Foreign ownership and firm performance: evidence from Japan's electronics industry

Abstract

Foreign investors have in recent years increased their ownership of Japanese firms. Has this greater involvement contributed to improve firm performance? We show that the answer depends on the assumptions regarding the unobservable firm effects. If the latter are assumed to be time invariant, as in most existing studies, the influence of foreign investors appears to be positive. However, unobserved firm characteristics are unlikely to be constant in the case of electronics firms. Using dynamic panel data estimation, we show that the effect of foreign ownership on operating profits has been initially insignificant, but is starting to show up strongly in the more recent period. On the other hand, the immediate impact has been to raise expectations about future firm performance.

Keywords:

• foreign investors
• performance
• unobserved heterogeneity
• dynamic panel
• GMM

JEL Classification::

• C18
• G32
• L63

Notes

¹ For instance, Gadad and Thomas (2005) find evidence of significant abnormal returns around the announcements of divestitures by the UK firms.

² In comparison, Colpan et al. (2010) analyse a sample of 96 electronics firms over the period 1992–2002.

³ Some authors, like Himmelberg et al. (1999), prefer to scale tangible assets by sales.

⁴ Because foreign ownership is concentrated on large firms (Kang and Stulz, 1997), the value-weighted average reported by the Tokyo Stock Exchange is necessarily higher than the un-weighted average that we have computed. Further calculations show that average foreign ownership is 17.2% for large firms and 6.7% for small firms using median total assets as the cutoff point.

⁵ Hu and Izumida (2008) and Nguyen et al. (2010) also show that large Japanese firms are associated with higher R&D intensity. In contrast Chan et al. (2001) find that R&D intensity is higher among small US firms.

⁶ For instance, Nguyen (2012) shows that the probability for a firm to move from a given quartile of foreign ownership to another quartile within one year can be as high as 34.2%. In comparison, the probability of a similar change for domestic institutional ownership is only 23.8%.

⁷ However, the results do not appear to be too sensitive to this choice.

⁸ In comparison, Goddard et al. (2005) report smaller coefficients on lagged ROA for a sample of European firms, meaning that their performance is less persistent than in Japan.