Investigating the Foreign-Ownership Influence on the Growth of Firms in Southern African Development Community

The study investigates the influence of foreign ownership on firm growth in the Southern African Development Community (SADC). Firm-level data from World Bank Enterprise Surveys for the years 2010–2022 and logistic regression are used to obtain results. Based on the findings, there is a positive influence of foreign ownership on firm growth in the SADC region. These results hold for both measures of firm growth, namely, growth in employment and growth in sales. This then implies that holding all else equal, foreign-owned firms in SADC are more likely to experience growth compared to locally-owned firms. Therefore, the creation of an enabling policy environment that stimulates growth, particularly for locally-owned firms, such as the development of policy frameworks that are supportive of innovation, competitiveness, and entrepreneurship, is imperative. Such frameworks will facilitate the growth aspirations of locally-owned firms operating in the SADC region.

Introduction

Firms, especially small and medium enterprises, are an emerging private sector in SADC and many other developing and less developed countries. In SADC, however, many of the locally-owned firms are experiencing negative growth or stagnation despite their dominant presence. On the other hand, most foreign-owned businesses in the area, which are fewer, do seem to be growing. Using firm-level data from World Bank Enterprise Surveys (WBES), Fig. 1 gives a clearer picture of firm growth by ownership as experienced by the firms located in the SADC countries. Among the total 6163 surveyed firms, 5427 are locally owned, while 736 are foreign-owned. The change in the firm sales is used to proxy for the firm growth, as done in Alhassanet al. (2016).

Fig. 1. Ownership (left) and growth (right) of firms in SADC. Source: Authors own computations using WBES data.

Furthermore, compared to other Sub-Saharan African regions, such as the East African Community (EAC) and the Economic Community of West African States (ECOWAS), SADC stands out as the only region where a noteworthy proportion of locally-owned firms exhibit negative growth. This observation is clearly depicted in Fig. 2.

Fig. 2. Firm ownership and growth in SADC, EAC, and ECOWAS. Source: Authors own computations using WBES data.

The data presented in Fig. 2 demonstrates that foreign-owned firms in all regions show a significant inclination toward positive growth. However, although the majority of locally-owned firms, more than 50%, experience positive growth in all regions, that is not the case in SADC, where more than half of the locally-owned firms experience negative growth. This disparity in ownership and firm growth patterns between SADC and other Sub-Saharan African regions highlights the need for this study to comprehensively examine the influence of foreign ownership on firm growth in SADC.

Given that firms constitute the private sector, they should play a pivotal role in driving economic growth, fostering innovation, and generating employment opportunities (see, for example, Beck, 2013; Fowowe, 2017). Therefore, negative growth or stagnation in the growth of the majority of locally-owned firms, which also constitute the majority of total firms in SADC, may adversely impact the private sector, thereby reducing job creation prospects, hampering innovation, and impeding overall economic development. This presents a huge concern that necessitates immediate attention and strategic intervention. For a meaningful intervention to happen, empirical research is needed for the development and implementation of informed intervention policies. Therefore, the purpose of the study is to investigate the influence of foreign ownership on firm growth in SADC. Moreover, to the best knowledge of the authors, no study has been conducted in SADC to investigate the influence of foreign ownership on firm growth. The rest of the study is organized as follows: Section 2 reviews the literature, Section 3 discusses the methodology used for data analysis, Section 4 presents and analyses results, and Section 5 concludes and provides policy recommendations together with the limitations of the study.

Literature Review

Theoretical Literature

Agency theory states that there is a principal-agent connection in which managers, acting as the agents, receive decision-making authority from shareholders, acting as the principals’ representatives in running the business. Agency difficulties can arise, though, when managers behave more in their self-interest than in the best interests of shareholders. To tackle these agency issues, oversight and monitoring systems are essential. According to Grossman and Hart (1980) and Shleifer and Vishny (1986), significant outside shareholders keep a close eye on managers and may be able to lower agency costs by resolving free-rider issues (Choi & Park, 2019).

