Corporate Governance and Innovation under Demand Uncertainty: A Panel Study of Korean Firms

Hlasny, Vladimir, and Minsu Cho (2017), Corporate Governance and Innovation under Demand Uncertainty: A Panel Study of Korean Firms, International Telecommunications Policy Review 24(4):65-115.

36 Pages Posted: 8 Aug 2017 Last revised: 5 Jan 2018

See all articles by Vladimir Hlasny

Vladimir Hlasny

Ewha Womans University; United Nations Economic and Social Commission for Western Asia (UN-ESCWA)

Minsu Cho

Ewha Womans University, College of Social Sciences, Department of Economics, Students

Date Written: August 5, 2017

Abstract

Existing literature has identified the effects of competition and firms’ ownership and management structure on firms’ decisions to invest in innovation. We extend this literature by examining the role of market-demand uncertainty on the relationship between firm ownership, management structure and management turnover, on the one hand, and firms’ innovation on the other hand. We evaluate the effects of product-market competition, concentration of firms’ ownership, presence of foreigners on owner-appointed corporate boards of directors, management independence, and management turnover rates on firms’ patent applications under varying degrees of uncertainty. The validity of alternative hypotheses about management motivation – lazy manager, career concerns, prospect theory, and special East-Asian institutional constraints hypotheses – is evaluated, controlling for firms’ prior investment in innovation and firm characteristics. Unique data for 711 Korean firms and nine years, 2003–2011, are used (4,339 records). We find support for the lazy-manager hypothesis by identifying substitutability between market-competitive pressures and owner-manager separation in driving managers’ effort to pursue innovation. Demand uncertainty raises managers’ incentives to innovate, by increasing the potential stake from innovation and increasing the risk of default if firms fail to innovate. There is little evidence that Korean managers pursue innovation to ease their career concerns or to meet an expected performance yardstick, or that they follow a special East-Asian pattern. Management turnover has little effect on innovation, and firms’ existing performance increases it. Foreign management and the share of the largest firm owner (proxying for conglomerate or family ownership) have little effect on firms’ innovation.

Keywords: Innovation, R&D, Patents, Corporate Governance, Management-Owner Separation, Career Concerns, Demand Uncertainty, Korea

JEL Classification: O31, O32, G32, D81

Suggested Citation

Hlasny, Vladimir and Cho, Minsu, Corporate Governance and Innovation under Demand Uncertainty: A Panel Study of Korean Firms (August 5, 2017). Hlasny, Vladimir, and Minsu Cho (2017), Corporate Governance and Innovation under Demand Uncertainty: A Panel Study of Korean Firms, International Telecommunications Policy Review 24(4):65-115., Available at SSRN: https://ssrn.com/abstract=3014138 or http://dx.doi.org/10.2139/ssrn.3014138

Vladimir Hlasny (Contact Author)

Ewha Womans University ( email )

11-1 Daehyun-dong
Seodaemun-gu
Seoul 120-750
Korea, Republic of (South Korea)

United Nations Economic and Social Commission for Western Asia (UN-ESCWA) ( email )

P.O. Box 11-8575
Riad el-Solh Square
Beirut, Lebanon 10000
Lebanon

Minsu Cho

Ewha Womans University, College of Social Sciences, Department of Economics, Students ( email )

Seoul 120-750
Korea, Republic of (South Korea)

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