Corporate governance drivers of firm innovation capacity

Abstract

Abstract We investigate the predictive factors of firm innovation capacity (FIC), proxied by intangible assets, as a means towards sustainable competitive advantage in a world of global change and innovation. The primary aim of this paper is to identify the key factors shaping a firm's innovation capacity management style. We use panel data for 1,942 firms (20,171 observations) in Germany, France, Italy, the United Kingdom, United States, and Spain, over the period 1999 to 2014. Our results show that capabilities driven by corporate governance mechanisms currently constitute the pivotal support for firms' innovation capacity (FIC). Our main findings are that corporate governance drivers such as executive incentives (E‐P) and the presence of independent nonexecutive directors (INEDs) have a bearing on FIC. Meanwhile, managerial performance (MP) and institutional shareholder activism (AI) emerge as basic motivational instruments and mechanisms of alignment between firm ownership and control. The influence of incentives and INEDs is found to be negative and that of institutional shareholder activism and MP to be positive. With respect to the business context, we find evidence of higher efficiency in firm disciplinary mechanisms in the Anglo‐American than in the Continental corporate governance model.