tiểu luận research proposal the role of foreign directors on firm performance invietnam

In that context, the role offoreign directors in Vietnam''''s business activities is becoming increasingly important andindispensable.The presence of foreign directors brings many advantage

THE UNIVERSITY OF DA NANG UNIVERSITY OF ECONOMICS FACULTY OF INTERNATIONAL BUSINESS

Võ Lê Mai Anh

Nguyễn Thị Diễm Thảo

Class: Group 8 – 47K01.2

Danang, December 2023

ABSTRACT 1

I INTRODUCTION 2

1 Background and necessity of the research topic 2

2 Research gap 3

3 Research objectives 4

4 Research questions 4

5 The subject and scope of the research 5

5.1 The subject of the research 5

5.2 The scope of the research 5

II LITERATURE REVIEW 5

1 Theoretical framework 5

1.1 Ownership Theory 5

1.2 Agency Theory 6

2 Concepts and definitions 7

2.1 Relationship between ROA and ROE 7

2.2 Tobin’Q 8

2.3 Foreign director 8

3 Hypothesis 9

3.1 Foreign Ownership Ratio 9

3.2 Foreign Management 9

3.3 Control Variables 10

III RESEARCH METHODOLOGY 11

1 Data Sampling and Data Collection 11

2 Variables 12

2.1 Dependent variable 12

2.2 Independent variables 12

2.3 Control variables include: 12

3 Estimation Method 13

4 Data analysis 13

IV THE STRUCTURE OF THE THESIS 14

REFERENCES 16

Human resources and capital from foreign investors play an extremely importantrole in the development of developing countries However, to take full advantage of thisadvantage, the role of foreign directors also needs to be emphasized Foreign directors notonly mobilize capital and expand markets, but also bring innovation, professionalism andinternationalization for the company This combination of human resources andinternational knowledge is a key factor in achieving sustainable growth and success intoday's business environment

However, does this really happen to Vietnamese businesses? To find the answer tothat question, this article examines THE ROLE OF FOREIGN DIRECTORS ON FIRMPERFORMANCE IN VIETNAM Financial performance is measured by Tobin's Q, ROAand ROE The study tested each model using the Pool OLS least squares method, randomeffects evaluation (REM) and fixed effects evaluation (FEM)

Key words: Foreign director, Financial performance, Firm performance

I INTRODUCTION

1 Background and necessity of the research topic

In the era of rapidly developing technology and globalization, Vietnam, as adeveloping country, has emerged as an attractive destination for foreign experts Theintegration of information technology and telecommunications has created favorableconditions for the country to participate in the global economy In that context, the role offoreign directors in Vietnam's business activities is becoming increasingly important andindispensable

The presence of foreign directors brings many advantages to Vietnamesebusinesses Firstly, they bring with them a wealth of expertise, management experienceand advanced methods of developed countries This stream of knowledge and skillscontributes to improving the overall performance and quality of business management,thereby promoting competitiveness and paving the way for sustainable development.Second, foreign directors have the ability to establish and promote relationshipswith international partners Leveraging their extensive network and understanding ofglobal markets, they assist businesses in expanding their customer base, exploring newcollaborative projects and identifying potential investment opportunities This plays a keyrole in scaling the business and accessing untapped markets, thereby driving growth.Third, foreign directors act as invaluable cultural and linguistic intermediariesbetween Vietnamese businesses and foreign partners Their proficiency in navigatingcultural nuances and overcoming communication barriers facilitates the seamless

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exchange of information and idea sharing By promoting effective cross-culturalcollaboration, they lay the foundation for building trust and amplifying the potential forsuccessful international business partnerships.

