Abstract
Foreign institutional investors hold over one-fifth of the total market value of the French stock market. Thus, it is important to analyse their influence on corporate investment decisions. This study investigates the impact of foreign institutional ownership on R&D activities. We examine whether these investors enhance or impede R&D investment intensity. Dynamic panel data analysis is applied to a sample of listed French high-tech firms over the period 2008–2014. Our results show that foreign institutional ownership encourages R&D investment while domestic institutional ownership dampens it. Foreign institutional ownership can act as a monitoring mechanism that reduces managerial myopia and encourages long-term and risky investment to enhance firm value.
Keywords
Introduction
The shareholdings of foreign institutional investors (such as mutual funds, pension funds, hedge funds, sovereign wealth funds, insurance companies and banks) have gradually increased in international stock markets during the last decades. Foreign institutional ownership accounted for half of the total institutional investments in non-US firms (Luong et al., 2017). Morin (2000) notes that pension funds such as California Public Employees' Retirement System (CalPERS) or Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA CREF) and investment funds such as Fidelity, Templeton and Capital Group have become leading shareholders in French firms and participate actively in monitoring management through voting rights. This trend raises concerns about whether these foreign investors influence managers’ decisions in domestic firms. R&D investment is one of the most important strategic decisions to enhance firm competitiveness and growth. R&D projects are risky and need long time to generate profits. They are generally associated with agency problems. The separation between management and control leads to conflict of interests between managers and stockholders (Berle & Means, 1932; Jensen & Meckling, 1976). Stockholders hold diversified portfolios and prefer high-risk and high reward projects. However, managers aim to keep their jobs and avoid risky R&D projects. Corporate governance theory suggests that institutional investors can play a monitoring role in mitigating agency problems related to managerial myopia. However, empirical results are mixed. These contradicting conclusions in the literature may result from not separating the impact of domestic and that of foreign institutional investors on R&D decisions. These investors have different objectives, resources and strategies. Most studies focused on the role of domestic institutional investors (Bushee, 1998; Chen et al., 2015; Kochhar & David, 1996; Rapp & Udoeiva, 2017; Wahal & McConnell, 2000; You et al., 2010). Other studies examine the effect of foreign investors on R&D investments and use aggregated measures of foreign ownership that do not permit to assess the particular role of foreign institutional investors (Huang & Shiu, 2009). Foreign institutional investors share common characteristics with domestic institutions, but they present some unique features that can influence their willingness to encourage innovation. Foreign institutions can bear more risk because they have internationally diversified portfolios and they are less subject to agency problems as they are independent from local managers. Conversely, they suffer an informational disadvantage compared to domestic institutional investors. This article fills in this gap and examines the joint effect of foreign and domestic institutional investors on R&D investments and compares their relative commitment to promote innovation.
Our article is motivated by the growing shareholdings of foreign institutional investors in the French stock market. De La Cruz et al. (2019) report that institutional investors owned about 28% of the total market capitalization of the French stock market, at the end of 2017. The foreign institutional ownership is about 21% of stock market capitalization and represents the triple of the domestic institutional ownership measured as 7% of the stock market. The relative importance of foreign institutional ownership raises concerns about their risk-taking behaviour and their short-term or long-term orientation. Moreover, the research on the role of foreign institutional investors focuses on emerging and developing countries. It primarily focuses on the impact of liberalization on the efficiency and the liquidity of stock markets and the management decisions in firms located in these countries. Most empirical results show that foreign institutional investors enhance stock market efficiency and liquidity (Kang et al., 2016; Liyan et al., 2015). At the firm level, they endorse best governance practices which improve investment efficiency, social responsibility and value creation (Chen et al., 2015; Huang & Shiu, 2009; Liu et al., 2018; Tokas &Yadav, 2020; Vo, 2016). We ask if these investors can also realize good performance in developed countries, with better governance system or their influence is limited to developing countries. Another motivation is the lack of literature interested in the impact of foreign institutional ownership on innovation. While Luong et al. (2017) and Bena et al. (2017) recently examined the impact of foreign institutional ownership on innovation output (patents and citations); to the best of our knowledge, no other authors have studied their impact on the innovation input (R&D investments) for a developed country.
