Abstract

This paper aims to examine whether foreign ownership could improve corporate performance in four ASEAN countries amid the US-China trade war. To enrich our understanding the role of foreign ownership in emerging market enterprises, we adopt the weighted least squares (WLS) and fuzzy-set qualitative comparative analysis (fsQCA) to provide robust and fruitful empirical evidences to both academics and practitioners. Our empirical results show that growth opportunity links the short-and long-term financial performance of listed firms in the ASEAN countries. Moreover, foreign ownership plays an important role on enhancing long-term performance for the firms in the ASEAN countries during the US-China trade war. The findings would fill in the gap on understanding the effect of the location shift of foreign investment during the trade war. The implications of the study would help the practitioners in managing their investment in the ASEAN countries during the US-China trade war.

1. Introduction

Since the US-China trade war broke out in 2018, many foreign firms have begun shifting their production operations out of China and into its southern neighbors. Some studies ^{1, 2, 3} indicate that trade diversion and inflow of foreign investment as a result of the trade war will confer greater benefits onto the Association of Southeast Asian Nations (ASEAN) countries. Hence, the role and impact of foreign investment on host countries has attracted much attention in recent literatures.

⁴ argues that foreign investment allows the firm to maximize its profits with risk reduction through international diversification. ⁵ note that firms perceive international opportunities and marshal their resources to exploit them. However, numerous studies ^{6, 7, 8, 9, 10} have shown that foreign ownership may have a positive or negative impact on firm performance.

¹¹ indicates that ASEAN has become one of the most attractive investment locations in the developing world. Apart from the abundant natural resources, ASEAN is a major manufacturer and exporter of textiles, light consumer goods, electronics, and petroleum products. These various factors and developments have led to ASEAN becoming a rapidly developing market with a strong potential demand for consumer and capital goods, and technical skills. Foreign investment is one of the main drivers in promoting economic growth in ASEAN countries ^{12, 13}. ³ argues that for Southeast Asian countries, it is foremost importance for them to form a picture of how much they will suffer and benefit during the US-China trade war.

However, there is almost no research explicitly examining the role of foreign ownership and growth opportunity on firm performance of ASEAN countries during the US-China trade war. Therefore, this study use the sample of listed firms in four emerging ASEAN countries over the period 2011-2018.

In order to provide robust empirical evidence, we adopt the weighted least squares (WLS) and fuzzy-set qualitative comparative analysis (fsQCA) to explore the relationship of the variables concerned. Our results show that growth opportunity links the short-and long-term financial performance of listed firms in the ASEAN countries. And, foreign ownership plays an important role in enhancing long-term performance for the firms in the ASEAN countries during the US-China trade war. Our findings would fill the gap in understanding the effect of the location shift of foreign investment during the trade war. And the implications of the results from the qualitative model provides a useful linkage between researchers and practitioners.

The rest of the paper is organized as follows: Section 2 reviews the related literature on foreign ownership, growth opportunity, and firm performance. Section 3 describes the dataset and the methodology used in the empirical tests. Section 4 discusses the main findings. Section 5 concludes and presents the limitations of this paper.

2. Literature Review

Based on internalization theory ^{14, 15}, the parent company provides intangible assets such as technology and management to its foreign affiliates ¹⁶. ¹⁷ note that the foreign investment could increase firms’ financial performance through their affiliates abroad.

¹⁸ show that foreign investment could improve operational efficiency by paying higher salary to workers in host countries. ^{19, 20} assert that concentrated ownership leading in multinational enterprise (MNE) subsidiaries can enhance operational performance than domestic firms. ²¹ find that foreign capital determines the effectiveness productivity in combination with other factors in India. ²² conclude that firms with more than 50% foreign ownership can earn more profits than other foreign holdings and domestic firms. ^{6, 23} evidence that there is a positive relationship between foreign investment and firm performance.

Even though several studies indicate the necessity of foreign capital to improve the business efficiency, there are still some conflicting findings were given. ²⁴ show that foreign firms in the US have lower profits than domestic firms. ⁸ finds that foreign corporations do not outperform domestic firms in Bulgaria and Romania. ²⁵ argue that the level of foreign capital is not related to firm productivity. ²⁶ confirm a negative relationship between foreign investment and firm productivity in Italy. ^{9, 27} argue that there is no relationship between foreign ownership and firm performance.

