(Luận văn) foreign ownership and firm performance, case of vietnam

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY t to -o0o - ng hi ep w n lo NGUYỄN THỊ THANH TÂM ad ju y th yi pl n ua al FOREIGN OWNERSHIP AND n va FIRM PERFORMANCE: CASE OF VIETNAM ll fu oi m at nh z z MAJOR: BUSINESS ADMINISTRATION ht vb MAJOR CODE: 60.34.05 k jm om n a Lu SUPERVISOR: Dr VÕ XUÂN VINH l.c gm MASTER THESIS n va y te re HO CHI MINH CITY, 2012 i t to ng ACKNOWLEDGEMENT hi ep I would like to express my greatest gratitude to my supervisor, Dr Võ w n Xuân Vinh, for his continuous support for the thesis, from initial advice lo ad in the early stages of conceptual inception and through ongoing advices y th and encouragement to this day, without which this research would hardly ju have been completed yi pl ua al I am grateful to the Examination Committee (Professor Nguyễn Đông n Phong, Dr Nguyễn Trọng Hồi, Dr Nguyễn Đình Thọ, Dr Nguyễn Văn va n Ngãi, and Dr Nguyễn Thị Mai Trang) for their valuable advices to make ll fu my thesis improved oi m nh I would like to thank my professors at Faculty of Business Administration at z and Postgraduate Faculty, University of Economics Ho Chi Minh City for z jm ht vb their teaching, guidance and support during my MBA course k I owe my sincere thanks to my classmates for their encouragement and a gm special thank of mine goes to my class monitor, Bùi Hồng Thu, for his econometrics respects om l.c great assistance in collecting data for this thesis and for his guidance in n va encouragement during my MBA course n a Lu I wish to thank my family for their unconditional support and y te re th ii t to ng ABSTRACT hi ep Purpose – The thesis aims to investigate the relationship between foreign w n ownership and firm performance on a selective sample of firms listed on lo ad Hochiminh Stock Exchange for period 2007-2010 y th ju Methodology – The thesis applies the Ordinary Least Squares method to yi pl run multiple regressions on the whole sample and on each level of foreign al ua ownership in order to give a closer view at the relationship between n foreign ownership and firm performance n va fu ll Findings – The empirical results show a significant correlation between m oi foreign ownership and firm performance, measured by Tobin’s Q The nh regressions on each level of foreign ownership indicate that foreign at z ownership was found to be significantly positive correlated with Tobin’s z ht vb Q when foreigners own between 5% and 20% of shares in firms, while a jm negative correlation occurs where foreign holdings are more than 20%, k specially considerably negative where the level is more than 40%; and gm there is no significant relationship between the two variables where om l.c foreigners own less than 5% of shares a Lu Originality/Value – The thesis tries to analyze how foreign ownership n va should take a scrutiny on benefits and costs of foreign investment n affects firm performance and suggests that Vietnamese business owners y te re th Key words – Foreign ownership, firm performance iii t to ng TABLE OF CONTENTS hi ep ACKNOWLEDGEMENT i w n ABSTRACT ii lo ad LIST OF TABLES iv ju y th LIST OF FIGURES .v yi ABBREVIATIONS vi pl INTRODUCTION 1.1 Background 1.2 Purpose 1.3 Scope 1.4 Research questions 1.5 Structure n ua al n va ll fu m oi LITERATURE REVIEW .6 nh at METHODOLOGY 16 3.1 Data 16 3.2 The model 16 3.3 Statistical Method 22 z z ht vb k jm DATA ANALYSIS 23 4.1 Descriptive Statistics 23 4.2 Correlations 25 4.3 Regression Results 26 l.c gm om CONCLUSION 37 APPENDICES 43 n a Lu REFERENCES 39 n va y te re th iv t to ng LIST OF TABLES hi ep Table 4.1 Descriptive Statistics 23 w n Table 4.2 Correlation matrix .25 lo ad Table 4.3 Ordinary Least Squares Regression Results .27 ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th v t to ng LIST OF FIGURES hi ep Figure 1.1 FDI contributions for the period 2006- 2011 w n lo ad Figure 1.2 FDI registered and implemented capital for the period ju y th 2006-2011 yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th vi t to ng ABBREVIATIONS hi ep debt_asset Financial Leverage w n lo Foreign Direct Investments ad FDI y th Foreign Ownership ju foreing_own yi pl al Gross Domestic Product n ua GDP va Hochiminh Stock Exchange ln_asset Firm Size OLS Ordinary Least Squares ROA Return on Asset ROE Return on Equity R&D Research and Development Q Tobin’s Q (Firm Performance) 2SLS Two Stage Least Squares n HoSE ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th t to ng hi ep INTRODUCTION 1.1 Background w n lo The relationship between ownership structure and firm performance has ad been examined since decades Some researches shows no effect of y th ownership structure on firm performance, while others indicate there is a ju yi correlation between these two factors pl al n ua Demsetz (1983) argues that there should be no relationship between va ownership structure and firm performance Pursuing this argument n empirically, Demsetz and Lehn (1985) find no significant correlation fu ll between profit rates and various measures of ownership concentration in m oi a sample of 511 United States companies using 1980 data Himmelberg