Foreign Ownership, Listed Status and Financial System in East Asia

1. 日本経済学会2009年春期大会 • 6, June, 2009 Foreign Ownership, Listed Status and Financial System in East Asia Evidence from Thailand and Malaysia Fumiharu Mieno, Kobe Universityfmieno@kobe-u.ac.jpin cooperation with JBIC Institute Paper is available from http://www2.kobe-u.ac.jp/~fmieno/main/22Report.htm

2. 1.Motivation Questions on the Conventional Arguments • Overreliance on Debt Finance Claessens et.al. (1998) and many - Debt financing really excessive?NO, debt financing have been never active in East Asia - Average debt ratio is generally lower than in Industrialized countries

3. 1. Motivation • Weak Corporate Governance and Immature Capital Market Claessens et.al (2000), Johnson et.al.(2000), and many • Expropriation of Minority Shareholders, Immature Capital Market • Focal point: Minority Shareholder’s Rights • Possible Critics • CG really mattered in the process of recovery? • Investors Right vs. Firm Participation in Capital Market. • Does the discussions really capture the characteristics of production sectors in real economy? such as, • the role of foreign capitals • firms’ non-listed tendency

4. 2. Research Focus • FDI and Corporate Finance (F. System) • Presence and Distribution of Foreign Capital in Southeast Asia • FDI and • Capital Market - attitude for going pubic (Listed) • Financial Intermediation – bank borrowing • Internal Market – non bank debt • Examination on the Distribution of Firms • Foreign Share as a Determinant of the Capital Structure

5. 3. Literatures & Evidences

6. 3. Literatures & Evidences FDI-led Industrialization and Firms’ Fundraisings(in Japanese academics) • Teranishi (1991) • Asymmetric Information & Failure on Long-term fund market • Okuda (2001) • Asymmetric Information matters in FDI-led Industrialization? • Mieno (2006b) • Characteristics of Credit Channel of Foreign Firms FDI and Financial System in Recent Literatures (in Mainstream Journals) • Daude and Fratzscher (JIE 2008): “Pecking order of cross-border investment” • Antras, Desai and Foley (NBER WP 2007) “Multinational Firms, FDI Flows and Imperfect Capital Markets”

7. 4. Approach • Collecting Financial Statements from Company Registration Offices of the Governments - instead of Stock Exchanges • Picturing Firm Distribution Map Classified by Foreign Ownership and Listed Status - to Find the Presence of FDI Firms • Searching Determinants of Capital Structure • Focusing on Foreign Share, Listed Status • Based on Agency Cost & Pecking Order Hypotheses

8. 5. Data Collection • Company Profile and Top 5-10 Shareholder for TOP 1300(T),1500(M) firms • Financial Statements for top 500(T) 800(M) firms for 2000-04 • Data Source Non Listed Firms • Thailand: Company Registration Office, Ministry of Commerce • Malaysia: Company Registration Office, Kuala Lumpur Capital & Negri Sembilan State • Collected through Local Consultant Companies. Listed Firms • OSIRIS DB by Bureau van Dijk Ltd.,

9. 6. Firm Distribution (Thailand) • Big Presence of Non-listed Firms in the Large Firms’ Layer: 66% of Top 400 • Large Presence of Foreign Capital：52.3% of Top 400 • Most of the firms with foreign share at more than 10% are rarely listed to the market Foreign Share & Definition: <10%: Fin. Investment <50%: Joint venture type 1 <95%: Joint venture type2 >95%: Subsidiary

10. 6. Firm Distribution (Malaysia) • Moderate Presence of Non-listed Firms in the Large Firms’ Layer: 26% of Top 600 • Large Presence of Foreign Capital：21.6% of Top 600 • Most of the firms with Foreign share are in forms of subsidiaries. Joint Venture case is Rare Summery of Thailand & Malaysia • Revisiting Corporate Governance Argument: - Investors’ Right v.s. Firms Participation • Estranged Relation between the Securities Market and Foreign Capitals

11. Thailand: • Japanese is the largest in number and occupies the half of the all foreign firms, following the U.S. and Singapore • Joint venture case are around half in number in most nationalities (except for Malaysia, Korea) • Malaysia: • Japanese and Singaporean are the largest in number, following EU.

12. Determinants of Capital Structure Methodology • Estimation Based on Agency Cost Approach Dependent Variables • Debt Ratio = Debt / Total Assets • Bank Borrowing Ratio = Bank Bor./ T.A. • Non-Bank Debt = (Debt – Bank Bor.) / T.A.

13. Determinants of Capital Structure Independent Variables Asset = T.A.(+) ; Cash= ROA as proxy (+,-); Risk = Standard Deviation of ROAs (-); NDT= Non-Debt Tax Shield (-); Ind = Manufacturing Sector Dummy - with ‘Foreign Share’ related variables as liner and square correlations (U shape) (D) • and ‘Listed Dummy’ (LIST) Estimation Method: OLS (Random Effect)

14. Determinants of Capital Structure (cont.) Descriptive Observation • Debt Ratio is low, particularly in Mal. • The role of financial intermediation (i.e. bank bor.) is very limited. • Negative correlation between foreign ownership and debt? • Positive correlation between foreign ownership and self financing?

15. Thailand Listed Status • Positive for Debt, Bank Borrowing • Negative for Non Bank Borrowing Foreign Share • U shaped Bank Borrowing • Adv. U shaped Non Bank Borrowing • Neutral for Debt Ratio

16. Determinants of Capital Structure (cont.) Thai Case

17. Determinants of Capital Structure (cont.)

18. Determinants of Capital Structure (cont.) Suggestion from the observation - Thailand • Substitution of ‘informal’ debt to ‘formal’ one in listed firms • Different Credit Channels between Joint Ventures and Subsidiaries? • CG problem in Joint Ventures?

19. Malaysia Listed Status • Positive for Debt, Bank Borrowing & Non Bank Debt. Foreign Share • Monotonous falling trend in Debt, Bank Borrowings & Non Bank Debt

20. Determinants of Capital Structure (cont.) Malaysian Case

21. Determinants of Capital Structure (cont.)

22. Determinants of Capital Structure (cont.) Suggestion from Observation – Malaysia • Relatively Active Debt-financing in Listed Firms • High Reliance on Self-financing in Foreign Firms

23. Discussion and Conclusion • There are tick layers of non-listed firms consisting both of domestic and FDI firms. • Debt financing is generally inactive, and many firms depend mostly on self-financing and internal market. • Listed status seems to be negatively associated with foreign ownership. • In general, debt financing is negatively correlated to foreign ownership. • Above two facts suggest that the foreign capital-led growth process of East Asia is related to the delayed development of the financial system both in capital market and debt financing.

24. Discussion and Conclusion Policy Implication • For the capital market development, the consideration to the incentive for firms’ participation in organized securities market is essential, in addition to that to minority shareholders right, particularly in relation to the foreign ownership. • The view of balanced development of the financial system, instead of the shift from financial intermediation to capital market, is necessary. • For designing the balanced development, the nature of complementarity, instead of substitutivity between financial intermediation and capital market should be made used of.