Foreign Ownership and Firm Innovation: Evidence from Korea

ABSTRACT

This study examines whether foreign equity investment promotes domestic firms’ innovation activities. Using panel data on the Korean firms during the 1999–2013 period, we find that foreign ownership has a positive effect on firms’ innovation activities. Furthermore, we also show that, as compared to non-chaebol firms, chaebol firms’ innovation activity becomes much greater with the increase of foreign ownership. Finally, we investigate industry-level spillover effects of innovation. Specifically, we find that foreign ownership promotes innovation activities via forward linkage, the effect of which is also more pronounced in chaebol firms.

KEYWORDS:

• Foreign ownership
• innovation
• chaebol
• spillover
• Korea

JEL CLASSIFICATION:

• F21
• G32
• O3

Acknowledgements

We are grateful to the editor (Kap-Young Jeong), two reviewers, Byungchae Jin, Kyuseok Lee, and Taeyoon Sung for their helpful comments on our work. Any remaining errors are ours.

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

1 The country classifications for developing economies are based on UN’s WESP 2014 (World Economic Situation and Prospects). See http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=771.

2 See https://www.globalinnovationindex.org.

3 KIPRIS is an affiliated organisation of the Korean Intellectual Property Office (KIPO).

4 See http://www.index.go.kr/potal/main/EachDtlPageDetail.do?idx_cd=2785.

5 In Korea, it is hard to retrieve citation data because of a lack of information; thus, we do not employ such data.

6 It should be noted that, even though we use the measures from Javorcik (2004), our study focuses on the innovation spillovers from the industry-level perspectives. On the other hand, Javorcik (2004) examines the productivity spillovers.

7 To check the robustness of our results, we repeat our analyses by excluding the period of Global Financial Crisis and find that our main conclusions remain intact.

8 It should be noted that, in Table 6, R²s in chaebol firms’ regressions (i.e., regressions (5) and (6)) are much higher than those in non-chaebol firms. Basically, the chaebol firms’ innovation activities are greater than non-chaebol firms’ activities; thus, R² that indicates the explanatory power of the regression model is relatively higher in the case of chaebol samples.