The impact of foreign ownership on firm performance: evidence from South Africa.

Abstract

The inflow of Foreign Direct Investment (FDI) is an important source of finance for South Africa. The South African government continuously attempts to attract more FDI to improve economic growth. Several studies have examined the determinants and effects of FDI at a macroeconomic level in South Africa, but very little research has analysed the effects of FDI at a microeconomic level, where the focus is on firm performance. Foreign ownership sourced from FDI can have both direct and spillover (indirect) effects on firm performance. The absence of evidence regarding the effect of foreign ownership on firm performance raises questions about the impact of FDI at the firm-level in South Africa. Hence, this study seeks to determine the direct and horizontal spillover effects of foreign ownership on the financial performance of firms listed on the Johannesburg Stock Exchange (JSE). This study uses panel data for non-financial firms listed on the JSE, covering the seven-year period from 2012 to 2018. The system Generalized Method of Moments (GMM) approach is employed to estimate the relationship as it accounts for endogeneity, simultaneity and unobserved heterogeneity, thus ensuring unbiased results. Firm performance is measured with Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q. The results for the direct effects vary across performance measures, with a non-linear effect of foreign ownership identified only when ROE is used. The findings show that foreign ownership has a positive effect on ROE at levels of foreign ownership below 40.1% but a negative effect at higher levels of foreign ownership. No evidence of horizontal spillovers are found for any performance measures. The implications of these findings are discussed along with recommendations for future research.