Does Ownership Structure Matter for Firm Technological Innovation Performance? The Case of Korean Firms

• Author: Suk Bong Choi,Byung Il Park,Paul Hong
• Date: 01 May 2012
• Published date: 01 May 2012
• DOI: http://doi.org/10.1111/j.1467-8683.2012.00911.x

Does Ownership Structure Matter for Firm

Technological Innovation Performance?

The Case of Korean Firms

Suk Bong Choi, Byung Il Park*, and Paul Hong

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study examines the inf‌luence of f‌irms’ ownership structureon their technological innovation

performance. First, we have examined whether ownership concentration positively inf‌luences technological innovation

performance. Then we have investigated the primary reasons for the results derived from the f‌irst stage of our analysis by

circumstantially exploring the impacts of four different ownership types.

Research Findings/Insights: Using f‌ive sets of cross-sectional data, consisting of 301 Korean f‌irms, we found that ownership

concentration does not have a signif‌icant effect on f‌irm technological innovation performance. However, some ownership

types (e.g., institutional and foreign) do have a positive effect.

Theoretical/Academic Implications: Drawing on agency theory and the resource dependence perspective, our paper is the

f‌irst to consider a comprehensive treatment of the effect of ownership types on innovation in an emerging country, in

particular in contrast to previous studies thathave focused on advanced economies. Since onlypartial predictions suggested

by agency and resource dependence perspectives were supported, it appears that neither theory adequately captures the

ownership-technological innovation performance relationship. Thus, we suggest that future research should explore the

question through a different theoretical lens to better understand the impact of ownership types. We suggest thattransaction

cost economics can be another path to approach the phenomenon.

Practitioner/Policy Implications: This study suggests thatmanagers should recognize how each characteristic of ownership

structure (types) inf‌luences the building of f‌irm-specif‌ic capabilities for innovation. Policy makers and managers should be

aware of the impact of the complete range of ownership types on technological innovation performance when they

implement corporate governance reform with greater effectiveness. It also suggests that successful technological catch-up

and innovation not only require policies for upgrading technology capabilities, but also the setting up of a suitable

supporting ownership structure that favors innovation of f‌irms in emerging countries. We suggest that successful techno-

logical catch-up and innovation require a supporting ownership structure.

Keywords: Corporate Governance, Technological Innovation Performance, Ownership Concentration, Ownership

Structure, Korea

INTRODUCTION

What determines the technological innovation perfor-

mance of f‌irms? Why do the technological innovation

capabilities of f‌irms differ? These questions have largely

been argued in the contemporary literature working on

the analysis of technological innovation performance. For

instance, the industrial organization literature views indus-

trial structure and dynamics as key factors affecting the

technological development of f‌irms and as explaining the

f‌inancial performance and growth of f‌irms with special ref-

erence to the size and concentration of industries, market

uncertainty and entry, integration and diversif‌ication, and

technological changes (Acs &Audretsch, 1987; Scherer, 1990;

Sutton, 1998). The strategic management literature, on the

other hand, focuses on f‌irm-specif‌ic resources and capabili-

ties, rather than industry structure, as important sources

for technological heterogeneity and innovation performance

*Address for correspondence: Byung Il Park, College of Business Administration,

Hankuk University of Foreign Studies, 270, Imun-dong, Dongdaemun-gu, Seoul 130-

791, Korea. Tel: 82-2-2173-3193; Fax:82-2-964-3532; E-mail: leedspark@hufs.ac.kr

267

Corporate Governance: An International Review, 2012, 20(3): 267–288

© 2012 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2012.00911.x

(Barney, 1991; Rumelt, 1991). Emphasizing economic and

technological factors, these two streams of research have

paid little attention to the role of states and institutions,

overlooking their dynamic interactions with the technologi-

cal innovation activities of f‌irms. Hence, a third line of

research, the national systems of innovation perspective,

highlights country-specif‌ic institutional networks and the

quality of their interactions in explaining endogenous

sources of national innovation performance (Edquist, 1997;

Freeman & Soete, 1997; Lundvall, 1992; Nelson, 1993).

Although the literature has examined the relationship

between institutional factors and technological innovation

performance, it has failed to providea detailed answer to the

questions by observing the phenomenon at the level of the

f‌irm, the industry, and the economy as a whole.

In contrast to the discussions explained above, corporate

governance factors, which emphasize a set of mechanisms

for the allocation of f‌irms’ resources and the distribution of

their returns, may inf‌luence variations in a f‌irm’s technologi-

cal development and innovation performance. One essential

assumption about corporate governance is that certain char-

acteristics of shareholders and their different preferences

with regard to a f‌irm’s R&D and technological innovation

activities play an important role in determining changes in

f‌irms’ technological innovation performance (Hoskisson,

Hitt, Johnson, & Grossman, 2002).