In a similar vein, outside directors are thought to monitor managerial conduct more successfully because of their reputational capital and fear of shareholder litigation. According to Mishra and Ratti (2011), foreign investors are more likely to be effective monitors because they demand greater corporate governance requirements than local institutional investors do. Consequently, it is anticipated that greater foreign ownership will result in lower agency costs, suggesting that foreign investors are essential in keeping an eye on management and reining in shareholders to lessen agency costs, hence enhancing long-term firm growth (Choi & Park, 2019).

Also, resource-based verdicts provide significant contributions to the most frequently used and well-liked theoretical framework for comprehending firm growth. Based on this theory, resource-based theory refers to the strategy of leveraging resources that satisfy the VRIN (valuable, rare, inimitable, and non-substitutable) criteria to gain a competitive advantage and to ensure firm growth. Moreover, when a company’s skills provide it with a competitive edge, it will increase market share, offer new goods, or provide value to customers (Hafizet al., 2022).

Put differently by Aguilera (2003), access to resources gives emerging markets a competitive edge, which is the consequence of having an ownership structure and using policies effectively. The argument in the literature is that there is resource inequality between different ownership types, hence differing impacts on a firm’s growth. Foreign shareholders mostly prioritize short-term investments, liquidity, and maximizing the market value of the stock despite having strong resources and governance. These foreign owners, according to Nguyenet al. (2020), then help firms access new markets, supplement capital, manage human resources, and reduce production costs. This makes it easier for the firms to access technological, managerial, and financial resources. Therefore, resource-based theory reinforces the positive relationship between foreign ownership and a firm’s growth.

Additionally, as per the internalization theory, assets unique to the parent company may be transferred to its affiliates. Furthermore, affiliates of multinational enterprises (MNEs) benefit from cross-national exchanges and are integrated into intrafirm knowledge exchange networks (Gupta & Govindarajan, 2000). Foreign-owned affiliates have an advantage when it comes to creating and introducing innovative products and processes because they can learn from the experiences of the parent company and MNE subsidiaries in other nations. Furthermore, because they can draw from the experiences of the MNE gained in other nations with comparable products and technologies, foreign-owned firms may be better able to introduce new products into the market and enjoy higher sales growth from new products, which in turn translates into higher growth in employment from product innovation (Dachs & Peters, 2014).

Moreover, internalization theory states that firm growth is also facilitated by foreign ownership for several other reasons. It is worth mentioning that foreign-owned firms are likely to be multinationals, which relatively makes them bigger firms, and for this reason face advantages like risk diversification, plenty of internal funds for innovation, and simpler access to external finance as stated by Dachs and Peters (2014). It is difficult for smaller firms to attain the same level of specialization and division of labor in research and development as these firms can. Furthermore, having a sizable amount of market power, which is made possible by foreign ownership, raises the possibility of producing internationally. As a component of a global organization, foreign-owned affiliates inherit this market power. Market power disparities affect how businesses set prices, which affects both everyday business operations and innovative projects.

Empirical Literature

Yudaevaet al. (2003) examine the productivity of Russian businesses in relation to the variations between those that are owned entirely by Russians and those that are owned by foreigners to some extent. Their findings emerging from the firm-level panel data suggest that foreign-owned firms are more productive relative to those that are domestically owned. Becket al. (2005) examine the relationship between firm size, firm growth, and perceived growth barriers involving finance, law, and corruption. Their study uses size-stratified firm-level survey data covering over 4255 firms in 54 countries. They find that firms in faster-growing countries have significantly higher growth rates and that the extent to which financial and legal underdevelopment and corruption constrain a firm’s growth depends very much on a firm’s size.

A study by Choi and Park (2019) looks at dividend payments and long-term company growth in relation to the relationship between foreign ownership and firm value. The dynamic panel generalized method of moments estimation method is utilized and data is obtained from the Korea Investors Service–Value database spanning the years 2001 to 2017. The results show that a higher likelihood of dividend payments is connected with a company’s increased profitability as a result of lower agency costs. Yang and Meyer (2019) examined the factors influencing firm growth in China using a nationally representative firm-level panel dataset for the years 2001–2007 amd found that younger foreign-owned firms outperform their older counterparts in terms of growth. The findings support the notion that younger firms grow more quickly than older ones because age plays a significant role in firm growth through the acquisition of efficiency.