We use an unbalanced panel data of 93 high-tech firms listed on the French stock market and observed during the period of 2008–2014. We consider that this sample fits well with the purpose of this article for three reasons. First, R&D investments are crucial for the growth and the survival of firms in high-tech industries. These firms have to identify and target the investors who encourage R&D activities. Second, France has one of the developed stock markets with the highest foreign institutional ownership. Managers and policymakers are interested to investigate the investment preferences of foreign institutions and whether they encourage risky and long-term projects. Third, France adopts the civil law system where the shareholders are less protected than in countries with a common law system. In this context, we expect that foreign institutional investors, as effective monitors, can protect minority shareholders’ interests and contribute to reduce managerial myopia. Taking into account the potential endogeneity problem between R&D investments and ownership variables and the dynamic nature of these investments, our empirical approach is based on dynamic panel data analysis. Flannery and Hankins (2013) suggest that the generalized method of moments (GMM) is the most efficient method to deal with endogeneity in dynamic panel models. Accordingly, we use the Arellano and Bond (1991) difference GMM estimator.
The rest of this article is structured as follows: The second section reviews the relevant literature. The third section describes the methodology employed. The fourth section presents and discusses the results. The article concludes in the fifth section. Policy and managerial implications, limitations and future research directions are outlined in the sixth and seventh sections.
Literature Review
Agency Problems Associated with R&D Activities
R&D activities require large amounts of permanent capital (Coad & Rao, 2010; Lai et al., 2005). They are characterized by long-term performance and short-term risk (Gharbi et al., 2014; Kochhar & David, 1996). Considering these differences in time and risk perspectives, agency conflicts may arise between managers and firms’ owners. Managers tend to attribute more importance to their career than firm value maximization. They are generally risk-averse and adopt a myopic behaviour. They may avoid risky and long-term R&D projects (Bebchuk & Stole, 1993; Nam et al., 2003). Due to their size, expertise and the importance of their stockholdings in investee firms, institutional investors have the resources and the incentives to monitor managers’ decisions and to encourage long-term value creation (Shleifer & Vishny, 1986).
Literature regarding the relationship between R&D activities and institutional owners found contradicting results. Two main streams were developed and empirically investigated. The first one suggests a passive behaviour of institutional investors that supports managerial myopia and reduces R&D activities (Bushee, 1998; Chen et al., 2015; Porter, 1992; Wahal & McConnell, 2000). The second stream defends the active investor hypothesis with an effective monitoring and influence of institutional investors on firm value creation and long-term development (Afza & Nazir, 2015; Kochhar & David, 1996; Rapp & Udoeiva, 2017; You et al., 2010). Hence, the evidence on whether institutional ownership enhances or reduces R&D activities is mixed. We propose that these contradicting results could be due to not separating the impact of domestic and that of foreign institutional investors in the literature and to consider that they have the same objectives and monitoring effectiveness. The purpose of this article is to fill in this gap.
Advantages of Foreign Institutional Investors in Promoting R&D Activities
Foreign institutional investors are gaining importance worldwide taking into account the growth of their international holdings (Luong et al., 2017; Nashier & Gupta, 2016). Nevertheless, the real effect of these investors on local firm corporate strategy is still indeterminate. We expect that foreign institutional investors encourage R&D investments for at least three reasons. First, foreign institutional investors are associated with enhanced corporate governance of investee firms and an effective monitoring role. They mitigate agency problems and enhance firm performance. Aggarwal et al. (2011) find that these investors are ‘proactively involved in monitoring investee firms worldwide’. They impose strong pressure on firm managers in order to meet shareholders’ objectives. When they invest globally, foreign institutions acquire more experience and knowledge about different countries’ legal frameworks, policy reforms and accounting standards. They develop a deeper understanding of a broader set of governance tools and encourage investee firms to adopt the best practices. Aggarwal et al. (2011) suggest that international portfolio diversification of institutional investors substantially promotes good corporate governance practices around the world. Kim et al. (2016) argue that foreign institutional investors possess technological advantages with the latest communication and analytical tools and the necessary human talent. Consequently, they can endorse improvements in the corporate governance function. Compared to domestic institutional investors, foreign institutional investors are less concerned with agency problems. They are less likely to develop business relationships with local investee firms (Gillan & Starks, 2003; Luong et al., 2017; Nashier & Gupta, 2016; Tsang et al., 2019). Due to their independence from local management, this type of institutions has no conflict of interests and can play a more important role in corporate monitoring. Moreover, foreign institutional investors are less influenced by local political pressure than domestic institutional investors (Kim et al., 2016; Nashier & Gupta, 2016). In the Chinese context, Huang and Zhu (2015) report that foreign institutional owners have a more effective monitoring role on state-controlled firms.
