Abstract
Abstract Based on a natural experiment of foreign investment access relaxation, this paper investigates impacts of foreign institutional investors (FIIs) on energy firms' innovation. It is still unclear the real effect of FIIs on energy firms' innovation in the literature. We detect a significantly positive relationship between foreign institutional investors and innovation outputs of energy firms using firm-level data. Three possible mechanisms driving our findings are explored. Foreign institutions increase the proportion of R&D expenditures in revenues, limit the scale of related party transactions to improve corporate governance, and widen the pay gap within firms to stimulate the efficiency of human capital. Our main findings are weakened in state-owned companies with high financing constraints. Jointly, our findings offer clear policy implications to emerging markets by identifying the effects of FIIs on energy firms' innovation.
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