THE EFFECTS OF FOREIGN OWNERSHIP AND SIZE ON FIRM PERFORMANCE: EVIDENCE FROM PANEL DATA ANALYSIS OF ISE LISTED FIRMS

The role of foreign direct investment (FDI) in economic development and its contribution to the performance of domestic firms has motivated researchers to initiate studies for analyzing the impact of FDI on economic performance. The literature on the role of FDI mainly focuses on the production, employment, economic growth, balance of payments, knowledge spillovers and general welfare of the recipient country. However, economic growth is triggered by firms that are able to transform these positive impacts of FDI into improved firm performance. Nevertheless, the impact of FDI on firm performance has not been investigated at firm level widely. The aim of this paper is to examine whether FDI and investment incentives can be justified on the basis of academic research regarding their firm performance effect. A panel data of non-financial firms listed at Istanbul Stock Exchange (ISE) for the period 1998-2007 is used to model firm performance in terms of return on assets and sales as a dynamic process. This paper contributes to the existing literature by providing firm level empirical evidence on the impact of investment incentives and foreign ownership together with size on firm performance. Our results suggest that large and foreign ISE listed firms perform better than domestic firms. Moreover, investment incentives, as both determinants of FDI decisions and as their stand alone positive impact on firm performance, can create the economic environment in which FDI inflows can be transformed into positive returns both for recipients and investors.