THE INFLUENCE OF FOREIGN OWNERSHIP ON VIETNAMESE CORPORATIONS’ PROFITABILITY

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VIETNAM NATIONAL UNIVERSITY – HOCHIMINH CITY

INTERNATIONAL UNIVERSITY

SCHOOL OF BUSINESS

THE INFLUENCE OF FOREIGN OWNERSHIP ON VIETNAMESE

CORPORATIONS’ PROFITABILITY

THE CASE STUDY ON MANUFACTURING LISTED COMPANIES ON HOSE

In Partial Fulfillment of the Requirements of the Degree of

BACHELOR OF ARTS in BUSINESS ADMINISTRATION

Student’s name: TR NH TH LIÊN ANH (BAFNIU10255)Ị Ị

Advisor: NGUY N KIM THU, PhD.Ễ

Ho Chi Minh city, Vietnam

2014

THE INFLUENCE OF FOREIGN OWNERSHIP ON VIETNAMESE

CORPORATIONS’ PROFITABILITY

THE CASE STUDY ON MANUFACTURING LISTED COMPANIES ON HOSE

APPROVED BY: Advisor APPROVED BY: Committee,

__________________________ _________________________________

Nguyen Kim Thu, PhD.

___________________________________

THESIS COMMITTEE

CHAPTER 1

INTRODUCTION

1.1. Motivation and Significance of the study

The government of Vietnam had just published Decision 55/2009/QĐ-TTg in April, 2009

about determining the percentage of foreign ownership in a listed corporation over 49%

and Decree 69/2007/NĐ-CP in April, 2007 stipulating room for ownership of foreign

investors in credit institutions not over 15%. These decisions of the government not only

opened more opportunities for foreign investment to promote its own benefits in Vietnam’s

economy but also showed the deep consciousness of Vietnamese economists and experts

on the important role of foreign investment in national development strategies and process.

The results in attracting successfully foreign investors into Vietnam are obviously shown

in the stock market. According to State Securities Commission of Vietnam, Vietnamese

stock market attracted 4,540 billion VND (about 218 million USD) from foreign investors

in 2012. In the year 2013, foreign investors had poured 6,829 billion VND into Vietnamese

stock market, equivalently 325 million USD, increasing 55% compared to 2012. Besides,

according to Vietnam Securities Depository, in the year 2013, there were additionally 728

foreign investors opening new transaction accounts with 291 foreign investors were

organizations. The number of foreign-invested firms has taken flight up dramatically from

1,525 in 2000 to 7254 in 2010 (Vietnam General Statistics Office, 2010; Vietnam General

Statistics Office, 2011)

From the achievements in foreign capital flow into Vietnamese stock market in the recent

years, the economists continued considering to open more chances for foreign investment.

Decree 01/2014/NĐ-CP in January, 2014 about expanding room for ownership of foreign

investors in credit institutions to 20% instead of 15% as stipulated in the Decree

69/2007/NĐ-CP in April, 2007 was just published. Moreover, in the last period of time in

2013, one draft decision about changing Decision 55/2009/QĐ-TTg by widening the room

for foreign ownership in a joint stock corporation from 49% to 60% was submitted to the

Prime Minister of Vietnam, which caused a surge of debates from economic experts on the

advantages and disadvantages of the decision. As we have known, when foreign investors

finally have their chosen destination, one of their most common investment activities is

known as buying shares and becoming equity owners of economic entities such as credit

institutions, banks or especially corporations in this case study. The impact on the

development of the whole economy is reflected by the influence they bring to the host

corporations. Therefore, due to highlight event, it is reasonably an important opportunity to

review the role of foreign ownership in the developing process of a corporation in such an

open economy of the country and examine rigorously the relationship between foreign

ownership and corporations’ ability to gain profit in an empirical particular case study.

