Abstract:-
This paper examines whether institutional ownership by foreign institutional investors (FIIs) and domestic institutional investors (DIIs) affects innovation in India’s pharmaceutical sector. Long-term investment in R&D is crucial for companies seeking to generate sustainable growth. Our study period spans from 1995 to 2019. The sample comprises an unbalanced panel of 150 BSE- and NSE-listed pharmaceutical firms in India. We have employed the 2SLS technique to control for endogeneity and the system GMM method of estimation for dynamic panel data as a robustness test in our analysis. Our findings reaffirm the “myopic viewpoint” theory, which holds that FII investors seek short-term gains and avoid investments in risky, long-term projects such as R&D in the pharmaceutical industry. However, our results show that FII promotes R&D in older pharmaceutical firms. Conversely, DII enhances R&D across the entire pharmaceutical industry. Moreover, DII positively affects large and young firms. For small firms, both FII and DII have no significant impact on R&D. These results remain robust when we apply system dynamic panel estimations. Our findings suggest that foreign institutional investors are unable to effectively monitor managerial myopia and promote innovation in the Indian pharmaceutical industry. However, as we observe that DII has a positive effect on R&D investment, this suggests that they monitor managers more efficiently than FIIs, given their informational advantage. Our results have implications for policymakers, regulators, and potential foreign equity participants.

(Jointly with Aruna Pain, Muralidhar Girls’ College and Dr. Kumarjit Mandal, Department of Economics, University of Calcutta)