Social norm differences and innovation: do institutional investors always spur corporate innovation?

Abstract

This paper examines how culture/social norms affect the role of institutional investors in fostering corporate innovation. We find that foreign institutional ownership has a positive association with innovation output only if these investors are from countries with more creative or less risk-averse cultures, compared to the country in which a firm is incorporated. The positive role of these institutions holds true even when they are non-independent investors, are from weak governance countries, or tend to invest in less-innovative industries. The results suggest that foreign institutions with more innovation-friendly social norms enhance corporate innovation primarily through the social norm channel, rather than through governance mechanisms or selective investment in innovative firms. In other words, these institutions could help a firm to overcome cultural barriers to innovation by bringing positive attitudes toward innovation.