Foreign ownership and firm performance case of vietnam

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY -o0o - NGUYỄN THỊ THANH TÂM FOREIGN OWNERSHIP AND FIRM PERFORMANCE: CASE OF VIETNAM MAJOR: BUSINESS ADMINISTRATION MAJOR CODE: 60.34.05 MASTER THESIS SUPERVISOR: Dr VÕ XUÂN VINH HO CHI MINH CITY, 2012 i ACKNOWLEDGEMENT I would like to express my greatest gratitude to my supervisor, Dr Võ Xuân Vinh, for his continuous support for the thesis, from initial advice in the early stages of conceptual inception and through ongoing advices and encouragement to this day, without which this research would hardly have been completed I am grateful to the Examination Committee (Professor Nguyễn Đông Phong, Dr Nguyễn Trọng Hoài, Dr Nguyễn Đình Thọ, Dr Nguyễn Văn Ngãi, and Dr Nguyễn Thị Mai Trang) for their valuable advices to make my thesis improved I would like to thank my professors at Faculty of Business Administration and Postgraduate Faculty, University of Economics Ho Chi Minh City for their teaching, guidance and support during my MBA course I owe my sincere thanks to my classmates for their encouragement and a special thank of mine goes to my class monitor, Bùi Hồng Thu, for his great assistance in collecting data for this thesis and for his guidance in econometrics respects I wish to thank my family for their unconditional support and encouragement during my MBA course ii ABSTRACT Purpose – The thesis aims to investigate the relationship between foreign ownership and firm performance on a selective sample of firms listed on Hochiminh Stock Exchange for period 2007-2010 Methodology – The thesis applies the Ordinary Least Squares method to run multiple regressions on the whole sample and on each level of foreign ownership in order to give a closer view at the relationship between foreign ownership and firm performance Findings – The empirical results show a significant correlation between foreign ownership and firm performance, measured by Tobin’s Q The regressions on each level of foreign ownership indicate that foreign ownership was found to be significantly positive correlated with Tobin’s Q when foreigners own between 5% and 20% of shares in firms, while a negative correlation occurs where foreign holdings are more than 20%, specially considerably negative where the level is more than 40%; and there is no significant relationship between the two variables where foreigners own less than 5% of shares Originality/Value – The thesis tries to analyze how foreign ownership affects firm performance and suggests that Vietnamese business owners should take a scrutiny on benefits and costs of foreign investment Key words – Foreign ownership, firm performance iii TABLE OF CONTENTS ACKNOWLEDGEMENT i ABSTRACT ii LIST OF TABLES iv LIST OF FIGURES .v ABBREVIATIONS vi INTRODUCTION 1.1 Background 1.2 Purpose 1.3 Scope 1.4 Research questions 1.5 Structure LITERATURE REVIEW .6 METHODOLOGY 16 3.1 Data 16 3.2 The model 16 3.3 Statistical Method 22 DATA ANALYSIS 23 4.1 Descriptive Statistics 23 4.2 Correlations 25 4.3 Regression Results 26 CONCLUSION 37 REFERENCES 39 APPENDICES 43 iv LIST OF TABLES Table 4.1 Descriptive Statistics 23 Table 4.2 Correlation matrix .25 Table 4.3 Ordinary Least Squares Regression Results .27 v LIST OF FIGURES Figure 1.1 FDI contributions for the period 2006- 2011 Figure 1.2 FDI registered and implemented capital for the period 2006-2011 vi ABBREVIATIONS debt_asset Financial Leverage FDI Foreign Direct Investments foreing_own Foreign Ownership GDP Gross Domestic Product HoSE 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 1 INTRODUCTION 1.1 Background The relationship between ownership structure and firm performance has been examined since decades Some researches shows no effect of ownership structure on firm performance, while others indicate there is a correlation between these two factors Demsetz (1983) argues that there should be no relationship between ownership structure and firm performance Pursuing this argument empirically, Demsetz and Lehn (1985) find no significant correlation between profit rates and various measures of ownership concentration in a sample of 511 United States companies using 1980 data Himmelberg et al (1999) extend the Demsetz and Lehn (1985) study by adding new variables to explain the variation in the ownership structure Ownership structure is measured by shareholdings of insiders (officers plus directors) Firm performance measure is Tobin’s Q They employ the capital-to sales, R&D-to-sales, advertising-to-sales, and operating