Second, the global diversification strategy adopted by foreign institutional investors permits them to substantially reduce the overall risk of their portfolios and encourages them to take larger risks than domestic investors (Ferreira & Matos, 2008). Foreign institutions can proceed to reduce managers’ myopic and entrenchment behaviours (Thomsen & Pedersen, 2000) and even force them to promote investment in risky projects to realize higher returns. Chen et al. (2015) studied whether institutional investors exacerbate managerial myopic behaviour in Taiwan. They found that foreign institutional investors have a direct positive effect on innovation activity. They conclude that foreign institutional owners can moderate managerial myopia.
Third, foreign institutional investors promote technological innovations (Bena et al., 2017; Luong et al., 2017; Useem, 1998). These investors are mainly from developed and most innovative economies. They could facilitate the transfer of knowledge and innovative technologies from their home countries to host countries. Useem (1998) supports the important role of foreign institutions in bringing new and distinct logic from their original countries to other institutional contexts. Firms in host countries benefit from the presence of foreign institutional investors by having greater access to new technologies. Hence, this may encourage managers to innovate and to boost their R&D efforts. Examining the Korean market, Choi et al. (2012) indicate that foreign investors help local firms to have access to foreign markets, encourage their technological innovation activities and push them to further ‘invest in technology development by using their ownership shares as leverage’.
Advantages of Domestic Institutional Investors in Promoting R&D Activities
Domestic institutional investors have a comparative informational advantage over foreign institutional investors. They are capable to monitor managers and promote R&D activities. Because of the far distance from local and monitoring information, foreign institutions’ monitoring effectiveness can critically drop (Kang & Kim, 2010; Kang et al., 2018; Kim et al., 2016; Leuz et al., 2009). Generally, they are less familiar with country and industry economic conditions (Brennan & Cao, 1997). Moreover, in an international context, the information asymmetry problem becomes more relevant due to geographic distance, cultural norms and linguistic differences (Bae et al., 2008; Ferreira et al., 2017; Kim et al., 2016). Examining a sample of 32 countries, Bae et al. (2008) find that resident analysts are able to provide more accurate forecasts for local firms than non-resident ones. They explain that local analysts are better informed than foreign analysts. They call this evidence ‘the local analyst advantage’. This same explanation can be also pertinent for institutional investors. Indeed, domestic institutional investors can benefit from local information advantage as opposed to foreign ones. Leuz et al. (2009) suggest that foreign investors face more important monitoring costs (such as information acquisition costs, multinational operations costs, travel costs, language and cultural understandings) than domestic investors for the same firms. These additional costs may discourage foreign investors from engaging in active monitoring. Using a sample of 29 non-US countries from 2001 to 2013, Kim et al. (2016) show that domestic institutions detect earnings management better than foreign institutions. They explain this result by the easy access of domestic institutional investors to monitoring information due to their proximity to it. Kang et al. (2018) point out that investors located near investee firms realize significant abnormal returns on their investments and engage in active governance activities. Indeed, proximate investors enjoy information advantages over distant ones. They have the ability to access more and better information concerning the hometown firms. Despite the technological progress that considerably mitigates the negative effect of distance on information gathering, recent literature still supports the domestic investors’ informational advantage (Ferreira et al., 2017; Kim et al., 2016).