nh at et al (1999) extend the Demsetz and Lehn (1985) study by adding new z variables to explain the variation in the ownership structure Ownership z ht vb structure is measured by shareholdings of insiders (officers plus jm directors) Firm performance measure is Tobin’s Q They employ the k capital-to sales, R&D-to-sales, advertising-to-sales, and operating gm income-to-sales ratios as instrumental variables Controlling for these l.c om variables and fixed firm effects, they find that changes in ownership a Lu holdings have no significant impact on performance Demsetz and Villalonga (2001) continue to examine the ownership-performance n th profit rate) is not found to be influenced by ownership (defined as y evidence shows that performance (defined as Tobin’s Q or the accounting te re By estimating a two-equation model for United States firms, their n an amalgam of shareholdings owned by persons with different interests va relation by treating ownership structure as an endogenous variable and as t to ng managerial ownership (Chief Executive Officers, board of directors, top hi ep management) or ownership by the five largest shareholders) w n Despite the fact that Demsetz and Lehn (1985), Himmelberg et al (1999), lo ad and Demsetz and Villalonga (2001) find no significant correlation y th between ownership structure and firm performance, series of subsequent ju researches, which had been done and built on the Demsetz heritage, prove yi For instance, Andersson et al (2004) find that pl the converse results al ua dispersed ownership is associated with worse performance when n examining firms listed on Sweden Stock Exchange A significant va n negative relationship is also found by Lee and Chuang (2009) when fu ll investigating the relation between insiders and corporate performance of m In line with this, Fishman et al (2005) find that oi Taiwanese firms nh managerial ownership impacts negatively on performance This is at z opposite to the findings reported by Drakos and Bekiris (2010), where z ht vb managerial ownership is found to be significantly positive correlated with k jm Tobin’s Q gm Figure 1.1 FDI contributions for the period 2006-2011 29.8 16 2006 2007 18.43 18.33 18.72 19 2008 2009 2010 2011 n va 16.3 26 n 17.96 25.8 a Lu 16.98 25.7 om l.c % 35 30 25 20 15 10 FDI contribution to the total national investments y te re FDI contribution to GDP Year th (Source: Foreign Investment Department, Ministry of Planning and Investment) t to ng Figure 1.2 FDI registered and implemented capital for the period 2006-2011 hi ep w n lo ad ju y th yi pl ua al (Source: Foreign Investment Department, Ministry of Planning and Investment) n va n As a part of ownership structure, foreign ownership plays an important fu ll role In Vietnam, foreign investments contribute considerably to Vietnam oi m economy at nh z Figure 1.1 and Figure 1.2 indicate that FDI implemented capital z ht vb continuously increases during the period 2006-2011 FDI implemented jm capital in 2011 reaches 11 billion USD, which contributes 26% to the k national investments and 19% to GDP Companies with foreign capital gm participation are a form of FDI Foreign investors bring to the receiving l.c companies some benefits, such as solid financial sources, modern om technology, and management skills To some extent, foreign ownership n a Lu should have impact on firm performance y te re Purpose n va 1.2 controversial in numerous studies in diverse economies For instance, th The relation between ownership structure and firm performance remains 33 t to ng With proportion of foreign ownership between 5% and 20%, foreign hi ep investors belong to the minor owner group, while Vietnamese are dominant shareholders Therefore, it may be easier to reach consensus in w n making decisions on firm operations, which lead to an efficient use of lo ad foreign capital and technology and a good application of management ju y th skills yi pl At the higher levels of ownership, especially more than 40%, foreigners al ua become more powerful in managing firms They bring to the firms n different business cultures through their way of management, which may va n cause divergence in firm management and lead to lower firm fu ll performance Besides, the conflicts of interest between large shareholders m oi reduce firm performance (Kuznetsov and Muravyev (2001) and Dinga et at nh al (2009)) z z ht vb In brief, the empirical findings show how foreign ownership affects firm jm performance and suggests that Vietnamese business owners should take a k scrutiny on benefits and costs of foreign investment In general, there is a gm significant correlation between foreign ownership and firm performance, om l.c measured by Tobin’s Q In particular, foreign ownership was found to be significantly positive impact on Tobin’s Q when foreigners own between a Lu 5% and 20% of shares in firms, while a negative influence occurs where n y te re between the two variables where foreigners own less than 5% of shares va where the level is more than 40%; and there is no significant relationship n foreign holdings are more than 20%, specially considerably negative th 34 t to ng Relationship