When Do Foreign Institutional Blockholders Passively Promote Firm Innovation in a Local Market? Evidence from Korea

Abstract

Using extensive hand-collected data on granted patents, we examine the effect of institutional blockholder monitoring on corporate innovation in Korea. Specifically, we focus on the relation between institutional blockholding and firm innovation. We find that institutional blockholders positively influence firm innovation and that this positive effect is driven primarily by foreign institutional blockholders, particularly when they engage in passive monitoring. The Korean market features limited participation by shareholders and pressure-sensitive domestic institutions. Thus, we demonstrate the importance of corporate governance for firm innovation in emerging markets, where corporate innovation is increasingly important for long-term economic growth, competitiveness, and value creation.