How Institutional Owners, Decentralization of the Firm and Unions Determine Innovation: Empirical evidence from the U.K.

Using a large dataset from the U.K., this study analyzes the relationship between institutional ownership, the level of decentralization in the firm, and the level of innovation. It is predicted that a higher percentage of institutional ownership increases the innovativeness of the firm, due to a more long-term orientation. Part of this relation is predicted to run through decentralization, as this may enhance the innovative activity of employees. Using OLS regressions, this study finds that decentralization increases the innovativeness of the firm and that firms with 25% to 50% of institutional ownership seem to be more innovative. However, when comparing the view of employees on decentralization in the firm with the view of the mangers, it seems that these firms are more decentralized according to the employees while less decentralized according to the managers. This study also finds that firms with at least 50% of institutional ownership seem to be less innovative and more decentralized. The innovativeness of these firms seems to decrease in decentralization, indicating that the owner of the firm might affect the relationship between decentralization and innovation. This study also analyzes the relationship between decentralization, unions and innovation. It is predicted that union power might enhance the positive effect of decentralization on innovation. However, it seems that only in firms that are highly decentralized, union power increases the innovativeness of the firm.