As a realization is growing that corporate governance

factors signif‌icantly inf‌luence a f‌irm’s technological innova-

tion performance, empirical examinations dealing with the

relationship between them are in the limelight. Despite the

recent prevailing trend, previous studies have omitted key

issues and thus we attempt to contribute to the current

knowledge by f‌illing the following research gaps. First,

although a number of previous studies attempted to

examine whether ownership concentration leads to techno-

logical innovation performance, they yielded conf‌licting

results. A potential explanation is that previous studies often

assume large shareholders possess a homogeneous prefer-

ence and have similar incentives for f‌irms’ strategic deci-

sions, and some of them merely use one or two ownership

variables to address the effects of f‌irms’ ownership struc-

ture1(Chibber & Majumdar, 1999; David, Kochhar, &

Levitas, 1998; David, Yoshikawa, Chari, & Rasheed, 2006;

Hoskisson et al., 2002; Sheu & Yang, 2005). In other words,

although there is a general consensus that the ownership

structure of f‌irms is considered a critical factor for determin-

ing a f‌irm’s investment strategy (Lee and O’Neil, 2003),

debate on the effect of ownership concentration on f‌irm

innovation (Tribo, Berrone, & Surroca, 2007) is still inconclu-

sive. While some studies show positive relations between

these two (Hosono, Tomiyama, & Miyagawa, 2004), others

found negative (Yafeh & Yosha, 2003) or neutral associations

(Francis & Smith, 1995). In this regard, it is crucial to

examine precisely whether ownership concentration brings

positive or negative outcomes in technological innovation

performance.

Second, we do not yet clearly know how ownership con-

centration functions. To reiterate, we argue that this is pri-

marily becausesome previous studies addressed only one or

two ownership variables and overlooked the interface

between corporate governance and technological innovation

based on a large sample of f‌irms. In the same way, strategic

and economic studies have not systematically examined

how these factors inf‌luence a f‌irm’s strategic decisions to

enhance technological innovation performance. For instance,

Hoskisson et al. (2002) merely explored the role of institu-

tional investors in f‌irm innovation strategy. Delgado-Garcia,

de Quevedo-Puente, and de la Fuente-Sabate (2010) investi-

gated the impact of a partial ownership structure on corpo-

rate reputation. Others often focus on the relationship

between fragmentary ownership structure and f‌irm f‌inan-

cial performance (e.g., David et al., 2006; Lee & O’Neill, 2003,

among others). In contrast to the previous studies, the aim of

this paper is to provide a comprehensive treatment of the

effects of ownership types and examine how governance

factors concurrently inf‌luence technological innovation per-

formance. Our fundamental view is that extant empirical

research simply seemed to assume that large shareholders

have a homogeneous preference for R&D investment.

However, different types of shareholders have different atti-

tudes towards risky investment decisions and, thus, we

need to classify various ownership types and explore sepa-

rately the effects of different types of ownership on techno-

logical innovation performance.

Third, most of the empirical examinations were under-

taken in the context of advanced economies. Tylecote, Cho,

and Zhang (1998) addressed the effects of different f‌inancial

systems on the process of technological innovation in the

steel, f‌ine chemicals and pharmaceutical industries of

Britain and Japan. Lee and Yoo (2008) analyzed the path of

corporate governance reform in a French case compelled by

f‌inancial eff‌iciency and cooperative innovation. Lee and

O’Neill (2003) identif‌ied the signif‌icant effects of ownership

concentration on R&D investment, which leads positively to

f‌irms’ technological innovation performance, for US and

Japanese f‌irms. In the study by David et al. (2006), owner-

ship variables have been investigated in the Japanese context

with special reference to foreign ownership. These illustra-

tions conf‌irm that previous research has focused mainly on

developed countries.

Meanwhile, David et al. (2006) suggested that more

research is needed on foreign ownership worldwide and

interaction effects with other types of shareholder to draw a

precise picture of ownership structures and their effects on

governance, strategy, and performance. With respect to this

issue, Chen, Li, Shapiro, and Zhang (2008) are perhaps a

welcome exception, suggesting useful insights for improv-

ing f‌irm’s innovation capability by organizing a good own-

ership structure, but the research issue needs to be further

examined by expanding it to other emerging markets.

We argue that Korea provides an interesting empirical

setting in which to examine the role of the corporate gover-

nance factor for f‌irm-level technological innovation, because

this country has successfully made the transition from imi-

tation to innovation. It also has one of the most inspiring

stories of economic development and technological progress

among frontier countries. Furthermore, f‌irms in emerging

economies may have different corporate governance charac-

teristics that may be particularly important for technological

innovation performance, compared with advanced countries

(Chang, Chung, & Mahmood, 2006). During the 1997 Asia

Crisis, the average returns of Korean f‌irms fell substantially

268 CORPORATE GOVERNANCE

Volume 20 Number 3 May 2012 © 2012 Blackwell Publishing Ltd