Institutional Structures and the Prevalence of Foreign Ownership of Firms: Empirical Evidence From Africa

Institutional Structures and the Prevalence of Foreign Ownership of Firms: Empirical Evidence From Africa

Otuo Serebour Agyemang (University of Cape Coast, Ghana)
DOI: 10.4018/978-1-5225-3247-7.ch024

Abstract

This chapter examines how country-level institutional structures influence the prevalence of foreign ownership of firms in Africa. It reinforces the new institutional economics perspective by empirically highlighting that institutional structures influence the prevalence of foreign ownership of companies in an economy. Using archival data from 39 African economies, the authors found that there is a significant positive association between regulatory quality and foreign ownership prevalence. Also, foreign ownership is prevalent in African countries that are politically stable and embrace rule of law. However, the authors found that countries with high voice and accountability structures are associated with low foreign ownership prevalence.
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Introduction

At the onset of developing, it is anticipated that the prevalence of foreign ownership of companies would become one of the significant sources of growth and development in developing economies. Firms with a higher share of foreign ownership should be more efficient than companies with no or small foreign stake (Blomstrom & Sjoholm, 1999). Foreign investments are anticipated to take the shape of transfer of new technologies and ideas, which eventually can be emulated by local corporate organisations (Naciri, 2008; Yudaeva et al., 2003). An opportunity to emulate Western style of managerialism is also a major reason for luring foreign investors into developing countries and economies in transition (Yudaeva et al., 2003). The prevalence of foreign ownership could possibly renew shareholders’ meetings, which will eventually bring about a change in attitudes of management toward shareholders (Bien et al., 2008). However, in an incrementally globalised economy, competition is fierce and country-level institutional structures can make an unambiguous difference, by influencing the way and manner in which domestic corporate organisations are perceived by foreign investors (Naciri, 2008; Jalilian et al., 2003; Rodrik, 2000; Campos et al., 1999). National institutions, which include governance structures and practices based on international norms and standards would enable economies particularly, developing economies to post-modernize their corporate sector, which could possibly increase the prevalence of foreign ownership in their economies (Altomonte, 2000; Morisset, 2000; North, 1991).

A plethora of studies have examined the preferences of institutional investors and how economic factors tend to influence these preferences (Uhlenbruck et al., 2006; Kirkpatrick et al., 2006; Habib & Zurawicki, 2002). However, foreigners tend to invest less money in corporate organisations that reside in economies that are characterised by weak institutional structures, weak investor protection and flawed accountability system (Kirkpatrick et al., 2006). This implies that foreign investors invest in companies that are resided in economies, characterised by strong institutional structures, which can help ensure transparency, accountability, information symmetries, among others. Foreign investors shy away from firms located in economies with unsound institutional structures, in that they are more likely to incur huge costs in relation to their information and monitoring costs (Wei, 2000; Shleifer & Vishny, 1993).

This chapter is concerned with how country-level institutional structures influence the prevalence of foreign ownership instead of examining how economic factors influence the prevalence of foreign ownership, given that disparities across economies in economic circumstances offer only a fractional explanation of the locational choices of foreign investors and that the effectiveness and efficiency of an economy’s institutional structures could have a considerable influence on their choices (see Uhlenbruck et al., 2006: Kirkpatrick et al., 2006; Habib & Zurawicki, 2002). Without a doubt, this chapter offers insight into how institutional structures influence the holdings of foreign investors in African countries. The objective therefore, of this paper, is to examine how country-level institutional structures influence the prevalence of foreign ownership in African economies.

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