CHAPTER 2: LITERATURE REVIEW
2.3 Empirical Evidence
2.3.1 Financial Performance
2.3.1.2 Non-Linear Relationship
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.
27 value of 39%. This suggested that foreign shareholding below 39% improved firm performance, however, once foreign ownership exceeded the threshold value, firm performance was impaired.
Akimova and Schwodiauer (2004) stated that the initial positive effect emerged from foreign investors providing new technology, but the latter negative effect of foreign ownership was due to the institutional environment in Ukraine being averse to foreign majority ownership.
In Vietnam, Phung and Hoang (2012) studied the relationship between firm performance and foreign and state ownership. All firms listed on the Ho Chi Minh and Hanoi stock exchanges from 2007-2012 were included in the study sample. The author used the FEM to estimate the relationship as it controls for unobserved heterogeneity between the variables. Tobin’s Q and ROA were employed as performance indicators. The study found that, for both performance measures, state ownership and firm performance shared an inverse U-shaped relationship, whereas the foreign ownership and firm performance shared a U-shaped relationship. Thus, only once foreign ownership becomes concentrated, do the benefits materialise, which the authors attribute to greater monitoring, as discussed in section 2.2.1.1. As such, Phung and Hoang (2012) recommend that for Vietnamese firms to enhance their corporate governance quality; they must increase foreign ownership to a notable level. While the authors do not discuss this possibility, drawing from the resource-based theory presented in section 2.2.1.2, these results may also suggest that the benefits of foreign ownership through technological transfer, capital investment and other resources, only manifest when firms have control, as reflected in a greater stake of foreign ownership.
Viet (2013) conducted a similar study in Vietnam, also adopting ROA and Tobin’s Q as performance measures. His sample consisted of 407 listed non-financial firms from 2006 to 2010.
This study employed the 2SLS method to account for endogeneity. Unlike Phung and Hoang (2012), Viet (2103) found a significant inverse U-shaped relationship between foreign ownership and firm performance. The author claimed that the inverse U-shape relationship was connected to the entrenchment effect that foreign investors developed when they held a substantial level of shareholding, as explained in section 2.2.1.1. There was also evidence suggesting that foreign investors preferred to invest in companies with sound financial performance (hence the endogeneity problem), large size, low level of debt, in the pharmaceutical industry, and listed on a more liquid stock exchange.
28 Similar to Viet (2013), Phung (2015) observed an inverse U-shaped relationship between foreign ownership and firm performance in Vietnam, from 2007 to 2012. This study also attributed the U- shape to an entrenchment effect of foreign investors. This study compensated for potential endogeneity by employing the system GMM approach. The results revealed an inflection point of 43% of foreign ownership, maintaining that during the initial increase of foreign ownership, foreign investors are incentivized to monitor the managers and force them to align their objectives with the shareholder’s objectives; however when it surpasses 43%, foreign investors display an entrenchment effect. The inverse U-shaped relationship found by Viet (2013) and Phung (2015) is consistent with section 2.2.1.1 on the benefits from monitoring and the losses from expropriations by shareholders when their ownership reaches a certain large level. However, these findings conflict with those of Phung and Hoang (2012). This may be due to the fact that Phung and Hoang (2012) did not account for endogeneity in their analysis.
An inverse U-shape relationship between foreign ownership and firm performance was also reported in Turkey by Gurbuz and Aybars (2010). This paper utilised 205 firms listed on the ISE from 2005 to 2007 and excluded all non-financial firms from the study sample. Firm performance was measured using ROA and the ratio of earnings before interest and tax to total assets (EBITTA).
Causality tests proved that foreign ownership should be regarded as an exogenous variable when estimating the relationship between firm performance and foreign ownership. The results revealed that although foreign ownership initially shared a positive relationship with financial performance, the relationship became negative once the foreign shareholders owned more than 50% of the ownership structure. This may be the consequence of Turkey’s distinctive methods in carrying out business operations in which they prefer to sustain local relationships and allow local ownership to have a fundamental role. These findings differ from the preceding Turkish studies by Gunduz and Tatoglu (2003) and Aydin et al. (2007) that found positive linear relationships. This may be due to the fact that these studies did not test for possibility of non-linear relationships.
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