Foreign Ownership and Corporate Performance

Despite the political sensitivity of foreign capital, existing work on the effect of foreign ownership at the firm level is slim. This paper examines the effect of foreign equity ownership on firm performance using a panel of Korean firms for the period of 1993-2002 when foreign capital inflows increased dramatically. Empirical results show that foreign equity ownership positively affects firm performance due to monitoring and shareholder activism, complementing domestic institutional investors and countering indigenous factors such as family and business group. In addition to shareholder activism, board participation by foreign investors also has a significant positive effect. There is also monotonically a positive relationship between the degree of foreign control and firm performance. Sub-period estimation shows that the effects of market liberalization were more gradual than abrupt even though the holding limit on foreign equity ownership was lifted only after the Asian financial crisis.