Directors’ Foreign Experience and Firm Innovation

ABSTRACT

This paper investigates whether board directors with foreign experience promote firm innovation. The evidence suggests that firms with a larger proportion of directors with foreign experience on their board have better innovation outcomes, both quantity and quality. This finding remains for various robustness tests. We propose three potential underlying channels behind and verify them. The findings show that the positive effect of directors’ foreign experience on firm innovation is stronger for highly innovative industries and more pronounced when foreign experience is gained in highly innovative countries, supporting the advising channel. Besides, independent directors exert a greater effect on innovation than non-independent directors, supporting the monitoring channel. Furthermore, directors with foreign experience provide more failure-tolerant CEO incentives as they lower CEO turnover-performance sensitivity and CEO pay-for-performance sensitivity, supporting the insurance channel. Overall, our paper provides robust and comprehensive evidence for the impact of directors’ foreign experience on firm innovation.

KEYWORDS:

• Board directors
• foreign experience
• innovation
• board functions

JEL:

• F61
• G31
• O32

Disclosure statement

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

Notes

1. Financial statements of financial firms are compiled under different accounting standards. ST (Special Treatment) stocks are stocks with abnormal financial conditions. *ST stocks are ST stocks that fail to comply with certain rules imposed by the exchange during the period of ST. ST and *ST stocks are typically in financial difficulty.

2. Invention patents are the most innovative because they are granted for novel technologies. Utility patents are granted for new applications of existing technologies. Design patents cover novel packaging and design, which involve limited technological advancements.

3. CNRDS provides patent citation data only for invention patents. Therefore, the citation data in our paper covers only invention patents.

4. The average length of time to patent grant after filing application is about 2.6 years for invention patents and about 0.6 years for utility patents in China.

5. The results are consistent when we end the patent data in 2016.

6. Chinese State Intellectual Property Office (CSIPO) adopts the International Patent Classification (IPC) system to organize patents into specific technology groupings. We follow Moshirian et al. (2021) and adjust the raw citation counts using the one-digit IPC code.

7. GII is available at https://www.wipo.int/global_innovation_index/en/index.html.

8. We use GII 2016 because our sample ends in 2016.

9. For the purpose of this test, we use forced CEO turnover, excluding normal CEO turnover. Reasons for normal turnover includes retirement, expiration of the term of office, and change of controlling rights.

10. During the period 2008–2016, around 36% of all A-share firm-year observations are with missing R&D. However, firms without reporting R&D might still engage in R&D-type activities (Koh and Reeb 2015). To show the robustness of our results, we adopt four alternative approaches commonly used in literature to deal with missing R&D (Koh and Reeb 2015): (1) Excluding firms with missing R&D; (2) Coding the missing R&D values as zero and including a dummy variable to denote missing R&D in the regression model; (3) Replacing missing R&D with the industry average of reported R&D; (4) Replacing missing R&D with the industry average R&D and including a dummy variable to denote missing R&D in the regression model. Our results are robust. We thank the reviewer for the suggestion.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71972163].