When Capital Crosses Borders, So Does Knowledge

We explore the role of foreign institutional investors in promoting international knowledge diffusion, using cross-border patent citations as evidence. Our analysis reveals that greater holdings by foreign institutional investors are associated with an increase in their portfolio firms' citations of patents originating from the investors' home countries. To address endogeneity concerns, we exploit a US dividend tax treaty reform as a quasi-exogenous shock that boosted US institutional ownership in affected foreign firms. Treated firms exhibit significantly greater post-shock citations of US patents. Another identification strategy using MSCI index inclusions as an exogenous shift in foreign ownership yields consistent evidence. These findings highlight a novel channel through which financial globalization can enhance innovation spillovers, suggesting that policies shaping foreign investment flows may have important, unintended effects on the global transmission of ideas.