Do Heterogeneous Boards Promote Firm Innovation? Evidence from Malaysia

Abstract

Research Question: What are the effects of board heterogeneity on a firm’s innovation in Malaysia? Motivation: Prior literature has presented differing views on the role of the board of directors and based on the resource dependency theory, board of directors is seen as a boundary spanner in the environment, securing resources for the organization and providing strategic advice that aids in firm survival and performance (Hillman & Dalziel, 2003; Pfeffer & Salancik, 1978; Hillman et al., 2000). This motivates us to explore the different dimensions of board characteristics and their influences on promoting innovation activities in the firms. Idea: In this study, we seek to understand the role of the board of directors in influencing innovation activities in firms by specifically investigating the effects of board heterogeneity on innovation in Malaysia. Data: Using a sample of 345 observations for the period 2010 to 2012, we examine eight different aspects of board heterogeneity. Financial data used as control variables are obtained from the Compustat database, while board heterogeneity data were hand collected from an individual company’s annual report downloaded from the Bursa Malaysia’s website. Method/Tools: Firm innovation is measured at two points in time. One is at the onset which entails R&D expenditure and the other at the end of the process which is the output of R&D, such as patents and patent citations. The final sample comprises 345 firm-year observations after excluding the missing data. Findings: Our results show that heterogeneous boards have both positive and negative effects on innovation. We find that gender, ethnic and tenure heterogeneity of directors encourage firms to innovate. In contrast, directors' heterogeneity on type of experience and external engagement is found to be detrimental to the firm’s innovation. Contributions: Provides evidence that board heterogeneity can help to enhance firm innovation activities. The study also looks at innovation across a larger cross-section of firms across several industries and assist in formulating policies to promote appropriate board attributes that would promote innovation.