CORPORATE GOVERNANCE AND INNOVATION: A SURVEY

Abstract

Abstract The traditional economics of innovation, inspired by Schumpeter and more recent advances on his work, seem unable to explain why firms with similar external conditions may show greatly different performance in innovation. Contrastingly, the literature on corporate governance provides some useful insights for understanding corporate innovation activity, to the extent that such literature examines the economic effects of different modes of coordination between firm members. The process through which individuals integrate their human and physical resources within the firm is central to the dynamics of corporate innovation. This paper provides the first survey of the literature on this issue. We start by discussing how various theoretical approaches to the analysis of the firm deal with technological innovation. We then describe three main channels – corporate ownership, corporate finance and labour – through which a system of corporate governance shapes a firm's innovation activity. Finally, we examine the relationship between country‐level institutional settings, national patterns of corporate governance and the aggregate innovation activity of corporations. We conclude by suggesting that future research should focus more deeply on the interrelation between the various dimensions of corporate governance and on their joint effect on firm innovation.