CHAPTER 2: LITERATURE REVIEW
2.3 Empirical Evidence
2.3.1 Financial Performance
2.3.1.1 Linear Relationship
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23 Thomsen and Pedersen (2000), Douma et al. (2006) assumed that the ownership structure was exogenous. The results showed that that the performance of foreign firms were superior to that of domestic firms, with firm performance measured by ROA and Tobin's Q. This superior performance was ascribed to foreign shareholders playing a significant monitoring role, which led to a reduction in agency costs. These results are consistent with those of the agency theory and a study by Boardman, Shapiro and Vining (1997), who also credited foreign ownership for the reduction of agency costs in Canadian companies.
A more recent paper on the impact of foreign ownership on the performance of Indian firms was conducted by Shrivastav and Kalsie (2017). The empirical analysis was conducted on 145 non- financial firms listed on the National Stock Exchange (NSE) from 2008 to 2012. The study utilised Tobin’s Q, ROA and ROE as performance indicators. As explained in section 2.2.1.1, the different forms of foreign ownership may exhibit different effects on the firm. Shrivastav and Kalsie (2017) incorporated this into their study by not only examining total foreign ownership but also disaggregating this measure into foreign corporate and foreign institutional ownership. Multiple regression analysis was performed using pooled Ordinary Least Squares (OLS) and the Random Effects Model (REM). Under the pooled OLS model, foreign ownership (as a holistic measure) displayed a positive effect on all measures of firm performance. However, regarding the REM, the effect was insignificant. When total foreign ownership was disaggregated, foreign corporate ownership exhibited a positive influence on firm performance, whereas foreign institutional ownership had an ambiguous effect on firm performance as results varied when different firm performance indicators were used.
Huang and Shiu (2009) studied the effect of foreign ownership on firm performance in Taiwan. In contrast to Douma et al. (2006), they treated foreign ownership as an endogenous variable and used Two-Stage Least Squares (2SLS) estimation to account for endogeneity. Despite the difference in assumptions, Huang and Shiu (2009) obtained similar results to Douma et al. (2006) as firms with high levels of foreign ownership performed better than firms with low levels. Huang and Shiu (2009) credited the superior performance to the ability of foreign investors to select more profitable investments as they have the resources that allow them to execute fundamental research.
The authors further argued that foreign investors also make contributions to technology, finance and expertise, thus increasing firm credibility and reputation compared to domestic investors.
24 Although most research on the foreign ownership-performance nexus focuses on large companies, Halkos and Tzeremes (2011) analysed 353 foreign-owned Small- and Medium-Sized Enterprises (SMEs) in the Greek manufacturing industry and concluded that foreign ownership had a positive effect on the performance of SMEs.
A Nigerian study by Uwuigbe and Olusanmi (2012) adopted a multivariate regression analysis to determine the relationship between ownership structure and enterprise performance. This study used a data sample consisting of 31 financial firms from 2006 until 2010. The empirical results revealed that foreign ownership had a favourable influence on firm performance. The authors stated that foreign ownership improved managerial efficiency, technical skills and the state of technology.
Marashdeh (2014) investigated the effect of corporate governance on the performance of 115 Jordanian firms during the period 2000 to 2010. Accounting-based measures such as ROA and ROE were used to measure firm performance and the Generalized Least Squares (GLS) and REM were used to estimate the empirical relationship. The results revealed that foreign ownership had a positive relationship with firm performance, but only when measured with ROE. These findings confirmed that foreign investors have the capacity and incentive to intervene (i.e., monitor and control) in corporate governance to improve the existing monitoring strategies of domestic investors (Gillan and Starks, 2003). This is supported by Lee, Rhee and Yoon (2018), who holds the view that a greater incentive for monitoring among foreign shareholders results in superior corporate performance. This evidence is also in agreement with the concepts of the agency theory presented in section 2.2.1.1.
Ting, Kweh, Lean and Ng (2016) explored the impact of ownership structure on firm performance in Malaysia from 2002 until 2011, using 201 non-financial firms. This study employed Tobin’s Q and ROA as performance indicators and constituted year and sector dummies to account for year and sector effects. Results from the pooled OLS regressions revealed that foreign ownership positively affected firm performance. Ting et al. (2011) attributed the positive impact to superior managerial efficiency, technical skills, and technology that foreign investors brought into the working environment.
A South African study by Dube (2018) investigated the impact of foreign ownership on financial performance of firms. This study utilised an unbalanced panel data set consisting of 205 non-
25 financial JSE-listed firms from 2004 to 2014. The Fixed Effects Model (FEM) and the GMM were used for estimation purposes. Dube (2018) found positive effects of foreign ownership on corporate performance. As per previous studies, these findings imply that foreign investors take on effective monitoring roles and transfer skills and advanced technology to their investee companies, thus improving firm performance in terms of ROA and ROE. However, the concentration of foreign ownership was only based on the percentage of the top one, two, three, five and 10 foreign shareholders. Dube (2018: 410) notes that “an analysis of the total number of shareholders for each firm would likely give a more accurate picture of ownership and its effects on corporate performance”. Hence, the results of the study may be unreliable.
In Indonesia, Nofal (2020) found that foreign ownership enhanced the firm performance of 66 non-financial firms listed on the Indonesia Stock Exchange, from 2014 to 2018. Nofal (2020) states that this outcome is consistent with the view of foreign ownership in Indonesia, where high and stable foreign ownership is beneficial to companies due to active monitoring, facilitation of technology usage, international market development and professional management. The findings of this study do not support the view of the entrenchment effect discussed in section 2.2.1.1 as the author argued that long-term and large-scale investments made by foreign investors do not seem to cause entrenchment, but rather results in monitoring benefits that reduce agency costs.
Not all studies, however, have found that firms with foreign ownership perform better than those without foreign ownership. For example, Kim and Lyn (1990) discovered that foreign firms operating in the US were not as profitable as domestic US firms. The authors argued that although foreign firms spend substantial time engaging in Research and Development (R&D), they do not give sufficient attention to advertising, resulting in lower performance. Furthermore, they contained higher debt levels combined with higher liquidity than domestic firms. Similarly, Munday, Peel and Taylor (2003) found that in terms of profit margin and ROE, foreign subsidiaries in the construction sector in the United Kingdom (UK) were less profitable than domestic firms.
The inferior performance of MNCs in the US and UK compared to the other countries cited may be attributable to their developed status. Traditionally, FDI flows from developed to developing countries, bringing with its superior technology and practices (Chari, Chen and Dominguez, 2011).
Chang, Mellahi and Wilkinson (2009: 2) states that “the ways in which MNCs from emerging economies manage their subsidiaries in developed countries are distinctive and different from the
26 ways in which MNCs from developed countries manage their foreign subsidiaries”. MNCs from emerging economies are faced with the double hurdle of liability of foreignness and liability of country of origin (Hymer, 1976). Although the liability of foreignness is inevitable for MNCs in both developed and emerging economies; MNCs from emerging economies are more susceptible to the liability of country of origin and specific disadvantages because of perceived weakness and lack of global dominance of the home country’s economy (Chang et al., 2009). Furthermore, FDI from developing countries may not provide any competitive advantage to MNCs, as it is unlikely that they contribute any scarce resources that developed countries do not already possess.