There is little empirical evidence concerning the relation between foreign institutional ownership and innovation. Huang and Shiu (2009) found that foreign ownership, as a whole, is strongly and positively associated with increases in firms’ R&D expenditure in Taiwan. They corroborate that foreign owners provide strategic advantage over domestic investors and their ownership is highly valued by the stock market in Taiwan. While Huang and Shiu (2009) use an aggregated measure of foreign ownership that considers all the stocks owned by foreign individuals, corporations, financial institutions and governments, we focus on the particular role of foreign institutional investors. Bena et al. (2017) found that foreign institutional ownership is associated with a significant increase in innovation output. They explain this result by the disciplinary and monitoring roles of foreign institutions. Luong et al. (2017) indicate that foreign institutional investors promote firms’ innovation efficiency and they propose the following reasons. Foreign institutions monitor corporate managers and actively intervene in firms’ strategic decisions to create value; they provide insurance for firm managers against early failure of their innovative activities and facilitate knowledge spillovers from most innovative countries. Compared to the studies of Bena et al. (2017) and Luong et al. (2017) that use innovation output measures (patents and citations), we use R&D investment intensity. While the number of patents and citations measures the efficiency and the productivity of the innovation activities, R&D investment intensity fits better with the purpose of our study and accesses the firm commitment to innovation and the degree of managerial myopia.
The literature review, developed above, shows that the impact of foreign institutional investors on R&D investments can be either positive or negative. Our empirical analysis will shed light on the role of these foreign investors in the French context. To the best of our knowledge, the current study is the first to address the impact of foreign institutional ownership on innovation input (R&D) and the willingness to engage in innovation for a developed country (France), while other studies focus on innovation output (patents and citations) or on developing economies.
Methodology: Empirical Model and Data
Empirical Model
To test the effect of foreign institutional investors on R&D investments, we estimate the following model:
where
RD = R&D investment intensity, computed as the ratio R&D expenses to sales.
FII = percentage of shares owned by foreign institutional investors.
DII = percentage of shares owned by the French institutional investors.
SIZE = log of market capitalization.
DEBT = Long-term debt/total assets.
Q = proxy for Tobin’s Q measured by the ratio: (market value of equity + book value of total debts)/book value of total assets.
DIVID = dividend payout: dividend per share/earnings per share at year end.
CRISIS = dummy variable that takes 1 for years (2008–2009) and zero otherwise.
Our dependent variable is the R&D investment intensity (RD). We include the lagged dependent variable to take account of the continuous nature of R&D activities. We examine the effect of foreign institutional ownership as our main independent variable. We introduce the domestic institutional ownership in the model to compare their relative contribution to R&D efforts. Our list of control variables is motivated by previous studies (Kochhar & David, 1996; López-Iturriaga & López-Millán, 2016). Literature suggests that firm size, leverage, past performance and dividend payout ratio can influence firm’s ability and willingness to invest in R&D. We also examine the impact of the global financial crisis on innovation activity.
We adopt a dynamic panel data approach and we estimate the Arellano and Bond (1991) difference GMM estimator. This model takes account of the dynamic structure of R&D investment and deals with potential endogeneity problems between investment decisions and ownership structure (David et al., 2006; Lohd et al., 2014; Nashier & Gupta, 2016). Flannery and Hankins (2013) examine the performance of seven econometric methods, including instrumental variables and GMM estimator, for estimating dynamic panel models in corporate finance research. In these studies, multiple variables generally exhibit endogeneity and serial correlation. Flannery and Hankins (2013) confirm the superiority of the GMM estimator in dealing with endogeneity in dynamic panel model using Monte Carlo simulations and real data. This approach accounts also for the unobserved firm-specific heterogeneity and provides robust estimations in the presence of heteroscedasticity and autocorrelation associated to the dynamic nature of panel data. Accordingly, we use the difference GMM procedure developed by Arellano and Bond (1991). We treat all right-hand variables (except the crisis dummy variable) as potentially endogenous and use their lagged terms as instruments. To check the validity of our estimated models, we use Sargan test to verify the validity of the restrictions imposed by the use of the instruments and the tests of the first- and second-order autocorrelation (AR [1] and AR [2]) to test the absence of second-order serial autocorrelation in the residuals. Wald test permits to assess the global significance of the model.
