Corporate Governance and Firm Innovation: The Effect of Ownership and Board of Directors on R&D Investments

Introduction

A firm’s innovation ability is essential because it leads to a new combination of its resources and generates effects throughout the lifetime of the firm. Firms’ competitors are not able to possess adequate resources to adopt an imitation strategy (Miller & Shamsie, 1996). Accordingly, innovation activity represents one of the fundamental pillars of competitive advantage, mostly because it is an inimitable resource (Monreal et al., 2012).

Using the consolidated process-based conceptualization (Tidd & Bessant, 2009), technological innovation can be viewed as the set of activities through which a firm identifies, designs, produces, and introduces a new product, technology, system, or technique (Freeman, 1976). To start and continue to drive this process, investments in Research and Development (R&D) are essential. They permit the exploration and exploitation of activities and, accordingly, the identification of new products or new processes.

If, on one hand, scholars acknowledge that investment in R&D represents a key driver for firms’ enduring competitive advantage, on the other hand, within the context of public companies, it is not obvious that managers have incentive to undertake R&D investment at their optimal level.

Drawing on the corporate governance literature, scholars emphasize the main mechanisms aimed at aligning the interests of management and owners. This chapter focuses on two of these mechanisms that may discourage the R&D underinvestment problem. More specifically, ownership structure, board of directors’ attributes, and their effects on R&D investments are investigated. These are relevant ways that scholars have emphasized to solve some managerial opportunistic behaviors, such as ones connected to R&D underinvestment.

The discussion of the main issues regarding the relationship between innovation and the corporate governance mechanisms mentioned above allows us to illustrate the research areas where scholars find a consensus and other areas where the literature shows conflicting results and debate is still open. In order to explore the effect of corporate governance on R&D investment, empirical studies will be examined, and the interpretation of the results will rely on the main theoretical frameworks used within the corporate governance literature.

We used a systematic selection process to select the eligible literature for our analysis. The literature review was limited to articles published in peer-reviewed journals, identified through three databases: ABI/Inform ProQuest, Business Source Complete (EBSCO), and EconLit (EBSCO). We searched for all articles up to 2019, using diverse combinations of keywords—(“duality”; “CEO-chairman duality” or “dual leadership”), (“board size”), (“outside directors” “or “independent directors”), (“ownership structure”), (“ownership concentration”), (“family ownership”), (“institutional ownership)—as well as three innovation-linked terms (“R&D investment”, “R&D expenditures”, and “innovation input”). We confirmed the importance of the articles by reading all abstracts, checking for a discussion related to the relationships among ownership structure, board of directors, and R&D investment. The rest of articles were read in their entirety, controlling for substantive relevance by checking for a discussion related to innovation strategies from a corporate governance perspective.

The chapter is divided into three sections: