), "Product and Process Innovation in the Product Life Cycle: Estimates for U.S. Manufacturing Industries", Southern Economics Journal, 60, 754-763. https://doi.org/10.2307/1060581
  48. Lhuillery, S. (2011), "The Impact of Corporate Governance Practices on R&D Efforts: A Look at Shareholders' Rights, Cross-Listing, and Control Pyramid", Industrial and Corporate Change, 20, 1475-1513. https://doi.org/10.1093/icc/dtr022
  49. Loch, C. H. and V. Tapper (2002), "Implementing a Strategy-Driven Performance Measurement System for an Applied Research Group", Journal of Product Innovation Management, 19, 185-198. https://doi.org/10.1016/S0737-6782(02)00136-4
  50. Loukil, N., O. Yousfi and S. Cheikh (2020), "Innovation Effort and CEO's Characteristics", International Journal of Innovation Management, 24, 2050079. https://doi.org/10.1142/s1363919620500796
  51. Luong, H., F. Moshirian, L. Nguyen, X. Tian, and B. Zhang (2017), "How Do Foreign Institutional Investors Enhance Firm Innovation?", Journal of Financial and Quantitative Analysis, 52, 1449-1490. https://doi.org/10.1017/S0022109017000497
  52. Mansfield, E. (1965), "Rates of Return from Industrial Research and Development", The American Economic Review, 55, 310-322.
  53. McConnell, J. and H. Servaes (1990), "Additional Evidence on Equity Ownership and Valuation", Journal of Financial Economics, 27, 595-612. https://doi.org/10.1016/0304-405X(90)90069-C
  54. Meyer, K. E. (2004), "Perspectives on Multinational Enterprises in Emerging Economies", Journal of International Business Studies, 35, 259-276. https://doi.org/10.1057/palgrave.jibs.8400084
  55. Minetti, R., P. Murro, and M. Paiella (2015), "Ownership Structure, Governance, and Innovation", European Economic Review, 80, 165-193. https://doi.org/10.1016/j.euroecorev.2015.09.007
  56. Mishra, A. V. (2014), "Foreign Ownership, and Firm Value: Evidence from Australian Firms", Asia-Pacific Financial Market, 21, 67-96. https://doi.org/10.1007/s10690-013-9177-0
  57. Mishra, R. and S. Kapil (2017), "Effect of Ownership Structure and Board Structure on Firm Value: Evidence from India", Corporate Governance, 17, 700-726. https://doi.org/10.1108/cg-03-2016-0059
  58. Morck, R., A. Shleifer, and R. W. Vishny (1988), "Management Ownership and Market Valuation", Journal of Financial Economics, 20, 293-315. https://doi.org/10.1016/0304-405X(88)90048-7
  59. Mount, M., R. Ilies and E. Johnson (2006), "Relationship of Personality Traits and Counterproductive Work Behaviour: Mediating Effects of Job Satisfaction", Personnel Psychology, 59, 591-622. https://doi.org/10.1111/j.1744-6570.2006.00048.x
  60. Munari, F., R. Oriani and M. Sobrero (2010), "The Effects of Owner Identity and External Governance Systems on R&D Investments: A Study of Western European Firms", Research Policy, 39, 1093-1104. https://doi.org/10.1016/j.respol.2010.05.004
  61. Pakes, A. and R. Ericson (1998), "Empirical Implication of Alternative Models of Firm Dynamics", Journal of Economic Theory, 79, 1-45. https://doi.org/10.1006/jeth.1997.2358
  62. Pierce, L. and J. Snyder (2020), "Historical Origins of Firm Ownership Structure: The Persistent Effects of the African Slave Trade", Academy of Management Journal, 63, 1687-1713. https://doi.org/10.5465/amj.2018.0597
  63. Rashid, M. (2020), "Ownership Structure and Firm Performance: The Mediating Role of Board Characteristics", Corporate Governance, 20, 719-737. https://doi.org/10.1108/CG-02-2019-0056
  64. Ravid, S. A. and N. Sekerci (2020), "Large Investors' Portfolio Composition and Firm Value", Journal of Corporate Finance, 61, 1-22.
  65. Rousseau, M. B., B. D. Mathias, L. T. Madden and T. R. Crook (2016), "Innovation, Firm Performance, and Appropriation: A Meta-Analysis", International Journal of Innovation Management, 20, 1650033. https://doi.org/10.1142/S136391961650033X
  66. Schumpeter, J. A. (1942), Capitalism, Socialism, and Democracy, New York, NY, Harper Collins.
  67. Sobel, M. E. (1982), "Asymptotic Confidence Intervals for Indirect Effects in Structural Equation Models", Sociological Methodology, 13, 290-312. https://doi.org/10.2307/270723
  68. Tian, X. and T. Wang (2014), "Tolerance for Failure and Corporate Innovation", Review of Financial Studies, 27, 211-255. https://doi.org/10.1093/rfs/hhr130
  69. Yoon, Soon-Suk (2005), "A Comparison of Earnings Management between KSE Firms and KOSDAQ Firms", Journal of Business Finance & Accounting, 32, 1347-1372. https://doi.org/10.1111/j.0306-686X.2005.00631.x
  70. Yuan, R., J. Xiao and H. Zou (2008), "Mutual Funds' Ownership, and Firm Performance: Evidence from China", Journal of Banking & Finance, 32, 1552-1565. https://doi.org/10.1016/j.jbankfin.2007.08.001