Regarding previous studies on examining the relationship between foreign investment and firm performance, ¹⁶ propose that the findings in literature may not apply to emerging markets. Especially under the event of the US-China trade war, foreign firms in China have shifted their operations to the ASEAN countries but little research has explored the impact of foreign ownership on firm performance in these countries. Therefore, this study proposes a testable hypothesis as follows:

Hypothesis 1: Foreign ownership has a positive effect on firm performance in the ASEAN countries during the US-China trade war.

Although China remains the goliath of global manufacturing in the world, foreign investors are increasingly turning their gaze southward to the emerging markets in the ASEAN. The shifts of foreign investment away from China towards the ASEAN during the trade war represent the existence of growth opportunities in the firms of ASEAN countries.

²⁸ argue that when the firm has outstanding debt risks and managers act to maximize equity value instead of firm value, managers have the incentive to invest growth opportunity. This invention will affect firm performance. ²⁹ find that firms acquired by foreigners have higher total factor productivity growth than those without foreign partnerships. ³⁰ ascertain that firm performance is stronger for high growth opportunity firms. ³¹ emphasizes that the existence of growth opportunity can lead to profitable investment projects, which will positively affect firm performance. ³² assert that growth opportunity has a moderator effect on firm value. ³³ confirm the positive role of growth opportunity in firm performance during the US-China trade war. Based on the arguments of extant literature, we could establish the second testable hypothesis as follows:

Hypothesis 2: The growth opportunity has a positive effect on firm performance in the ASEAN countries during the US-China trade war.

3. Data and Methodology

This study used data collected from Thomson Reuters Datastream Databank covering the period 2011-2018. The sample includes listed firms in the four ASEAN countries, including Vietnam, Indonesia, Malaysia, Thailand, which are developing and fast-growing countries ³⁴. After removing all missing values and outliers, we ended up with the total number of 7,806 observations.

Following previous studies, firm performance is measured in different ways. ^{6, 23, 35, 36} use Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q as the measures of firm financial performance. While Tobin’s Q ratio has been extensively used as a proxy for operating performance in the long run ^{35, 37}, ^{38, 39} suggest that ROE can be used as a proxy for short-term performance. Likewise, ^{40, 41, 42} confirm that ROA are often used to measure short-term performance.

Considering the factors affecting long-term firm performance, three control variables are included in our research models. ⁴³ recognize that firm size (SIZE) may have an impact on firm value which signals future performance. ⁴⁴ posits that high profits are expected in large firms caused by economies of scale. Besides, ⁴⁵ report that firm listed age (AGE) has a significant correlation to firm performance. The longer firms are listed on the stock exchange, the more proven experiences in attracting and using capital efficiently. Finally, ²⁸ elicit that leverage (LEV) could help managers avoid engaging investment without high profit.

This study uses two methods to examine the relationship of foreign ownership and firm performance during the US-China trade war. We use the Weighted Least Squares (WLS), instead of Ordinary Least Squares (OLS), to estimate regression models to avoid the problem of heteroscedasticity. Besides, we also adopt the fuzzy-set qualitative comparative analysis (fsQCA) to examine the relationship. While normal quantitative analysis methods (such as ANOVA, SEM) treat variables independently and separately, fsQCA makes conditions combine with each other, or causal recipes, incorporates ingredients conditions to results ⁴⁶. ^{47, 48} demonstrate that fsQCA is suitable for range of studies due to same conclusions for both small and large sample.

The descriptive for the model variables are presented in Table 1. To test Hypothesis 1 and 2 conjecture the correlation among foreign ownership, growth opportunity and firm performance, two regression models by using different proxies for short-term performance are constructed as below:

(1)

(2)

4. Empirical Results

Table 2 reports the descriptive statistics of the variables for the sample firms in Vietnam, Indonesia, Malaysia and Thailand during the 2011-2018 period. The table discloses that the means of all variables are positive. Among them, Indonesia has the highest mean of foreign ownership ratio (0.304). The high level of foreign investment in Indonesia can be explained by the inward flows of foreign investment achieved an impressive increase 460% from 2016 to 22 million US$ in 2018 ⁴⁹. Besides, Vietnam is the only country with all sample firms carrying positive values of return on assets and return on equity ratios (min ROA = 0.007, min ROE = 0.000). The foreign investment of Vietnam has steadily increased over the years due to the advantages of integrated economy, political stability and safe environment for investors.

