Cultural distance, foreign ownership, and corporate innovation in China

ABSTRACT

This study examines the impact of heterogeneous foreign institutional investors on innovation in Chinese listed firms from 2009 to 2020. Empirical results indicate that foreign institutional investors from regions with high cultural distance are associated with a significant increase in corporate innovation of Chinese firms. Moreover, the results remain robust to alternative cultural distance measures and methods that address endogeneity. This research provides novel evidence regarding the role of foreign institutional investors in China.

KEYWORDS:

• Cultural distance
• innovation
• China
• foreign institutional ownership

JEL CLASSIFICATION:

• M10
• M14
• G30
• O31
• O32

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ A-share firms are mainland-based Chinese companies traded on Chinese stock exchanges..

² By contrast, R&D expenditure is used as a proxy for innovation input..

³ We obtain data from Hofstede’s website (www.geert-hofstede.com).

⁴ Schwartz’s (2006) seven cultural dimensions are: embeddedness (i.e. the extent of maintaining the social order and avoiding change), harmony (i.e. the extent of people putting emphasis on the group), egalitarian commitment (i.e. the extent of transcendence of selfish interests), intellectual autonomy (i.e. the extent of creativity and curiosity), affective autonomy (i.e. the extent of stimulation and excitement), mastery (i.e. the extent of efforts to modify one’s surroundings), and hierarchy (i.e. the extent of legitimacy of hierarchical role). We obtain data from the author’s website (https://www.researchgate.net/profile/Shalom-Schwartz).

⁵ House et al.’s (2004) nine cultural dimensions are: performance orientation (i.e. the extent of encouraging performance improvement and excellence), assertiveness (i.e. the extent of being assertive), future orientation (i.e. the extent to which individuals engage in future-oriented behaviours), humane orientation (i.e. the extent to which a collective encourages individuals to be fair), institutional collectivism (i.e. the extent to which societal practices encourage collective distribution of resources), in-group collectivism (i.e. the extent to which individuals express pride), gender egalitarianism (i.e. the extent to which a collective minimizes gender inequality), power distance (i.e. the extent to which the community accepts and endorses authority), and uncertainty avoidance (i.e. the extent to which a society desires to avoid uncertainty). We obtain data from https://globeproject.com/study_2004_2007#data..

Additional information

Funding

The work was supported by the Natural Science Foundation of Guangdong Province for Distinguished Young Scholars [No. 2019A1515011649, 2021A1515011337]; the Characteristic Innovation Projects of Colleges and Universities in Guangdong Province [No. 2019KTSCX036]; Social Science Foundation of Guangdong Province [No. GD21YYJ09]; the Foundation of Southern China Institute of Fortune Management Research, Statistical Science Research Foundation of China [No. 2021LY089].