Foreign Investment

Article 1

Title

Foreign Ownership and Investsment: Evidence From Korea

Topic

Relationship among financing decision, dividend policy and ownership

Theory used by the article

Modigliani and Miller (1958) maintained that firm’s investment depend solely on the profit opportunity.

Jensen and Meckling (1976), Managers who are not owners may pursue their own interest not the stockholder interest.

Jensen (1986) Argues that managers tend to spend all available funds on investment projects at their own discretion.

Hypothesis

• There are a relationship between debt policy, dividend policy, and ownership structure.
• Ownership structure affects investment
• Cash flow sensitivity of investment to be lower in foreign owned firm than in domestically owned firm

Variable used

Abbrevation	Description
Kt It · Qt TAt Bt Et CFt Highi Lowi Beforet Aftert	Captal at the beginning of period t Capital expenditure during periond t Average Q at the beggining of period t Total asset at the beggining of period t BV at the beggining of period t Market value of equity at the begng t Cash flow during period t 1 for firm with high for own, 0 for low 1 for firm with low for own, 0 for high 1 before 1998, = 0 after 1998 1 after 1998, = 0 before 1998

Method of analysis

The ordinary least squares (OLS) estimation method for dynamic investment models is likely to result in biased estimates because of endegoneity and heterogeneiry and heterogeneity problems.

The generalized method of moments (GMM) estimation is widely used for dynamic panel models.

Result

For both the q model and the Euler model, it is found that firms are financially constrained since the coefficient in CF/K is statistically significant at the conventional level. This suggest the availability of internal funds does affect investment levels.

Both a q model and an Euler equation are estimated, adopting two classification methods to distinguish high foreign ownership from low foreign ownership. In both models, the cash flow sensitivity for firms with high foreign ownership is statistically insignificant. Cash flow has a significant impact on the investment of firms with low foreign ownership. This finding suggest that financial constraints faced by firms decrease as foreign ownership increases.

Liquidity constraints are reduced mainly in firms with low foreign ownership. Cash flow sensitivity in firms with high foreign ownership is statistically insignificant regardless of time periods.

If the value of the firm is directly related to financial constraints that the firm faces, the effect of cash flow on investment may also have a non linear relationship with the level of foreign ownership.

Foreign ownership seems to have a linear relationship to financial constraints.

Conclusions:

The result however, does not suggest that developing countries should entirely open their stock market to foreign investors. Many countries, in fact, experienced severe instability in capital markets after abruptly opening their stock markets. The findings simply suggest that foreign ownership plays a role in reducing financial constraint on firms, and thus improves accesibility of external financing for investment. In adition to capital inflows, the relaxation of the information assymmetry can also be a potential benefit of open financial markets.

Article 2

Title

Foreign ownership and firm performance: evidence from turkey

Topic

The  study  investigates  whether  foreign  owned  firms  perform  significantly  better than domestically owned Turkish corporations quoted on Istanbul Stock Exchange (ISE), in Turkey.

Previous Research used by the article

• Earlier and recent empirical studies conclude that the MNEs have performed better than the domestically owned firms. Therefore, the foreign ownership has positive influences on the firms performance.
• Researches on firms with foreign ownership operating in developed countries, Goethals and Ooghe (1997) conducted a study to investigate the performance between 25 Belgian firms and 50 foreign companies, which are Belgian taken over by foreigners.
• Besides Alan and Steve (2005) also looked at the short and long term performance of UK corporations acquired by foreigners.
• Grant (1987) and Qian (1998) assessed the relationship between the return performance and multiple explanatory factors per se multinationality.
• Liu et al. (2000) looked at the issue from different angle and examined intra-industry productivity spillovers from FDI on manufacturing sector in UK.
• Piscitello and Rabbiosi (2005) extended the study to Italy to investigate the influence of inward FDI coming into existence through acquisitions.
• Akimova and Schwödiauer (2004) examine the impact of ownership structure on corporate governance and performance of privatized corporations in Ukrainian transition economy
• The most recent study conducted by Barbosa and Louri (2005) investigate if MNEs operating in Portugal and Greece perform differently than their domestic counterparts.

