Foreign Capital and Local Firms: The Effect of Foreign Ownership and Management on Corporate Performance

Despite the political sensitivity of foreign capital, existing work on the effect of foreign capital at the firm level is slim. This paper examines the effect of foreign equity ownership and management on firm performance using a panel of Korean firms for the period of 1993-2007 when foreign capital inflows increased dramatically. Empirical results show that foreign equity ownership positively affects firm performance, countering or complementing the negative or insignificant influence of local institutions such as family, institutional investors or business groups. Direct foreign management participation, especially foreign executives or management teams, has additional positive impact on local firms. Temporally market liberalization accelerated the positive impact of foreign equity investors. These results suggest that foreign ownership and management can complement weak indigenous institutional infrastructure, similar to the role afforded to business groups by Khanna and Palepu (2000).