income-to-sales ratios as instrumental variables Controlling for these variables and fixed firm effects, they find that changes in ownership holdings have no significant impact on performance Demsetz and Villalonga (2001) continue to examine the ownership-performance relation by treating ownership structure as an endogenous variable and as an amalgam of shareholdings owned by persons with different interests By estimating a two-equation model for United States firms, their evidence shows that performance (defined as Tobin’s Q or the accounting profit rate) is not found to be influenced by ownership (defined as managerial ownership (Chief Executive Officers, board of directors, top management) or ownership by the five largest shareholders) Despite the fact that Demsetz and Lehn (1985), Himmelberg et al (1999), and Demsetz and Villalonga (2001) find no significant correlation between ownership structure and firm performance, series of subsequent researches, which had been done and built on the Demsetz heritage, prove the converse results For instance, Andersson et al (2004) find that dispersed ownership is associated with worse performance when examining firms listed on Sweden Stock Exchange A significant negative relationship is also found by Lee and Chuang (2009) when investigating the relation between insiders and corporate performance of Taiwanese firms In line with this, Fishman et al (2005) find that managerial ownership impacts negatively on performance This is opposite to the findings reported by Drakos and Bekiris (2010), where managerial ownership is found to be significantly positive correlated with Tobin’s Q Figure 1.1 FDI contributions for the period 2006-2011 % 35 30 25 20 15 10 29.8 16.98 17.96 16.3 16 2006 2007 FDI contribution to GDP 25.7 25.8 26 18.43 18.33 18.72 19 2008 2009 2010 2011 Year FDI contribution to the total national investments (Source: Foreign Investment Department, Ministry of Planning and Investment) Figure 1.2 FDI registered and implemented capital for the period 2006-2011 (Source: Foreign Investment Department, Ministry of Planning and Investment) As a part of ownership structure, foreign ownership plays an important role In Vietnam, foreign investments contribute considerably to Vietnam economy Figure 1.1 and Figure 1.2 indicate that FDI implemented capital continuously increases during the period 2006-2011 FDI implemented capital in 2011 reaches 11 billion USD, which contributes 26% to the national investments and 19% to GDP Companies with foreign capital participation are a form of FDI Foreign investors bring to the receiving companies some benefits, such as solid financial sources, modern technology, and management skills To some extent, foreign ownership should have impact on firm performance 1.2 Purpose The relation between ownership structure and firm performance remains controversial in numerous studies in diverse economies For instance, 33 With proportion of foreign ownership between 5% and 20%, foreign investors belong to the minor owner group, while Vietnamese are dominant shareholders Therefore, it may be easier to reach consensus in making decisions on firm operations, which lead to an efficient use of foreign capital and technology and a good application of management skills At the higher levels of ownership, especially more than 40%, foreigners become more powerful in managing firms They bring to the firms different business cultures through their way of management, which may cause divergence in firm management and lead to lower firm performance Besides, the conflicts of interest between large shareholders reduce firm performance (Kuznetsov and Muravyev (2001) and Dinga et al (2009)) In brief, the empirical findings show how foreign ownership affects firm performance and suggests that Vietnamese business owners should take a scrutiny on benefits and costs of foreign investment In general, there is a significant correlation between foreign ownership and firm performance, measured by Tobin’s Q In particular, foreign ownership was found to be significantly positive impact on Tobin’s Q when foreigners own between 5% and 20% of shares in firms, while a negative influence occurs where foreign holdings are more than 20%, specially considerably negative where the level is more than 40%; and there is no significant relationship between the two variables where foreigners own less than 5% of shares 34 Relationship between Firm Performance and Leverage The results in Table 4.3 indicate that the coefficient for leverage is consistently negative and