In(Ex)Ternal Corporate Governance and Innovation: A Review of the Empirical Evidence

Abstract

This empirical review aims to discern the role of both internal and external corporate governance in enhancing firm innovation activity. It highlights the incentives and obstacles corporate governance creates for the innovation activity of firms. The extant literature reverberate several key observations. The number of inside vs. independent directors, better protection of shareholder rights as well as higher ownership concentration appears to facilitate firm R&D expenditures and intensity, and more patents. Director stock option incentives as well as greater disclosure and transparency (of innovation activity) and greater stakeholder involvement also appear beneficial to firm innovation. Better presence of institutional investors, anti-takeover provisions, and existing competition are also observed to positively impact firm innovation activity. On the other hand, the literature offers implication that in instances where corporate governance provisions are mandated then firms can become dissuaded from engaging in innovation activity. Despite the general sentiment regarding the benefits of good corporate governance on enhancing firm innovation outcomes, it is noted the majority of studies offer evidence from the context of developed countries only. Nonetheless, there exists growing evidence that from an emerging market context, firm governance can similarly be closely linked to innovation outcomes among countries that have weak country governance. Further study on how both internal and external corporate governance mechanisms promotes or encumbers innovation activity at the level of the firm appear central in advancing theoretical arguments on the ways in which firms can achieve an ideal balance in terms of voluntarily adopting vs. mandating corporate governance provisions.