In the name of national security: Foreign takeover protection and firm innovation efficiency

Research Summary This study investigates the influence of foreign takeover protection triggered by investment-related national security screening laws and regulations on firm innovation efficiency. Drawing on agency theory, we argue that an increase in foreign takeover protection can lead to a reduction in innovation efficiency-the amount of innovation output relative to innovation input-by encouraging managerial entrenchment that can result in ineffective allocation and use of R&D resources. Such effects are weaker in the presence of monitoring from external governance actors-dedicated institutional investors and financial analysts. Using the enactment of the Foreign Investment and National Security Act in the United States as our empirical context, we find support for our arguments. Managerial Summary Many countries have enacted investment-related national security screening laws and regulations to protect domestic high-tech firms from foreign acquisitions. Although the goal of these laws and regulations is to retain the country's leadership position in global innovation, it may unintendedly lead to a reduction in firm innovation efficiency-the effectiveness in transforming innovation input to output-by encouraging managerial entrenchment that can give rise to ineffective allocation and use of R&D resources. Such effect is weaker when other external governance actors, such as dedicated institutional investors and financial analysts, impose stronger monitoring on managers. Our arguments are supported by empirical analyses in the context of the enactment of the Foreign Investment and National Security Act in the United States.