Foreign ownership can play a role in the risk-taking choices of companies for several reasons – such as exporting and innovation. In private companies, foreign ownership has not doubled since the beginning of the sample period, but is still only 1.9% in 2013. We observe a strong time series correlation of foreign ownership and export choices: Both have increased over time.
This analysis reveals that foreign ownership is positively associated with the likelihood of exporting and the proportion of sales derived from exports. For listed companies, on the other hand, we find both an effect of having some foreign ownership and an effect of the level of foreign ownership. Interestingly, our results regarding foreign ownership remain robust, and stock option use itself is also associated with greater export and innovation activity (but it is unrelated to productivity or profitability).
They find that foreign ownership induces higher R&D and capital intensity for firms with stronger growth options. Our main interest is to measure the impact of foreign ownership and foreign corporate governance on export and innovation decisions (as well as firm performance).
Descriptive statistics
Dependent variables
We use a number of additional variables as controls: firm size (the log of the number of regular employees), age of the firm, wages per worker, and a binary indicator Listed firm that equals one if a firm is listed in one scholarship in a given year and zero otherwise. The definitions of all variables are given in Table 1. the means of R&D intensity and the number of patents are zero. Both the frequency and the degree of export and foreign direct decisions of listed firms are higher than those of unlisted firms.
Further, the export percentage of listed firms is 12%, which is about 4 times higher than that of unlisted firms. However, this is partly driven by the fact that listed firms are more likely to export. About 26% of listed firms engage in foreign direct investment, while only 5% of unlisted firms.
The R&D intensity of listed firms is 2.2%, which is three times higher than that of unlisted firms, 0.66%. The performance of listed firms is higher than that of unlisted firms when measured by TFP and ROA.
Explanatory variables
The sample size for the number of products is reduced relative to the other variables because it requires a match to the production inventory, and because of the difference in the sample, most firms are not matched. The average age of the company is 49, and the average number of full-time employees is 735, but the two characteristics are quite different. The dependent variables are related but far from perfectly so suggesting that it is useful to treat them separately.
In Section 4.2, we then test more formally the role of Foreign Ownership by also controlling for other variables. As is clear from Figure 1, there is a time series correlation of foreign ownership and export shares; our focus, instead, is on the differences between firms in these quantities.
Correlations and differences in means
For all five of our key outcome variables (exporter, export share, foreign direct investment, R&D intensity, and ln(patents)), we find that firms with some foreign ownership have higher export/innovation activity than firms with no foreign ownership. In addition, we observe that foreign-owned firms produce more products and demonstrate greater operational performance. Of course, such correlations and simple comparisons of averages can be spurious because they ignore other factors that may drive foreign ownership and export and innovation decisions.
Regression analysis
The results imply that a one standard deviation increase in Foreign Ownership is associated with a one standard deviation increase in the Export Share. A one standard deviation increase in foreign ownership leads to an increase in R&D intensity of only 2.5% of a standard deviation, and ln(Patents) of 1.2% of a standard deviation. A one standard deviation increase in Foreign Ownership results in an increase in TFP of 1.9% of a standard deviation, an increase in ROA of 3.6% of a standard deviation, and an increase in Sales Growth of 2.2% of a standard deviation.
For listed companies, an increase in foreign ownership by one standard deviation leads to an increase in the probability of exporting by 1.7%, while for non-listed companies the effect is 2.4%.9 The influence of foreign ownership on R&D activity is pronounced for non-listed companies. A one standard deviation increase in foreign ownership leads to a -3.0% decrease in a standard deviation in CapEx for listed companies, while it leads to a 1.5% decrease in a standard deviation in CapEx for unlisted companies . For listed (unlisted) companies, an increase in foreign ownership by one standard deviation leads to an increase in TFP by one standard deviation.
For listed (non-listed) companies, a one standard deviation increase in foreign ownership leads to a one standard deviation increase in ROA. For publicly traded (non-listed) companies, an increase in foreign ownership by one standard deviation leads to an increase in sales growth by one standard deviation.
Core versus Periphery
The role of Foreign Ownership when foreign owners have a minority stake
Both listed and unlisted firms with smaller volumes of products and higher foreign ownership have higher profitability and sales growth (and in unlisted firms, higher minority shares of foreign owners are also associated with higher TFP). The economic effects of higher foreign ownership in this sub-sample are somewhat weaker than when looking at the entire sample. In firms with a foreign minority ownership, a one standard deviation increase in foreign ownership is associated with a 1.2 percentage point increase in the probability of exporting (respectively 1.1 percentage point in listed firms and 0.5 percentage point in unlisted firms).
The influence of foreign ownership on the R&D activity is also pronounced only for listed firms. A one standard deviation increase in Foreign Ownership leads to an increase in R&D intensity by 4.3%. Overall, we interpret these results – together with those from Table 5, which highlighted the unconditional effect of any Foreign Ownership – as suggesting that the role of Foreign Ownership in Japanese companies is, for unlisted firms, a "corporate culture" -factor is; it doesn't matter much how much foreign ownership there is, but it makes a big difference if there is some foreign ownership.
Omitted variables: Incentives, firm culture, and other factors
It is important that the effect of foreign ownership remains strong even when controlling for incentives in the form of stock options. 10. In addition, we also conducted a fixed-effects analysis, so that the analysis focuses on the impact of changes in foreign ownership on changes in the dependent variables. The sample period is also shortened (to 1994 to 1999), and the results for foreign ownership remain robust.
The results further suggest that increases in foreign ownership are associated with increases in the number of patents. Finally, an increase in foreign ownership is associated with an increase in ROA, but there is no statistically significant relationship with changes in sales growth. We also find that foreign ownership increases as ln(employees) increases, wage increases, ln(firm age) decreases, for listed firms, and ROA increases.
A one standard deviation increase in foreign ownership driven by peer effects is associated with a 16 percentage point increase in the probability of exporting and a 55% increase in the export share of a standard deviation. Foreign ownership and export orientation of Japanese manufacturing firms are still low by international standards, but both have increased significantly in the past 2 decades. Firms with higher foreign ownership and those using stock options engage in more export and R&D activities.
This figure shows the average values of export share and foreign ownership (both in percentages), separately for listed and unlisted Japanese manufacturing companies. This figure shows the scatter plots of export share versus foreign ownership (both in percentages). The sample includes all Japanese manufacturing firms from 1996 to 2013 where foreign ownership is greater than 0% and less than or equal to 50%.
This table shows the means of the dependent variables in Japanese manufacturing firms with no foreign ownership and firms with foreign ownership > 0%. This table presents panel regressions of dependent variables capturing innovation activities (R&D intensity and ln(Patents)) and export decisions (Exporter, Export Share, FDI) on lagged foreign ownership and control variables. The sample includes Japanese manufacturing firms from 1995 to 2013 that have more than 0% and less than or equal to 50% foreign ownership.
The sample is limited to companies with more than 0% and equal to or less than 50% foreign ownership. Panel A presents the marginal effects of Probit regressions of stock option exercise (which is 1 if the firm exercises stock options in a given year and 0 otherwise) on the (lagged) foreign ownership and control variables. This table summarizes the results of the 2SLS regressions with foreign ownership as an endogenous variable.
Average foreign ownership in the same industry, prefecture and year is used as the instrumental variable.