However, despite the manifold benefits of having foreign directors, potentialchallenges and limitations need to be acknowledged and addressed A pressing concern isensuring seamless integration and development of local employees and managersalongside their foreign counterparts Effective knowledge transfer processes need to be inplace to ensure that local talent is nurtured, developed and given opportunities for careeradvancement within the company

Furthermore, creating a harmonious balance between the management style andbusiness culture of foreign directors and the local context is another important challenge.Deep understanding of Vietnamese culture, customs and values is essential to avoidconflicts and create a cohesive and productive working environment

Finally, it is important to carefully consider whether relying too much on foreigndirectors could unintentionally lead to a lack of confidence and dependence onVietnamese businesses Developing and enhancing the management and leadershipcapacity of local staff and managers is paramount to ensuring sustainable growth andreducing dependence on foreign expertise in the long term

In summary, as the global economy continues to develop and integrate, the role offoreign directors in Vietnam's business landscape becomes increasingly important Whiletheir presence brings many benefits to Vietnamese businesses, it is important to stayvigilant and address potential issues to ensure that the participation of foreign directors isgenuine bringing positive impact and supporting the long-term development ofVietnamese businesses

2 Research gap

Studies on the impact of foreign directors on firm performance have yieldedinconsistent results However, these studies have provided few explanations for thisdiversity

Research by Oxelheim and Randøy (2003) focuses on Nordic companies and showsthat companies with board members originating from the UK and US have significantlyhigher corporate performance This may suggest that having British and Americandirectors may signal the adoption of an Anglo-American corporate governance system,thereby enhancing a company's international orientation .

However, the study by Masulis et al (2012) focus on US firms and show that firmswith foreign independent directors (FIDs) have poorer performance, especially when thefirm has a limited presence in the country where the foreign director is located out therereside The reason given by the author is due to the challenge that FIDs face whenattending board meetings because of the long travel distance, leading to reducedmonitoring activities

Research by Nguyen et al (2020) pointed out the negative impact of foreignmanagement on the financial performance of Vietnamese enterprises This suggests thatthe presence of foreign management may not effectively contribute to improving theperformance of firms in the Vietnamese context

Research by Phung and Le (2013) further points to negative outcomes fromincreased foreign ownership in Vietnamese enterprises, suggesting that foreignshareholders may not provide effective monitoring services results in the local context.Another study by SUGAI et al (2008) focus on Japanese firms with foreigndirectors and show that these firms have significantly better performance than similarfirms without foreign directors However, the selection method used in this study, whichcompares companies with and without foreign directors based on similarity in total assetsand industry, may be subjective and influence the reliability of the results

Overall, the impact of hiring foreign directors on firm performance remainsuncertain and varies depending on the region and how foreign directors are defined.Factors such as national language, corporate governance systems and supervisorymechanisms can influence the results

To have a deeper understanding of the factors that may influence the impact offoreign directors and how their participation affects the performance of Vietnameseenterprises, further research is needed

Studies could focus on factors such as national culture, corporate governancesystems and specific supervisory mechanisms in the Vietnamese context to assess theimpact of foreign directors In addition, consideration should be given to how foreigndirectors are measured and defined to ensure consistency and comparability acrossstudies.

Further studies could also explore other factors such as the skills and experience offoreign directors, the relationship between foreign directors and other board members, andthe ways in which they interact with other stakeholders in the company

Overall, hiring foreign directors can bring benefits or drawbacks depending on avariety of factors For Vietnamese businesses, specific research needs to be conducted tobetter understand how foreign directors are involved and their impact on businessperformance in the local context

3 Research objectives

The study aims to examine and assess the impact of foreign directors on businessoperations in Vietnam, specifically focusing on their role in enhancing the performanceand competitiveness of Vietnamese enterprises By conducting this research, valuableinsights can be gained regarding the significance and influence of foreign managers in theVietnamese business context

The findings of thisstudy will contribute to the existing knowledge andunderstanding of the role of foreign directors in Vietnam It will provide importantinformation and useful tools that can assist businesses in making informed strategicdecisions By understanding the impact of foreign directors, companies can betterleverage their expertise, knowledge, and international perspectives to enhance theircompetitiveness in the global market

The research may shed light on various aspects, such as the specific contributionsand challenges posed by foreign directors in Vietnamese enterprises, the effectiveness oftheir supervisory roles, and their ability to introduce international best practices andcorporate governance standards

The insights gained from this research can be utilized by Vietnamese enterprises toimprove their corporate governance practices, enhance their international orientation, andstrengthen their competitiveness in the global marketplace Additionally, policymakersand regulatory bodies can benefit from the findings to develop appropriate guidelines andframeworks that facilitate the effective participation of foreign directors in Vietnamesecompanies.

