With the exception of a few studies, the literature on the relationship between corporate governance (CG) and innovation tends to investigate only the partial effects of CG dimensions on innovation. The aim of this chapter is to contribute to the debate by analysing not only the relationship between CG and innovation, but also how market concentration and CG interact in their effects on innovation. The case for examining both partial and interactive effects can be summarized as follows: investment in research and development (R & D) is costly and associated with uncertain returns for shareholders and uncertain private benefits for managers. At a given level of market concentration within an industry, CG rules affect managers’ innovation effort by ameliorating or exacerbating the agency problem. However, the level of market concentration also affects the managers’ innovation effort by affecting the rates of pre-innovation and post-innovation profits. Given these dynamics, it is necessary to investigate not only the partial effects of CG and market concentration on R & D expenditures; but also the way in which CG rules and market structure interact and affect the level of R & D effort.
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