The Impact of Foreign Ownership on Firm Performance, Evidence from an Emerging Market: Turkey

Abstract

Problem statement: The inflows of foreign direct investment are important sources of finance for developing countries. Due to the increase in the amount of the international flows of capital over the last three decades, the issue of the possible impact of foreign direct investment on the performance of corporations and thus the economy has gained increased attention. The purpose of this study is to explore how the financial performance of the companies listed on the Istanbul Stock Exchange (ISE) is affected by foreign ownership. Approach: This study employed panel data analysis on a sample of 205 non-financial listed companies covering the 3 year time period from 2005-2007. After having examined previous empirical work, several firm and industry related variables are included to eliminate the likely impact of other factors on corporate financial performance and to accurately demonstrate whether there are any significant differences in the financial performance of the firms due to foreign ownership. We also take into account the existence of a potential reverse relationship and conduct causality tests between the measures of financial performance and percentages of foreign ownership. Results: The results indicated that minority foreign-owned companies (MIN) perform better than domestic ones (DOM) in terms of operating profitability. When return on assets is employed as a performance measure, it is observed that MIN perform better than both DOM and majority foreign-owned companies (MAJ). It is also found that MAJ perform worse than DOM. The results of further analyzed, which employ yearly dummies for different ownership structures, are also provided. Conclusion: The overall results of this study indicated that foreign ownership improves firm financial performance in Turkey up to a certain level, beyond which additional ownership by the foreigners does not add to firm profitability. As it is obvious that the recent financial crisis will reduce the amount of international movement of capital, it is important to analyze the case prior to the crisis to be better able to gauge the possible impact of the lack of these inflows on companies in 2009 and onwards.