between Firm Performance and Leverage hi ep The results in Table 4.3 indicate that the coefficient for leverage is w n consistently negative and significant at the 1% level through the whole lo ad sample and at each level of foreign ownership This finding is consistent y th with almost previous studies (Himmelberg et al (1999), Demsetz and ju Villalonga (2001), Welch (2003), Andersson et al (2004), Fishman et al yi pl (2005), Kapopoulos and Lazaretou (2007), Bilyk (2009), Lee and Chuang al ua (2009), and Hess et al (2010)), which found financial leverage constitutes n a significant negative correlation with Tobin’s Q and argued that as debts va n rise, the costs associated with servicing them increase too, as a result, fu ll firm performance declines Another possible reason in Vietnam case is m oi that the companies have inefficiently used debts by investing in at nh unproductive projects z z ht vb Nonetheless, this is opposite to the findings by McConnell and Servaes jm (1990) and Abidin et al (2009), where leverage is found significantly k negative related to Tobin’s Q They explained that interest payments gm reduce a firm’s tax liability, which leads to increase in firm performance om l.c Relationship between Firm Performance and Firm Size n y te re foreign ownership The results in the whole sample, and those at the va performance and firm size through the whole sample and at each level of n a Lu Table 4.3 reveals inconsistent findings regarding relation between firm indicate that there is insufficient evidence to infer that there is a th levels of foreign ownership less than 5% and between 20% and 40% 35 t to ng significant relation between firm size and firm performance, even at the hi ep 10% level These results coincide with those reported by Demsetz and Villalonga (2001), Andersson et al (2004), and Cornett et al (2009) w n lo ad An interesting point is that there is a significant negative impact of firm y th size on firm performance at the 1% level where the fraction of foreign ju ownership is between 5% and 20% This contradicts the finding at the yi pl level of foreign ownership more than 40%, which indicates asset scale al n level ua and Tobin’s Q have a statistically significant positive relation at the 5% n va fu ll The positive relation is explained by the argument that the large firms m oi make use of the economies of scale and scope12 (Himmelberg et al nh (1999), Abidin et al (2009), and Bilyk (2009)) The large firms have all at z options to invest in projects that are not available for smaller firms With z ht vb large proportion of foreign ownership (more than 40%), the firms benefit investors might not have enough capacity to finance k jm well from foreign financial strength to invest in their projects that local gm om l.c The negative indication between firm size and performance is consistent with the findings by McConnell and Servaes (1990), Welch (2003), Lee a Lu and Chuang (2009), Drakos and Bekiris (2010), and Hess et al (2010) n y te re (Demsetz and Villalonga (2001) and Drakos and Bekiris (2010)) Lee va of investments, which produces a negative indication to firm performance n This finding supports the view that larger firm size requires higher level th 12 Economies of scale: mass production of standardized product with few options Economies of scope: production of a high variety of products (Schroeder (2003), p.63) 36 t to ng and Chuang (2009) give another view that when the asset scale is greater, hi ep the company may already be in a mature stage, and the opportunity for future growth will relatively lower Himmelberg et al (1999) argue that w n monitoring and agency costs can be greater in large firms, which lead to lo ad decrease firm performance This is a likely explanation for our case ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th 37 t to ng CONCLUSION hi ep By the present thesis, we have answered our stated research questions w n concerning the relationship between foreign ownership and firm lo ad performance The thesis employed a selective sample of firms listed on y th HoSE, for the period 2007-2010 The OLS method was applied for our ju empirical analysis yi pl al ua Consistent with most of previous studies, our empirical findings prove the n existence of a significant relationship between foreign ownership and va When regressing on the whole sample, foreign n firm performance fu ll ownership and firm performance constitute a significantly positive m However, the relationship changes by levels of foreign oi correlation nh ownership There is insufficient evidence to find a significant correlation at z between foreign ownership and firm performance where foreigners hold z ht vb less than 5% of shares Foreign ownership is positively correlated with jm Tobin’s Q when foreigners own between 5% and 20% of shares k Nevertheless, an increase in foreign ownership at substantial levels of gm foreign ownership (20%-40%, especially more than 40%) will cause a om l.c decrease in firm performance The possible reason is that diversified ownership causes conflicts of interest, which reduce firm performance n y te re negative correlation with Tobin’s