4 Research questions

In this research, I attempt to answer for four research questions:

1 What is the role of foreign directors in business operations in Vietnam?

2 What are the specific benefits and contributions that foreign directors bring toVietnamese businesses?

3 In improving the performance and competitiveness of businesses, how important

is the role of foreign directors?

4 Are there other factors besides foreign directors that can contribute to thedevelopment and success of Vietnamese businesses?

5 The subject and scope of the research

5.1 The subject of the research

The subject of the study: Vietnamese enterprises with foreign directors participating

in the management apparatus

5.2 The scope of the research

The scope of the research includes 427 companies operating in many differentindustries in Vietnam These companies have foreign directors and were studied over a 5-year period, specifically from 2014 to 2018

Focusing on companies with foreign directors, this study aims to examine the impact

of foreign ownership on financial performance in the Vietnamese business context Thecompanies selected represent a variety of industries and provide a comprehensive samplefor analysis

Additionally, excluding businesses in the financial sector and those that do not meetthe study criteria will help maintain the focus of the study and ensure that the findings areapplicable to the target audience expected research This approach allows for a moretargeted and meaningful analysis of the relationship between foreign ownership andfinancial performance in the selected sample of Vietnamese firms.

1 Theoretical framework

1.1 Ownership Theory

Ownership theory, formulated by Alchian and Demsetz in 1973, emphasizes thesignificant influence of ownership structure on the motivation and behavior of owners.According to this theory, concentrated ownership, such as private ownership, plays a vitalrole in driving better business efficiency compared to dispersed public ownership.Private ownership fosters a clearer decision-making process and facilitates thealignment of motivations, interests, and behaviors among owners, executives, andemployees In private ownership, a smaller number of owners typically hold substantialstakes in the company This concentration of ownership encourages owners to makedecisions that maximize their returns and promotes a sense of responsibility andaccountability towards the long-term success of the business

On the contrary, public ownership often involves a diffuse ownership structurewith numerous shareholders, leading to potential conflicts of interest and decision-makingprocesses that prioritize short-term gains The lack of clarity and accountability in publicownership can have a negative impact on executive motivation, important firm decisions,and the ability to address the consequences of decisions resulting from collectiveownership

It is important to note that ownership structure is just one aspect influencingbusiness efficiency, and other factors such as management practices, market conditions,and regulatory frameworks also play significant roles However, ownership theory

underscores the advantages of concentrated ownership, particularly private ownership, inpromoting the alignment of interests and driving superior operational efficiency.

1.2 Agency Theory

The representation theory, initially proposed by Jensen and Meckling (1976) andfurther developed by Fama and Jensen (1983), provides a framework for understandingthe relationship between executives (representatives) and owners in a company and itsimpact on operational performance According to this theory, owners recognize thatexecutives possess specialized skills and knowledge in company management, leadingthem to hire and delegate management responsibilities to these executives

Executives, acting as agents on behalf of the owners, are responsible for the day management of the company However, conflicts of interest can arise between ownersand executives as each party seeks to maximize their own benefits To address theseconflicts and improve operational performance, owners must bear agency costs, asoutlined in the representation theory

day-to-Agency costs consist of several categories of expenses Firstly, control costs involvecompensating controllers who monitor and inform shareholders about any self-servingactivities or decisions made by executives These controllers play a crucial role inensuring that executives act in the best interests of the owners and the company as awhole

Secondly, bonding costs are incurred to prevent negative consequences resultingfrom dishonest actions or behavior by executives These costs are aimed at establishingmechanisms to align the interests of executives with those of the owners and mitigate therisk of opportunistic behavior

Lastly, residual losses refer to charges associated with the damages caused by agentswho misuse their power or act in their own self-interest, resulting in financial losses forthe company These losses represent the potential negative outcomes that can arise whenconflicts of interest are not properly managed

By accepting agency costs, owners aim to mitigate conflicts of interest and createincentives for executives to act in the best interests of the company (Jensen & Meckling,1976) This, in turn, is expected to enhance the operational performance of the company.The representation theory provides a valuable framework for understanding thedynamics between owners and executives and the importance of managing agency costs

to improve operational performance By recognizing the inherent conflicts of interest andimplementing mechanisms to align the interests of both parties, companies can strive formore effective governance and decision-making processes that ultimately contribute tobetter operational performance