significant at the 1% level through the whole sample and at each level of foreign ownership This finding is consistent with almost previous studies (Himmelberg et al (1999), Demsetz and Villalonga (2001), Welch (2003), Andersson et al (2004), Fishman et al (2005), Kapopoulos and Lazaretou (2007), Bilyk (2009), Lee and Chuang (2009), and Hess et al (2010)), which found financial leverage constitutes a significant negative correlation with Tobin’s Q and argued that as debts rise, the costs associated with servicing them increase too, as a result, firm performance declines Another possible reason in Vietnam case is that the companies have inefficiently used debts by investing in unproductive projects Nonetheless, this is opposite to the findings by McConnell and Servaes (1990) and Abidin et al (2009), where leverage is found significantly negative related to Tobin’s Q They explained that interest payments reduce a firm’s tax liability, which leads to increase in firm performance Relationship between Firm Performance and Firm Size Table 4.3 reveals inconsistent findings regarding relation between firm performance and firm size through the whole sample and at each level of foreign ownership The results in the whole sample, and those at the levels of foreign ownership less than 5% and between 20% and 40% indicate that there is insufficient evidence to infer that there is a 35 significant relation between firm size and firm performance, even at the 10% level These results coincide with those reported by Demsetz and Villalonga (2001), Andersson et al (2004), and Cornett et al (2009) An interesting point is that there is a significant negative impact of firm size on firm performance at the 1% level where the fraction of foreign ownership is between 5% and 20% This contradicts the finding at the level of foreign ownership more than 40%, which indicates asset scale and Tobin’s Q have a statistically significant positive relation at the 5% level The positive relation is explained by the argument that the large firms make use of the economies of scale and scope12 (Himmelberg et al (1999), Abidin et al (2009), and Bilyk (2009)) The large firms have all options to invest in projects that are not available for smaller firms With large proportion of foreign ownership (more than 40%), the firms benefit well from foreign financial strength to invest in their projects that local investors might not have enough capacity to finance The negative indication between firm size and performance is consistent with the findings by McConnell and Servaes (1990), Welch (2003), Lee and Chuang (2009), Drakos and Bekiris (2010), and Hess et al (2010) This finding supports the view that larger firm size requires higher level of investments, which produces a negative indication to firm performance (Demsetz and Villalonga (2001) and Drakos and Bekiris (2010)) Lee 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 and Chuang (2009) give another view that when the asset scale is greater, the company may already be in a mature stage, and the opportunity for future growth will relatively lower Himmelberg et al (1999) argue that monitoring and agency costs can be greater in large firms, which lead to decrease firm performance This is a likely explanation for our case 37 CONCLUSION By the present thesis, we have answered our stated research questions concerning the relationship between foreign ownership and firm performance The thesis employed a selective sample of firms listed on HoSE, for the period 2007-2010 The OLS method was applied for our empirical analysis Consistent with most of previous studies, our empirical findings prove the existence of a significant relationship between foreign ownership and firm performance When regressing on the whole sample, foreign ownership and firm performance constitute a significantly positive correlation However, the relationship changes by levels of foreign ownership There is insufficient evidence to find a significant correlation between foreign ownership and firm performance where foreigners hold less than 5% of shares Foreign ownership is positively correlated with Tobin’s Q when foreigners own between 5% and 20% of shares Nevertheless, an increase in foreign ownership at substantial levels of foreign ownership (20%-40%, especially more than 40%) will cause a decrease in firm performance The possible reason is that diversified ownership causes conflicts of interest, which reduce firm performance In contrast to the findings reported by McConnell and Servaes (1990) and Abidin et al (2009), our results indicate that leverage was found to have a negative correlation with Tobin’s Q This is perhaps due to increase of costs servicing debts and due to ineffective use of debts 38 A final remark about our findings is the relationship between firm size and performance Firm size and performance have a significant positive correlation when foreigners own more than 40% of shares, while a significant negative correlation occurs at the level of foreign ownership between 5% and 20% A likely explanation is that firms with large ownership by foreigners benefit well from foreign investment and that firms with lower level of foreign ownership have to suffer increasing monitoring costs There are some potential limitations associated with this thesis, which may serve as a source of inspiration for further research For instance, we have not discussed about the impact of origin of foreign investors and the role of foreign owners who hold managerial positions in firms Hence, it would be interesting to investigate the correlation between 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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 43 APPENDICES Appendix Regression result for the whole sample Dependent Variable: Q Method: Least Squares Date: 06/27/12 Time: 22:29 Sample: 567 Included observations: 567 Variable FOREIGN_OWN DEBT_ASSET LN_ASSET C R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient 0.5093 -2.7124 0.0221 2.2996 0.290104 0.286321 0.93077 487.745 -761.8525 1.944492 Std Error 0.2499 0.2006 0.0344 0.4344 t-Statistic 2.0378 -13.5208 0.6430 5.2940 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) Prob 0.0420 0.0000 0.5205 0.0000 1.431856 1.10177 2.70142 2.73204 76.69129 44 Appendix Regression result at the level of foreign ownership less than 5% Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 19:31 Sample: 168 Included observations: 168 Variable FOREIGN_OWN DEBT_ASSET LN_ASSET C R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient -0.1622 -1.9634 -0.0431 2.6930 0.573219 0.565413 0.386368 24.48192 -76.59521 2.049203 Std Error 2.065421 0.163557 0.033911 0.404168 t-Statistic -0.078531 -12.00449 -1.270742 6.663114 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) Prob 0.9375 0.2056 1.115367 0.586087 0.959467 1.033847 73.42415 45 Appendix Regression result at the level of foreign ownership between 5% and 20% Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 19:29 Sample: 163 Included observations: 163 Variable Coefficient Std Error t-Statistic Prob FOREIGN_OWN DEBT_ASSET LN_ASSET C 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 R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat 0.243059 0.228777 1.188526 224.6024 -257.4144 2.038926 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) 1.428054 1.353377 3.207539 3.283459 17.01869 46 Appendix Regression result at the level of foreign ownership between 20% and 40% Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 22:01 Sample: 134 Included observations: 134 Variable FOREIGN_OWN DEBT_ASSET LN_ASSET C R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient -2.8544 -2.8482 0.0950 2.3581 0.221254 0.203283 1.005631 131.4681 -188.8597 2.026198 Std Error 1.545489 0.478942 0.070544 1.071614 t-Statistic -1.846927 -5.946814 1.346336 2.200554 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) Prob 0.067 0.1805 0.0295 1.659569 1.126643 2.878503 2.965006 12.31165 47 Appendix Regression result at the level of foreign ownership between 40% and 49% Dependent Variable: Q Method: Least Squares Date: 06/28/12 Time: 20:06 Sample: 102 Included observations: 102 Variable Coefficient Std Error t-Statistic Prob FOREIGN_OWN DEBT_ASSET LN_ASSET C -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 R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat 0.478861 0.462908 0.847497 70.38866 -125.8138 1.879604 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) 1.660053 1.156416 2.545368 2.648308 30.01658 ... effects of foreign ownership on performance of 264 Ukrainian manufacturing companies in 2002-2006 Bilyk (2009) divides foreign ownership into two types, namely foreign offshore and foreign non-offshore... firm performance and suggests that Vietnamese business owners should take a scrutiny on benefits and costs of foreign investment Key words – Foreign ownership, firm performance iii TABLE OF CONTENTS... of Planning and Investment) As a part of ownership structure, foreign ownership plays an important role In Vietnam, foreign investments contribute considerably to Vietnam economy Figure 1.1 and