Data
The sample consists of all the high-tech firms listed in the CAC All-Shares index, the largest index of the French stock market, as on the 31 December 2014. We examine firms operating in high-tech sectors (information technology, electrical and electronic equipment and telecommunication). The use of dynamic panel estimation imposes to not consider firms that are in the sample for few years. Following Arellano and Bond (1991), for a firm to be included in the sample, their data must be available for at least 4 consecutive years.
The final sample included 93 firms. We constructed an unbalanced panel data of 628 firm-year observations for the period 2008–2014. R&D, institutional ownership and other financial data are collected from Thomson Reuters Database.
Results and Discussion
Table 1 reports the descriptive statistics of R&D investment intensity and domestic and foreign institutional ownership. It also reports descriptive statistics for all control variables used in the estimated models. First, we note a mean value of R&D investment intensity of 6%. This indicates the importance of investment in R&D for the high-tech sectors. The standard deviation, as measure of dispersion, is 9% and it is above the mean value. This suggests that R&D investment intensity differs significantly across the firms in our sample.
Foreign and domestic institutional ownership have the same mean value of 11%. For a sample of French firms included in the SBF 120 index during the period 1998–2007, Goyer and Jung (2011) found a mean of 15% for foreign institutional ownership. Examining a data set of equity holdings in 32 countries, Ferreira et al. (2017) indicate that foreign institutional investors possess on average 12.9% as a fraction of market capitalization at the end of 2010. They report 17% of foreign institutional ownership for a sample of 453 French firms from different economic sectors. Compared to our sample, we can conclude that foreign institutional investors invest less in high-tech firms.
The median ranges from 0.03 for foreign institutional ownership to 0.07 for domestic institutional ownership. Standard deviation ranges from 0.11 for domestic institutional ownership to 0.15 for foreign ownership. We notice a high dispersion of foreign institutional ownership since the standard deviation of that variable is above the mean.
For control variables, it is worth to highlight the low mean leverage ratio as measured by long-term debt to total assets and the low mean payout ratio.
Descriptive Statistics.
Pearson’s Correlation Matrix.
Pearson’s correlations and variance inflation factor (VIF) are used to investigate whether multicollinear problems exist between the independent variables. Table 2 reports the correlation coefficients between all variables. The results show that there is a weak correlation between the used variables. Indeed, the correlation between any given pair of independent variables is below 0.8. In addition, the results show that the highest VIF factor is equal to 1.8. Hence, we can assume the absence of multicollinearity among our independent variables.
Table 2 reports a positive and significant correlation between R&D investment intensity and both foreign institutional ownership and Tobin’s Q.
We perform the modified Wald test for heteroskedasticity and the Wooldridge test for autocorrelation on the residuals of a fixed effect specification of model (1). The results, not reported here for sake of brevity, confirm the existence of heteroscedasticity and autocorrelation in the residuals of the fixed effects model. Accordingly, we use the difference GMM estimator, developed by Arellano and Bond (1991), that deals with heteroscedasticity and autocorrelation in dynamic panel models.
Table 3 reports the effects of foreign and domestic institutional ownership on R&D investment intensity for high-tech firms listed on the French stock exchange for the period 2008–2014. Results are presented as follows. Model 1 examines the impact of the foreign institutional owners on R&D investment. Model 2 is used to investigate the effect of domestic institutional owners on R&D investment. Finally, foreign and domestic institutional ownerships are both used in Model 3 to test their joint effects on R&D.
The three models were estimated using the Arellano and Bond (1991) GMM estimator. We show that whatever the estimated model, the results of AR (2) test show that regression errors did not exhibit second-order autocorrelations. The Sargan test supports the validity of the instruments used. Wald test shows that our models are globally significant at 1% level.