Q This is perhaps due to increase of va Abidin et al (2009), our results indicate that leverage was found to have a n a Lu In contrast to the findings reported by McConnell and Servaes (1990) and th costs servicing debts and due to ineffective use of debts 38 t to ng A final remark about our findings is the relationship between firm size hi ep and performance Firm size and performance have a significant positive correlation when foreigners own more than 40% of shares, while a w n significant negative correlation occurs at the level of foreign ownership lo ad between 5% and 20% A likely explanation is that firms with large y th ownership by foreigners benefit well from foreign investment and that ju firms with lower level of foreign ownership have to suffer increasing yi pl monitoring costs ua al n There are some potential limitations associated with this thesis, which va n may serve as a source of inspiration for further research For instance, we fu ll have not discussed about the impact of origin of foreign investors and the m oi role of foreign owners who hold managerial positions in firms Hence, it nh would be interesting to investigate the correlation between these factors at z and firm performance z k jm ht vb om l.c gm n a Lu n va y te re th 39 t to ng REFERENCES hi ep w n lo Abidin Z Z., Kamal N M., and Jusoff K (2009) Board 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USA: Cengage Learning Inc Yasar M and Paul C J M (2007) Firm Performance and Foreign Direct Investment: Evidence from Transition Economies Economics Bulletin, Vol 15(21), p 1-11 ad ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re th 43 t to ng APPENDICES hi ep Appendix Regression result for the whole sample w n lo Dependent Variable: Q Method: Least Squares Date: 06/27/12 Time: 22:29 Sample: 567 Included observations: 567 ad ju y th yi pl Coefficient n 0.5093 -2.7124 0.0221 2.2996 n va t-Statistic 0.2499 0.2006 0.0344 0.4344 Prob 2.0378 -13.5208 0.6430 5.2940 0.0420 0.0000 0.5205 0.0000 ll fu FOREIGN_OWN DEBT_ASSET LN_ASSET C ua al Variable Std Error Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) 1.431856 1.10177 2.70142 2.73204 76.69129 oi at nh z z 0.290104 0.286321 0.93077 487.745 -761.8525 1.944492 m R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat k jm ht vb om l.c gm n a Lu n va y te re th 44 t to ng Appendix Regression result at the level of foreign ownership less hi ep than 5% w n lo Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 19:31 Sample: 168 Included observations: 168 ad ju y th Coefficient yi Variable pl -0.1622 -1.9634 -0.0431 2.6930 n ll fu Prob -0.078531 -12.00449 -1.270742 6.663114 0.9375 0.2056 1.115367 0.586087 0.959467 1.033847 73.42415 oi m Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) at nh 0.573219 0.565413 0.386368 24.48192 -76.59521 2.049203 t-Statistic 2.065421 0.163557 0.033911 0.404168 va R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat n ua al FOREIGN_OWN DEBT_ASSET LN_ASSET C Std Error z z k jm ht vb om l.c gm n a Lu n va y te re th 45 t to ng Appendix Regression result at the level of foreign ownership hi ep between 5% and 20% w n lo Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 19:29 Sample: 163 Included observations: 163 ad ju y th yi Variable pl Std Error t-Statistic Prob 3.6505 -2.1553 -0.2481 5.4340 2.163045 0.481999 0.088145 1.111092 1.68768 -4.471482 -2.814954 4.890693 0.0934 0.0055 n va ll 1.428054 1.353377 3.207539 3.283459 17.01869 m Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) oi at nh 0.243059 0.228777 1.188526 224.6024 -257.4144 2.038926 fu R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat n ua al FOREIGN_OWN DEBT_ASSET LN_ASSET C Coefficient z z k jm ht vb om l.c gm n a Lu n va y te re th 46 t to ng Appendix Regression result at the level of foreign ownership hi ep between 20% and 40% w n lo Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 22:01 Sample: 134 Included observations: 134 ad ju y th Coefficient yi Variable pl -2.8544 -2.8482 0.0950 2.3581 1.545489 0.478942 0.070544 1.071614 n va t-Statistic Prob -1.846927 -5.946814 1.346336 2.200554 0.067 0.1805 0.0295 ll 1.659569 1.126643 2.878503 2.965006 12.31165 m Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) oi at nh 0.221254 0.203283 1.005631 131.4681 -188.8597 2.026198 fu R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat n ua al FOREIGN_OWN DEBT_ASSET LN_ASSET C Std Error z z k jm ht vb om l.c gm n a Lu n va y te re th 47 t to ng Appendix Regression result at the level of foreign ownership hi ep between 40% and 49% w n lo Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 20:06 Sample: 102 Included observations: 102 ad ju y th yi Variable pl Std Error t-Statistic Prob -7.6193 -3.5324 0.1549 4.5850 3.42427 0.409559 0.064839 1.844721 -2.2251 -8.6249 2.389015 2.485448 0.0284 0.0188 0.0146 n va ll 1.660053 1.156416 2.545368 2.648308 30.01658 oi m Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) at nh 0.478861 0.462908 0.847497 70.38866 -125.8138 1.879604 fu R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat n ua al FOREIGN_OWN DEBT_ASSET LN_ASSET C Coefficient z z k jm ht vb om l.c gm n a Lu n va y te re th