Yang and Tsou (2020) conducted a study to analyze the various factors that influence firm growth in China using panel data from China’s Annual Survey of Industrial Firms conducted by the National Bureau of Statistics. The study focused on a specific time frame from 2001 to 2007. The findings indicated that foreign-owned enterprises generally exhibited superior employment growth compared to local firms. Dachs and Peters (2014) conducted a study that investigated the relationship between innovation and growth in firms, both foreign-owned and domestically owned. By utilizing a model developed by Harrisonet al. (2008) and analyzing data from the Community Innovation Survey across 16 countries, this study uncovered significant disparities between these two categories of firms. The analysis demonstrated that foreign-owned firms experienced greater job losses due to general productivity increases and process innovation. In contrast, domestically owned firms realized employment creation resulting from product innovation.

Furthermore, Masenyetse and Manamathela (2023) examine the critical factors influencing firm growth in three Southern African nations: Namibia, Lesotho, and Eswatini using WBES data for the surveys conducted in the years 2014 and 2016, specifically the Namibian survey from 2014 and the surveys from Eswatini and Lesotho in 2016. The purpose of their study was to ascertain whether exporting and the use of Information Communication Technology contribute to the growth of firms. The findings suggest that the growth of enterprises in these countries is positively influenced by export activity, as indicated by the coefficient of exporting, which is found to be positive and significant at the 1% level. These outcomes were obtained using non-parametric analysis and ordinary least squares.

Data and Methodology

Data Scope

The data used in this paper combines firm and country-level data from different sources. The firm-level data, which entails the firm characteristics, is sourced from the WBES database for the years 2010 to 2022. This was done to restrict the sample to the most recent survey in each country to enable the advantages and insights of obtaining results based on more recent information. As indicated in Table I, 6877 firms were surveyed in SADC. However, only 4527 were used as some firms were dropped due to missing information. Data on country-level variables that may influence the growth of firms comes from the World Development Indicators (WDI) and World Governance Indicators (WGI). The description of the variables, measurements, and data sources is provided in Table II.

Table I. Number of Firms Used by Country, Ownership, and Year of Survey

Countries	Number of firms	Positively growing	Negatively growing	Foreign-owned	Locally-owned	Year of survey
Angola	144	125	19	18	126	2010
Botswana	188	148	40	81	107	2010
Eswatini	85	63	22	3	82	2016
Lesotho	109	68	41	16	93	2016
Madagascar	265	122	143	34	231	2022
Malawi	277	177	100	52	225	2014
Mauritius	606	350	256	24	582	2020
Mozambique	411	261	150	98	313	2018
Namibia	190	102	88	12	178	2014
South Africa	1014	325	689	7	1007	2020
Tanzania	317	60	257	12	305	2013
Zambia	474	241	233	121	353	2019
Zimbabwe	447	143	304	35	412	2016

Table II. Variables Description, Measurement, and Data Sources

Variables	Description and measurement	Data sources
Dependent variables
Growth in sales	Difference between the sales value in the year of survey and the previous year. It takes on values 1 if the firm potrayed a positive increase by sales and 0 if the firm potrayed a negative increase.	WBES
Growth in number of permanent employees	Difference between the value of number of permanent employees in the year of survey and the previous year. It takes on values 1 if the firm potrayed a positive increase and 0 if the firm potrayed a negative increase.	WBES
Independent variables
Foreign-ownership	Dummy variable equals to 1 if 50% or more of the firm is owned by foreign organization and 0 otherwise.	WBES
Firm size	The size of the firm is a continuous variable measured as the number of permanent employees.	WBES
Access to finance	Based on the question: “To what degree is access to finance an obstacle to the current operations of this establishment?” Answers vary between 0 (no obstacle), 1 (minor obstacle), 2 (moderate obstacle), 3 (major obstacle) and 4 (very severe obstacle). An ordinal variable taking on values 0 (no obstacle), 1 (minor obstacle), 2 (moderate obstacle), 3 (major obstacle) and 4 (very severe obstacle) and arises from the the question: “To what degree is access to finance an obstacle to the current operations of this establishment?”.	WBES
Firm age	Age of the firms (in years).	WBES
Manager’s sex	A dummy variable that takes the value 1 if the manager of a firm is a female and 0 otherwise.	WBES
Export activity	A dummy variable that takes the value 1 if a firm exports and 0 otherwise.	WBES
GDP growth rate	Real GDP growth rate.	WDI
Inflation	Inflation rate measured as annual change in the GDP deflator.	WDI
Domestic credit to private sector	The ratio of domestic credit to the private sector to GDP.	WDI
Quality of institutions	Rule of law: Percentile rank.	WGI
Time dummy	Dummy taking on the values 1 to 8 based on the 8 different years in which the survey was conducted.	Own formation

