Effects of Outward FDI on Firm's Innovation Activities and Financial Performance: The Case of Korea

This study investigates the role of Korean investors' outward foreign direct investment (OFDI) in the U.S. as a conduit for knowledge spillovers. Specifically, we focus on the impact of M&As and patent acquisitions on the innovation activities of acquiring firms, and the subsequent financial performance of both the acquirers and their domestic partners (vendors) within supply chains. The findings are as follows: First, the M&A investments in the U.S. firms have played a role in facilitating knowledge spillover from the U.S. to Korea, as shown by an increase in the cumulative number of backward patent citations after such deals. Second, the patent quality of Korean acquirers significantly explains variations in their domestic financial performance. Notably, the relationship between U.S. patent citations and financial performance strengthens in magnitude and significance when considering citations from earlier periods, especially within high-tech industries. Third, The U.S. patent quality of acquirers in high-tech is also positively correlated with the financial performance of their domestic first-tier suppliers. It appears that it takes an additional one to two years for U.S. patent quality improvement of Korean acquirers to translate into the financial performance of parent companies in Korea. Finally, policy Implication. The fact that it takes some time for innovation gains to be realized by domestic firms and to spill over to other related domestic agents in supply chains highlights the need for support policies to focus on improving performance over the medium to long term rather than the short term.