2 Concepts and definitions

2.1 Relationship between ROA and ROE

ROA measures the profitability of a company in relation to its total assets It showshow effectively a company utilizes its assets to generate profits A higher ROA indicatesbetter efficiency in utilizing assets to generate income This ratio is commonly used toassess the operational performance and efficiency of a business Comparing the ROA ofdifferent companies within the same industry can provide insights into which companiesare making better use of their assets to generate profits

ROE, on the other hand, focuses on the return generated specifically on theshareholders' equity It measures the profitability of a company in relation to theshareholders' investment ROE considers both the profitability of the company and thelevel of risk associated with the capital structure A higher ROE indicates that thecompany is generating stronger profits in relation to the shareholders' investment It is animportant metric for investors as it provides insight into the company's ability to generatereturns for its shareholders

However, it's crucial to note that a high ROE alone doesn't always indicate a healthyfinancial position If a company achieves a high ROE by taking on excessive debt, it can

be a cause for concern High debt levels increase financial risk and can potentially strainthe company's ability to meet its obligations in the long run Therefore, investors should

consider both the ROE and the level of debt in order to assess the financial health andsustainability of a company.

Additionally, it's important to compare ROA and ROE together to gain a morecomprehensive understanding of a company's financial performance If a company has ahigh ROE but a low ROA, it suggests that the company is relying heavily on debtfinancing, which can be risky Investors may be concerned about the company's ability togenerate profits from its assets and its overall financial stability

Tobin's Q = Market Value of the Firm / Book Value of Assets

If Tobin's Q is greater than 1, it indicates that the market value of the firm exceedsthe book value of its assets, suggesting that the firm has the potential to generate highervalue than its existing assets In cases where Tobin's Q is less than 1, it may suggest thatthe market value is lower than the book value, implying that the firm is not generatingequivalent value to its assets

Tobin's Q is used to assess investment performance, the attractiveness of a firm toinvestors, and its ability to create value for shareholders It can also be used to compareperformance among firms within the same industry or over time

2.3 Foreign director

Researchers have shown interest in the impact of foreign management on financialperformance Various measures of financial performance, such as Tobin's Q, ROA, ROE,and ROS, indicate that having board members of diverse nationalities leads to higherfinancial performance Studies conducted in Korea by Choi et al (2007) and in Malaysia

by Saleh et al (2009) demonstrated the positive effect of foreign management onfinancial performance Oxelheim and Randoy (2003), studying firms in Norway and

Sweden, found that firms with British and American board members had higher Tobin's Qcompared to other firms This was attributed to the improvement in cooperation intechnology, consultancy, marketing arrangements, branding, patent obligations, andresource sharing facilitated by foreign management and control The diversity ofnationalities also promoted more effective global relationships, expanded the internationalnetwork, and resulted in a larger consumer market and higher operational efficiency(Djankov & Hoekman, 2000)

However, Joenoes and Rokhim (2019) found a negative impact of Asian nationalityboard members on the financial performance of Indonesian firms They explained thatfirms with non-Asian board members tended to have members from developed countrieswith superior experience and management skills compared to those from Asian countries.Studies conducted by Rose (2007) in Denmark and Darmadi (2011) in Indonesia did notfind empirical evidence supporting the positive correlation

Based on the review of these studies, it becomes apparent that the relationshipbetween foreign ownership and management and financial performance can yielddifferent results in different research contexts Vietnam, as a developing country, hasimplemented various policies to encourage foreign investment, particularly since theenactment of the Investment Law in 2014 The authors have collected data from firmslisted on the Vietnamese stock market to examine how foreign ownership andmanagement influence financial performance

3 Hypothesis

3.1 Foreign Ownership Ratio

Ownership theory suggests that ownership incentivizes firms to efficiently utilizeresources in order to maximize profits Previous studies have explored the relationshipbetween capital investment/contribution and foreign ownership, which extends beyondfinancial contributions to encompass areas such as training, management transfer, andtechnical cooperation Several studies conducted in different countries, including Olga(2009), Chibber and Majumdar (1999), Douma et al (2006), Vu et al (2019), Nguyen andDang (2017), have found a positive correlation between the foreign ownership ratio and