Model Specification

In the literature, different variables have been used to proxy firm growth, including growth in sales, growth in number of permanent employees, total assets, market shares, and profits (see, for example, Becket al., 2005; Coad, 2007; Zhou & Wit, 2009; Masenyetse & Manamathela, 2023). This paper uses growth in the number of permanent employees to proxy firm growth. This is because employment is more consistent and stable across industries and time (Karlsson, 2021). Furthermore, the number of employees reflects how the internal process is organized and adapts to changes in activity, and employment is also not sensitive to inflation or currency exchange rates (Kimberley, 1976). For robustness check, this paper also employs sales growth as the measure of firm growth. Growth in a number of permanent employees is measured as the difference between the value of a number of permanent employees in the year of the survey and the previous year. It takes the value 1 if the firm grew positively and 0 if the firm experienced stagnant or negative growth. Growth in sales, on the other hand, is measured as the difference between the sales value in the year of survey and the previous year. It takes the value 1 if the firm grew positively and 0 if the firm experienced stagnant or negative growth.

Owing to the dichotomous nature of the dependent variable, the study employs logistic regression, and the general model is specified as follows:

where $Fir{m}_{GROWTH}$ is firm growth. The key independent variable, OWN, is foreign ownership that takes on the value 1 if the firm is foreign-owned and 0 if it is locally-owned. Variable FIRM is a vector containing firm-level characteristics that may affect firm growth, while COUNTRY is the vector containing country-level variables that may affect firm growth that is controlled for in this study. ${\text{μ}}_i$ is the error term, ${\beta }_0$ is the intercept, and ${\beta }_i$ ranging from 1 to 3 represents the coefficients of the respective firm-level characteristics and country-level characteristics on firm growth.

$$\begin{array}{rl}Fir{m}_{GROWTH}& ={\beta }_0+{\beta }_{1}OWN+{\beta }_{2}FIRM\\ & +{\beta }_{3}COUNTRY+{\text{μ}}_i\end{array}$$

Data Analysis and Results

Summary Statistics

Table III indicates that among the 4527 firms, approximately 48% experienced positive growth, while about 52% experienced negative growth in terms of sales change. However, when considering employment growth, only 36.5% of these firms demonstrated positive growth, and 63.5% experienced negative growth. This suggests that, according to both growth measures, the majority of firms within the SADC region experience negative growth. Furthermore, approximately 88% of the firms in the sample are locally-owned, while the remaining 12% are foreign-owned. The sample also comprises of both small and large firms since the largest firm in terms of employment boasts a workforce of 30,000 employees, whereas the smallest firm only employs a single permanent employee. The majority of these firms are led by male managers, accounting for 78% of the firms, while female-led firms make up the remaining 22%. In addition, 82% of the firms are not engaged in any exporting activities. Only around 18% of the firms are actively involved in exporting.

Table III. Summary Statistics

Variable names	Observation	Mean	Standard deviation	Minimum	Maximum
Dependent variables
Sales growth	4527	0.484	0.499	0	1
Employee growth	4527	0.365	0.481	0	1
Independent variables
Firm-level characteristics
Firm size	4527	71.556	509.725	1	30000
Foreign ownership	4527	0.114	0.318	0	1
Male	4527	0.776	0.417	0	1
Export activity	4527	0.178	0.383	0	1
Access to finance	4527	1.627	1.564	0	4
Firm age	4527	20.793	17.873	2	220
Country-level characteristics
Inflation	4527	7.221	6.486	0.5	32.3
Credit private sector	4527	46.211	35.702	7.8	92.2
GDP growth rate	4527	2.889	6.356	−6	14.5
Quality of institutions	4527	41.243	22.373	8	79

Access to finance as an obstacle to the current operations of firms, as perceived by the firms, ranges from a minimum rating of 0, indicating not an obstacle, to a maximum rating of 4, indicating a very severe obstacle. The average rating of 1.6 suggests that, on average, most firms in the sample perceive access to finance to be either a minor obstacle or a moderate obstacle. Lastly, the oldest firm within the sample is 220 years old, whereas the youngest firm has only been in existence for two years. Thus, the sample is comprised of both young and old firms.

