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: 60.05 MASTER THESIS SUPERVISOR: Dr. VÕ XUÂN VINH HO CHI MINH CITY, 2012 TIEU LUAN MOI download : skknchat@gmail.com 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. TIEU LUAN MOI download : skknchat@gmail.com 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. TIEU LUAN MOI download : skknchat@gmail.com iii TABLE OF CONTENTS ACKNOWLEDGEMENT. ii LIST OF TABLES. iv LIST OF FIGURES.
43 TIEU LUAN MOI download : skknchat@gmail.com iv LIST OF TABLES Table 4. Ordinary Least Squares Regression Results.27 TIEU LUAN MOI download : skknchat@gmail.com v LIST OF FIGURES Figure 1. FDI contributions for the period 2006- 2011. FDI registered and implemented capital for the period 2006-2011 .3 TIEU LUAN MOI download : skknchat@gmail.com 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 TIEU LUAN MOI download : skknchat@gmail.
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 TIEU LUAN MOI download : skknchat@gmail.com 2 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.
FDI contributions for the period 2006-2011 % 35 29.3 16 10 5 0 2006 2007 2008 2009 2010 2011 Year FDI contribution to GDP FDI contribution to the total national investments (Source: Foreign Investment Department, Ministry of Planning and Investment) TIEU LUAN MOI download : skknchat@gmail. 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. 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.
Purpose The relation between ownership structure and firm performance remains controversial in numerous studies in diverse economies. For instance, TIEU LUAN MOI download : skknchat@gmail.com 4 Demsetz (1983), Demsetz and Lehn (1985), McConnell and Servaes (1990), Himmelberg et al (1999), and Demsetz and Villalonga (2001) conduct survey in United States of America; Mudambi and Nicosia (1998) and Dinga et al (2009) study the case of United Kingdom; the studies of Welch (2003) and Fishman et al (2005) are based on Australia data; Kuznetsov and Muravyev (2001) examine the ownership- performance relationship in Russia; and other empirical analysis are reported by Andersson et al (2004) and Bandick (2005) in Sweden, Al- Shiab and Abu-Tapanjeh (2005) in Jordan, by Aydin et al (2007) in Turkey, by Kapopoulos and Lazaretou (2007) in Greek, by Lee and Chuang (2009) in Taiwan, by Hu and Zhou (2006) and Hess et al (2010) in China, by Drakos and Bekiris (2010) in Egypt, by Priya and Shanmughan (2011) in India, by Gelubcke (2011) in Germany, and by Pervan et al (2012) in Croatia. Nonetheless, there have been, to the best of my knowledge, very few studies on the topic of foreign ownership and firm performance relation in Vietnam. The purpose of this study is to examine whether there exists a relationship between foreign ownership and corporate performance of the companies listed on HoSE and to explore how foreign ownership affects firm performance.
Scope The present thesis employs a selected sample of the companies listed on HoSE for the period 2007-2010. TIEU LUAN MOI download : skknchat@gmail.com 5 The thesis is limited to examine the impact of foreign ownership on firm performance without taking into account the relation between the origin of foreign investors and firm performance. The thesis does not examine the relationship between firm performance and foreign investors who hold managerial positions in the companies. Research questions To explore the relationship between foreign ownership and firm performance, the two specific research questions are set as follows.
• Is there a relationship between foreign ownership and firm performance of HoSE listed companies? • Does foreign ownership affect positively firm performance? 1. Structure The thesis does not follow the conventional way where each section is outlined into chapter but into section. The remainder of this thesis is organized as follows. The literature review section summarizes previous studies on this topic.
The data and the methodology employed in the thesis are presented in the following section. The analysis section introduces the empirical findings. The final section concludes the thesis. TIEU LUAN MOI download : skknchat@gmail.
LITERATURE REVIEW Though the ownership-performance relationship has been the subject of voluminous researches, no agreement has been reached. Some studies find no link between ownership structure and firm performance, namely Demsetz and Lehn (1985), Himmelberg et al (1999), Demsetz and Villalonga (2001), Welch (2003), Klungland and Sunde (2009), and Mihai (2012). Demsetz and Lehn (1985) apply the OLS method to run statistical analysis over 511 firms in United States of America, for the time period 1976-1980, and find no significant relationship between ownership concentration and accounting profit rates. This cross-sectional analysis is then extended by Himmelberg et al (1999) by adding new variables to explain the variation in ownership structure.
Himmelberg et al (1999) find that managerial ownership and firm performance measured by Tobin’s Q are endogenously determined by firm specific factors and key variables in the firm’s contracting environment. Controlling both for observed firm characteristics and firm fixed effects, they conclude that managerial ownership does not affect firm performance. However, examining the endogeneity of ownership structure by using instrumental variables, they find a quadratic relationship between ownership and performance. Himmelberg et al (1999) conclude that previous works are unable to examine the non- observable heterogeneity, and hence any relationship detected might result from spurious correlations.
TIEU LUAN MOI download : skknchat@gmail.com 7 Demsetz and Villalonga (2001) investigate the link of ownership structure and corporate performance, but in a new way, where ownership is made multi-dimensional and treated as an endogenous variable. Conducting both OLS regression analysis and 2SLS test, over a sample of 223 firms quoted in the Fortune 500 list, for the time-period 1976-1980, they affirm that there was no significant relation between ownership structure and firm performance. Applying and developing the models by Demsetz and Villalonga (2001), Welch (2003) examine the connection of ownership structure with firm performance, on a sample of 114 public companies listed on the Australian Stock Exchange, for the time-period 1999-2000. The OLS results show that ownership is significant in explaining performance.
However, when endogeneity is taken into account, the 2SLS regression provides no statistical dependence of ownership on performance. Additionally, the results from a generalized nonlinear model illustrate limited evidence of a nonlinear relationship between managerial share ownership and firm performance. The similar results are found in the study of Klungland and Sunde (2009), on a large sample of quarterly data from non-financial Norwegian companies listed on the Oslo Stock Exchange in the period 2001-2007. Using OLS analysis, Klungland and Sunde (2009) find a significant negative relation between ownership concentration and firm performance, measured by Tobin’s Q.
Nevertheless, when controlling for fixed firm effects, there is no significant relationship. Using the method of TIEU LUAN MOI download : skknchat@gmail.com 8 instrument variables (2SLS) to account for endogeneity of ownership structure, Klungland and Sunde (2009) find that the choice of instrument highly affects the significance of the results.