Innovation: The Bright Side of Common Ownership?

Abstract

Firms have inefficiently low incentives to innovate when other firms benefit from their inventions and the innovating firm therefore does not capture the full surplus of its innovations. We show that, in theory, common ownership of firms mitigates this impediment to corporate innovation. By contrast, without technological spillovers, innovation has the effect of stealing market share from rivals and in that case more common ownership reduces innovation. Empirically, the association between common ownership and innovation inputs and outputs decreases with product market proximity and increases with technology proximity. The sign and magnitude of the overall relationship between common ownership and corporate innovation thus varies considerably across the universe of firms depending on their relative proximity in technology and product market space. Some of these results persist if we use only variation from BlackRock’s acquisition of BGI. Our findings inform the debate about the welfare effects of increasing common ownership among U.S. corporations. This paper was accepted by Joshua Gans, business strategy. Funding: The authors acknowledge grant funding from the Washington Center for Equitable Growth. M. Antón acknowledges the financial support of the Department of Economy and Knowledge of the Generalitat de Catalunya [Ref. 2014 SGR 1496] and the Ministry of Science, Innovation, and Universities [Ref. PGC2018-097335-A-I00]. M. Schmalz acknowledges funding from Deutsche Forschungsgemeinschaft under Germany’s Excellence Strategy [EXC 2126/1-390838866]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.04363 .