Hypothesis

Foreign ownership participation increases the performance of the firm

• The hypothesis to test the effect of foreign ownership presence on ROA are:

Ho: there is no significant difference between firms with FO and domestic firms in corresponding to ROA

H1: there is no significant difference between firms with FO and domestic firms in corresponding to ROA

• The hypothesis to test the effect of foreign ownership presence on ROE are:

Ho: there is no significant difference between firms with FO and domestic firms in corresponding to ROE

H1: there is no significant difference between firms with FO and domestic firms in corresponding to ROE

• The hypothesis to test the effect of foreign ownership presence on OPM are:

Ho: there is no significant difference between firms with FO and domestic firms in corresponding to OPM.

H1: there is no significant difference between firms with FO and domestic firms in corresponding to OPM

Variable used

• ROA  as  the  operating  profits  before  interest,  depreciation  and  taxes  to  the  book value  of  total  assets.
• OPM  is  operating  profits  before  interest,  depreciation  and  taxes  to  the  book  of sales.
• ROE is defined as profit before taxes to the book value of total equity.

Method of analysis

In this study t-test statistics is performed to test whether there are many significant differences on Return on Asset (ROA), Return on Equity (ROE), Operating Profit Margin (OPM) ratios between the firms with foreign participation ranging from 0%-100%, 25%-100%, 50%-100% in capital structure and domestic firms.

Result

As  it  can  be  seen  in  Table  I,  for  year  2003  (0%-100%  FO),  H0  is  rejected. (p=0,011<0,05).When  ROAs  are  compared,  it  is  found  that  the  firms   ROAs  with  FO  (Foreign Ownership) and domestic  firms are  different significantly after t-test was performed (t0,05: 298 = -2,550). According  to  the finding, ROA of  firms  with  FO, which is 21.38 %, is  higher  than ROAs  of domestic firms, which is 14.59 %.

Moreover, for  year  2004 (0%-100% FO),  H0 is also rejected. (p=0,021<0,05). It also is reached to  same  conclusion  in  2004  that  there  is  significant  difference  on  the  firms   ROAs  with  FO  and domestic firms (t0,05:  298 = -2,314). Based on  this outcome, ROA  of  firms with FO, which  is  23.70 %, is higher than ROAs of domestic firms, which is 15.92 %.

For  year  2003 (25%-100% FO), H0 is  rejected.  (p=0,010<0,05).  When ROAs  are  compared,  it is  found  that  the  firms   ROAs  with  FO  and  domestic  firms  are  different  significantly  after  t-test  was performed (t0,0 5: 288  =  -2,589).  According  to  the  finding,  ROA  of  firms  with  FO,  which  is  22.28  %,  is higher than ROAs of domestic firms, which is 14.59 %.

For  year  2003  (50%-100%  FO  ownership),  H0  is  rejected.  (p=0,037<0,05).  When  ROAs  are compared, it is found  that the firms  ROAs  with  FO  and domestic firms are different significantly after t-test  was  performed  (t0,05:  272  =  -2,097).  According  to  the  finding,  ROA  of  firms  with  FO,  which  is 23.46 %, is higher than ROAs of domestic firms, which is 14.59 %.

However  for  year  2004  between  25%-100%  and  50%-100%  foreign  ownership  participation level, there are  no  significant  differences  between firms  with  FO and  domestic firms in  corresponding to ROA.

As  can  be  seen  Table  II  for  year  2003-2004  among  foreign  ownership  participation  level groups,  there  are  no  significant  differences  between  firms  with  FO  and  domestic  firms  in corresponding to ROE.

The  findings  indicate  that  for  year  2003-2004  among  foreign  ownership  participation  level groups,  there  are  no  significant  differences  between  firms  with  FO  and  domestic  firms  in corresponding to OPM.

Conclusions:

In this paper, t-test statistics confirm the hypothesis that firms with foreign ownership in respect to ROAs have better performed that domestic firms. Therefore, our result show that firms with foreign ownership perform better than domestic firms in Turkey for the perion 2003-2004. This findings matches the prior studies conclusions of performance of foreign owned firms and domestic in developed, developing and transition economies.

They provided some evidence of foreign ownership benefit positively on performance of firms listed in ISE. There many be couple reasons why foreign ownership increases firm perfomance. One reason might be ability to monitor or control or give incentives for managers leading manage a firm more seriously and avoiding initiatives reducing the corporate values. Another one would be transfering new technology by foreign firms generating savings on operating expenses.

~ by yohaneskristiawan on April 19, 2010.