Once, corporations’ profitability is one of the most helpful figures that reveal a scenario of

how foreign ownership promotes its own advantages in the host country and how efficient

the host corporations absorb benefits from foreign ownership for their improvement and

development strategies. Many researchers have chosen this affair to be the major topic of

their own studies. Several researches in the world have discussed about this relationship

between foreign ownership and corporations’ profitability and most researches show that

foreign ownership has positively affected profitability of a firm (Mariko Sakakibara et al,

2005; Ongore, 2011; Gurbuz and Aybars, 2010). However, there is a quite narrow source

of studies as evidences supporting for this issue in case study of Vietnamese corporations

(Phung & Hoang, 2013, Phung & Le, 2013; Phan, 2013). These studies found, yet, provide

a conflict in a nature of results. For more particular, Phung and Hoang (2013)’s conclusion

conveyed that foreign ownership boosted up firm performance while Phung and Le (2013)

gave out a negative result on the relationship between foreign ownership and firm value of

listed companies. On the contrary, Phan (2013) found that there was a significant inverted

U shaped relationship between foreign ownership and firm performance. Consequently, the

evidences about the direct impact of foreign ownership to Vietnamese corporations’

profitability are still vague. Thus, due to the contrary of results from international and

domestic researches, it is necessary to investigate this issue again in the empirical test

conducted with all the firms in one specific sector, whether foreign ownership has a

positive or negative effect on Vietnamese corporations’ profitability as expectations in the

theoretical review. This study is meant to be a contribution to the body of evidences

clarifying the power of foreign ownership in Vietnamese corporations in one stated case

study. That urges me to bring it on.

1.2. Objective of the study

Basically there are two main objectives in this study

· Check if there is any relationship between foreign ownership and firms’ profitability,

using regression model.

Find out explanations for this relationship (if any)

1.3. Hypothesis of the study

The empirical test for the case study on manufacturing companies on HOSE (Ho Chi Minh

Stock Exchange) will be conducted to identify whether foreign ownership has a positive or

negative effect on those observations’ profitability. In literature review part, the theoretical

researches will be explained, stating out the advantages of foreign ownership which other

studies have explained and got a deep analysis on. Besides, the quantitative testing in some

studies is also examined again. Although from the vast source of international and

domestic studies on this linkage the testing results have a conflict on this relationship,

there is only one hypothesis focused:

Hypothesis: Foreign ownership has the positive effect on manufacturing listed

corporations’ profitability on HOSE.

1.4. The scope of the study

The research sample of the case study includes 41 firms with foreign ownership at least

5% of total common shares selected from 100 manufacturing listed companies on HOSE,

divided into 19 sub categories. Data from stock websites in the period of time from 2010 to

2013 will be collected from the stock websites for estimating the variables: Age, Size,

Foreign Ownership and Leverage in the Ordinary Least Squares (OLS) model. The final

result will help to find out if the impact of foreign ownership on profitability of those

observed corporations is positive or negative.

1.5. The structure of the study

The structure of the study will be arranged as follow.

Chapter one is the Introduction with sub categories including the significance, objective

and hypothesis, scope, structure and limitation of the study.

Chapter two is the Literature Review with the definition of foreign ownership, the

overview and analysis on effects of foreign ownership on the host corporations based on

previous researches and the literature base of the testing model for case study.

Chapter three is Methodology with research model, research method, and research sample

and data collection.

The final chapter is the analysis of results of the case study test.

1.6. Limitation of the study

Due to the lack of data for each variable, all 100 manufacturing companies could not be

selected, but only 41 companies with most enough data. Thus, with the expected

hypothesis, the result from the test of the case study in these manufacturing companies

conducted cannot be perfectly representative for all Vietnamese corporations.

CHAPTER 2

LITERATURE REVIEW

2.1. Concept of Foreign Ownership

The capital flows into one particular country is usually taken into two kind of investment:

foreign direct investment (FDI) and foreign portfolio investment (FPI) (Jun Wu et al, 2012;

Itay and Razin, 2005; Evans, 2002). Thus, to describe fully about these characteristics of

foreign ownership in a company, it will be discussed based on both kinds of investment.

In form of foreign portfolio investment, ownership may refer to foreign portfolio investors

who purchase securities (stocks and bonds) for profit on their investment (Jun Wu et al,

2012). Portfolio investment, or indirect investment, was also explained in article 3 of the

Vietnamese Law on Investment, 2005: “Indirect investment is a form of investment made

through the purchase of shares, stocks, bonds, other valuable papers, securities investment

fund, and through other intermediary financial rulings by which the investor takes no

direct part in the management of investment operation” (cited from Nguyen (2007)). There

are usually two main types of investors including in this kind of investment, those are:

institutional investors and private foreign or retail investors. According to Samak, N &

Helmy, O (2000), institutional investors, such as mutual funds, pension funds, and

insurance companies, control money for individuals and firms. These investors are

discussed to be “particularly important for emerging markets, and offer fundamental

advantages and demand high standards of management”. On the other hand, private

foreign investors or retail investors, have a tendency to “invest directly and more