This study calculates Variance Inflation Factor (VIF) to test multicollinearity among the variables used in the four ASEAN countries. The values of VIF for variables are less than 10 which means that there is no multicollinearity present in our research ⁵⁰.

This paper uses WLS to examine the relationship between foreign ownership (FO) and long-term performance (Tobin’s Q) in four ASEAN countries. Since ⁵¹ suggest that the required sample size in multiple regression should be equal or more than 50 + 8*m (m - the number of independent variables), so sample size of all four ASEAN countries are accepted for WLS method.

Table 3 and Table 4 present the regression results for both ROA and ROE and indicates that foreign investment has no relation with long-run performance under the trade war. The return on assets and the return on equity positively affects the long-term performance in most cases. Table 4 also supports our expectation that growth opportunity has a positive impact on long-term business performance amid the trade war.

The results of WLS regression for two proxy variables of short-term performance (ROA and ROE), in general, propose similar findings that growth opportunity positively affects long-term performance during two time periods and foreign ownership is not significantly related to long-term performance after the trade war.

This paper additionally adopts fsQCA method to re-examine the relationship between foreign ownership and long-term performance amid the trade war. FsQCA allows the combination of independent variables as conditions to produce results that affect the dependent variable. Consequently, this method provides logically possible causal recipes on long-term performance to overcome the limitations of quantitative methods ⁵².

Table 5 and Table 6 provide causal configurations that lead to long-term performance from parsimonious solutions. This research examine necessity and suffciency conditions using fsQCA ⁴⁷.

In fsQCA method, we can evaluate the useful of solutions depends on two parameters (consistency and raw coverage). Consistency threshold is above 0.75 means that condition are sufficient for the outcome ⁵³. Conditions which consistency threshold exceed of 0.9 indicate necessary conditions and could be considered as strong subsets of the outcome ⁵⁴. ⁵⁵ states that consistency is similar to coefficient of correlation and represents the solution's sufficiency, while coverage is similar the coefficient of determination (R²) ⁵⁶. In other words, consistency is the same as the level of agreement between cases in describing the target outcome, coverage shows how importance empirical relevance is and a combination might have a small raw coverage ^{54, 57}.

Table 5 indicates that higher foreign ownership with better short-term performance (ROA) or greater growth opportunity can lead to better long-term performance both before and after the trade war in all four ASEAN countries. Increasing foreign ownership in small firms also can enhance long-term performance in Indonesia, Malaysia, Thailand after the trade war. Table 6 displays foreign ownership has important role to long-run performance in four countries in 2018. In addition, Table 6 also shows that foreign investment in young firms could improve future performance in all countries under the US-China trade war. Short-term performance (ROE) and growth opportunity contribute to the changes of long-term performance during the period 2011-2018. These findings are similar for both ROA and ROE which support our hypotheses.

Comparing both methods this study adopts, different results relate to long-term performance are provided. The absence of foreign ownership is not a barrier for better long-term performance in WLS results but foreign ownership plays a key role in fsQCA findings. Especially, growth opportunity and short-term performance are also important factors that contribute to long-term firm performance both before and after the trade war.

5. Conlusions and limitations

In summary, this study proposes the argument that foreign ownership provides an additional explanation for long-term firm performance in four ASEAN countries amid the US-China trade war. We adopt WLS and fsQCA models to analyze the relationship among these factors. While WLS results show foreign ownership affects long-term firm performance only before the US-China trade war, fsQCA supports that it plays a key role in enhancing firm value in four ASEAN countries both before and after the trade war. Short-term performance of both ROA and ROE potentially impacts future firm performance. Growth ability is also a remarkable factor for investors to consider and ensure the profitability in their long-run investments.

As our findings, fsQCA offers a deeper understanding of what drives the long-term performance for the firms in the ASEAN region during the trade war. By overcoming the limitations of traditional regression methods, fsQCA shows that foreign ownership is an important factor which affects firm value in the ASEAN countries. Moreover, fsQCA allows us to analyze the effect of combination factors related to long-term firm performance. Practitioners can consider different combinations of factors in fostering firm value.

This research has some limitations. The sample listed firms includes only four developing countries in the ASEAN (Vietnam, Indonesia, Malaysia and Thailand). Therefore, our findings may not be valid for all ASEAN and other developed countries. The future research could expand the samples to other ASEAN countries. Besides that, only one year after the US-China trade war is avalable for analysis. Likewise, potential studies could examine datasets with longer periods after the trade war to test these concerns.

References