The results of Model 1 show a strong positive and significant influence of foreign institutional ownership on R&D activities. Conversely, Model 2 shows that domestic institutional ownership has a significant negative effect. The results of Model 3 confirm the results of the two precedents models. These findings support the active monitoring view attributed to foreign institutional investors and corroborate previous studies, such as those of Chen et al. (2015), Bena et al. (2017) and Luong et al. (2017).
Foreign institutional owners monitor management actions and decisions more effectively than domestic ones. Their presence helps to improve R&D investment intensity. Compared to domestic institutional investors, foreign institutional investors are independent investors as they are not under the pressure of local managers who require their support to maintain business ties (Gillan & Starks, 2003). Domestic institutional investors generally tie business relations with investee firms, and they may support managers’ decisions to preserve their business interests; for example, a bank can be shareholder and creditor for a firm at the same time, and an insurance company often provides insurance services to their investee firms. To develop their business relation, banks and insurance companies adopt generally passive behaviour on monitoring firms, and they prefer to not oppose managers’ decisions (Brickley et al., 1988; Chen et al., 2007). Tribo et al. (2007) found a negative impact of bank ownership on Spanish firm R&D investments. They conclude that banks are passive institutional investors that exacerbate managerial myopia.
This finding highlights the significant positive role of foreign institutional investors in the French context. In a civil law system, such as the French institutional setting, minority shareholders' interests are less protected than in common law system (Ajina et al., 2015; Goyer & Jung, 2011; López-Iturriaga & López-Millan, 2016). Therefore, foreign institutional owners rather than domestic institutions act as a control device to reduce managerial myopia and encourage long-term investment, like R&D activities, to reach better performance. Foreign institutional investors influence local managers by using their voting rights or by threatening to sell their shares (Aggarwal et al., 2011).
The results of the lagged dependent variable in the three estimated models report that R&D activities exhibit persistence over time. R&D investment intensity in the current period is positively and significantly associated with R&D investment intensity in the previous period. Managers adjust their current R&D activities to what has been done in the near past. This finding comforts our choice for a dynamic panel data analysis.
From the analysis of control variables, it is worth to highlight that smaller firms tend to invest more in R&D than larger firms in high-tech industries. Moreover, R&D investments are positively associated with leverage and negatively associated with payout ratio. High-tech firms finance their investment with long-term debt and retained earnings. From Model 3, we report a statistically significant decrease in R&D activities during the global financial crisis.
Effects of FII and DII on R&D Investment Intensity.
The results presented in Table 3 support the view that foreign institutional investors contribute to alleviate agency problems between managers and shareholders by mitigating managerial myopia and encouraging long-term investments. We expect that the importance of the role of foreign institutional ownership in promoting innovation depends on the quality of governance mechanisms in the investee firms. This role will be crucial when internal corporate governance system is not efficient. The agency theory suggests that larger firms implement stricter governance mechanisms than small firms (Jensen, 1986). Large firms have various stakeholders and bear higher political costs in case of scandals or lawsuits because they attract widespread media attention (Laing & Weir, 1999). We expect that the monitoring effect of foreign institutions will be more pronounced in small firms.
Table 4 compares the impact of foreign institutional ownership on the R&D investments for two different subsamples: 47 small firms and 46 large firms, sorted according to the sample mean of market capitalization for each firm. The results confirm the dynamic nature of R&D investment since the coefficients of the lagged dependent variable are positive and significant for both models. Foreign institutional ownership is associated with higher R&D investment in French high-tech firms, but the impact is more relevant for small firms (the coefficient is equal to 0.196) compared to large firms (the coefficient is equal to 0.011). This result can be explained by the fact that corporate governance mechanisms in small firms are less effective and foreign institutions’ monitoring mitigates managerial myopia and urges managers to invest in R&D projects. Furthermore, domestic institutional ownership does not encourage R&D investment for small and large firms.
