Pen­sion funds drive in­nov­a­tion in smal­ler com­pan­ies

Smaller companies that receive investment from pension funds are more likely to develop new technologies and products – especially green ones.

The correlation (the statistical relationship) is strongest when pension funds take on long-term ownership and encourage leadership to think more strategically and with a longer-term perspective.

“We can see that companies with pension funds as investors file twice as many patents on average, and their share of employees working in research and development is four percentage points higher,” says Professor Dario Pozzoli, one of the authors behind the study.

Together with two colleagues, he has analysed Danish unlisted companies through national registers – that is, companies that are not publicly traded. The criterion was at least ten employees, and around 117,000 companies are included in the study.

First major study

The study is the first in-depth analysis of how pension fund investments affect innovation in smaller Danish unlisted companies.

“Pension funds are now among the largest asset managers in many countries, including Denmark.  Here, total pension wealth actually exceeds twice the country’s GDP,” says Dario Pozzoli and continues:

“At the same time, pension fund investments in Danish companies have grown by more than 50% over the past 10 years. Their investments can therefore play a real role in determining which companies grow and which projects are realised. Generally, smaller companies have limited access to long-term capital compared to listed companies. At the same time, they make up a very large part of the Danish business community, which makes them particularly interesting,” the CBS researcher explains.

Capital and requirements drive development

The researchers’ study shows a direct link between investment and company innovation. The longer the time – ideally up to five years – during which capital is invested in a company, the more innovation it develops.

However, pension funds do not only contribute capital, they also contribute governance and influence the day-to-day management to some extent. 

“Our results suggest that this is particularly evident among companies operating in less competitive markets,” says Dario Pozzoli.

According to the researchers, the findings indicate that pension funds may become an even more important part of financing innovation in the future – especially at a time of increasing need for investment in green technology, digitalisation and long-term sustainable development.

Pension funds may play a key role

“We now have data that shows what pension fund investments mean for smaller companies. This is also important in the political debate on regulation. If you impose overly strict limits on how pension assets can be invested, you may restrict the financing of innovative companies,” Pozzoli points out.

He and his two co-authors emphasise that their findings are relevant for companies, investors as well as policymakers discussing how Denmark can best finance the green transition and maintain its competitiveness.

The study is titled ‘Pension Fund Investment and Firm Innovation’ and is published in Journal of Corporate Finance.

The authors are David Pinkus, Dario Pozzoli and Cédric Schneider, all from CBS.