Effects of FII and DII on R&D Investment Intensity Across Small and Large Firms.
Conclusion
This article investigates the impact of foreign institutional ownership on R&D investment intensity. We used a sample of 93 high-tech French listed firms over the period 2008–2014. To deal with the dynamic nature of R&D activities and the potential endogeneity between these activities and ownership structure, we conduct a dynamic panel data analysis and we estimate the Arellano and Bond (1991) GMM estimator.
Our theoretical development suggests that the impact of foreign institutional ownership on R&D investment can be either positive or negative. Our empirical results demonstrate that foreign institutional investors encourage R&D activities in French high-tech firms and that their impact is more relevant for small firms.
These findings are consistent with the active monitoring role of foreign institutional investors. They are pressure-resistant and independent from local management, and they have the experience and the expertise to monitor firms and urge managers to invest in R&D to enhance long-term performance. In addition, they can facilitate technology transfer to host country. Our findings do not corroborate the literature that considers foreign institutions as short-term investors (Arora, 2016).
Conversely, institutional domestic ownership is negatively associated with R&D activities. While they have an informational advantage over foreign investors, they fail to be active monitors. These investors have generally existent or potential business relations with investee firms, and they may choose to support managers’ myopic behaviour to preserve their business interests.
Our article contributes to two strands of the literature. First, it contributes to the literature on the factors that influence firms’ willingness to invest in R&D investment. Existing evidence suggests that ownership structure can influence risk-taking behaviour and innovation strategy. Some studies examine the impact of managerial ownership and family ownership (Belloc, 2012; Matzler et al., 2015). Other studies examine the role of institutional investors and found mixed results. These studies do not distinguish between foreign and institutional investors. In this study, we present evidence that domestic and foreign institutional investors have heterogeneous monitoring behaviour and they influence R&D investment decisions differently. This study provides a possible explanation for the inconsistency in past results on the relation between institutional ownership and R&D activities in different national contexts by differences on the relative importance of domestic and foreign institutional ownership between countries. In countries where foreign institutional investors maintain substantial holdings compared to domestic investors, as in France, the relation should be positive.
Second, our article contributes to the literature on the impact of foreign institutional investors on the investment decisions on local firms in developed countries. Most recent empirical studies focus on the role of these investors in emerging markets (Chen et al., 2015; Liu et al., 2018; Vo, 2016).
Implications
The results of this article have some important managerial and policy implications. R&D investment is crucial for the development and survival of firms, especially in the high-tech sector, and for the economic growth at the macro level. Managers of high-tech firm should attract foreign institutional investors that can provide long-term capital and endorse best governance practices. Hence, companies should develop investor relations departments. Their role should be to target foreign institutional investors with long-term orientation. Useem (1996) concludes that successful firms consider their shareholders as strategic assets, and they maintain permanent communication with them. La Voie (2003) observes that German companies in bioscience industry adopt this strategy and they succeed to raise large amounts of long-term capital from US institutional investors. Policymakers should facilitate foreign institutional investment in their countries by reinforcing investor protection legislation.
Limitations/Future Research
This section addresses the limitations of the study and highlights future research directions. First, the sample used is based on the high-tech sector of one country and this seems not enough to generalize the findings. Future research should consider a large sample of developing and developed countries to compare the role of foreign institutional investors in different settings. Second, in this study, we considered foreign institutional investors as a group that has the same preferences and objectives. Future research should study the role of each type of foreign institutions separately, namely banks, insurance companies, pension funds, mutual funds and hedge funds. Third, future studies should examine the relation between foreign and domestic institutional investors and other strategic decisions such as dividend policy, corporate diversification and financing policy. We expect that differences in monitoring effectiveness between these two types of investors can lead to different impacts of their ownership on firms’ strategic decisions. Fourth, future studies should try to identify moderating or mediating variables that can influence the willingness of institutional investors to promote or reduce R&D investments which will improve our understanding of the disparities of R&D investment intensity between firms with different ownership structures.
Footnotes
Acknowledgements
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve the quality of the article. Usual disclaimers apply.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.