The pairwise correlations between the regression variables are provided in Table IV. The correlation matrix indicates that all the variables can be used in regressions without significant concerns about multicollinearity. There is a positive correlation between foreign ownership and the two different measures of firm growth. This simple correlation analysis suggests a positive relationship between foreign ownership of firms and firm growth.

Table IV. Correlation Matrix

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)
(1) Employment growth	1	0.300*	0.050*	−0.019	0.061*	0.026	0.016	−0.100*	0.127*	0.155*	0.075*	−0.146*
(2) Sales growth		1	0.064*	−0.015	0.008	0.044*	0.011	−0.101*	0.172*	0.137*	0.036*	−0.100*
(3) Foreign-ownership			1	−0.075*	0.030*	0.059*	−0.003	−0.034*	0.092*	0.078*	−0.078*	−0.139*
(4) Access to finance				1	−0.032*	0.066*	0.007	−0.092*	0.253*	0.062*	−0.02	−0.217*
(5) Firm size					1	−0.029	0	0.073*	−0.005	−0.025	−0.012	−0.004
(6) Manager sex						1	0.048*	−0.005	0.174*	0.037*	−0.045*	−0.116*
(7) Export activity							1	0.014	0.097*	−0.094*	0.078*	0.079*
(8) Firm age								1	−0.132*	−0.150*	0.004	0.142*
(9) GDP growth rate									1	0.041*	0.385*	−0.228*
(10) Inflation										1	−0.186*	−0.510*
(11) Institution quality											1	0.199*
(12) Time dummy												1

Main Regression Results

Table V reports the logistic regression marginal effects of the relationship between foreign-ownedeship and firm growth as measured by growth in employment. The coefficient of foreign-owneship is positive and significant in all specifications. Specifically, in the full model specification, the probability of a foreign-owned firm realizing growth is about 0.04 higher than that of a locally-owned firm, ceteris paribus. Therefore, the results indicate that being a foreign-owned firm is linked with achieving positive firm growth in SADC. These results are consistent with the findings of Yang and Tsou (2020), who found that foreign-owned enterprises exhibit superior employment growth compared to local firms, and Pasali and Chaudhary (2020), who found that a 1% increase in foreign shares leads to a 0.9% point increase in the number of full-time employees.

Table V. Foreign-Ownership and Employment Growth

Variables	(1)	(2)	(3)
Foreign-ownership	0.0976***	0.0865***	0.0444*
	(0.0234)	(0.0234)	(0.0236)
Access to finance		−0.0042	−0.0270***
		(0.0054)	(0.0056)
Manager’s sex		0.0498***	0.0158
		(0.0178)	(0.0178)
Export activity		0.0159	0.0100
		(0.0192)	(0.0189)
Firm age		−0.0030***	−0.0020***
		(0.0004)	(0.0004)
GDP growth rate			0.0139***
			(0.0016)
Inflation			0.0096***
			(0.0014)
Credit to private sector			0.0007
			(0.0004)
Quality of institutions			−0.0003
			(0.0006)
Time dummy			−0.0006
			(0.0049)
Observations	4,527	4,527	4,527
Pseudo R2	0.1204	0.1003	0.1402

Access to finance has a negative relationship with firm growth; however, the relationship is only significant when macro variables are controlled. That is, the more access to finance becomes a constraint to the operations of a firm, the lower the likelihood of the firm growing. Firms facing difficulties in obtaining finance encounter challenges in acquiring capital for essential investments. This constraint hampers their capacity to innovate and pursue growth opportunities. Limited access to finance can also result in operational inefficiencies, which can further impede growth and negatively affect market share and overall performance (Southern African Development Community Secretariat, 2016). Whether the firm is exporting or not does not influence firm growth in SADC. Masenyetse and Manamathela (2023), on the other hand, find that the growth of enterprises in Namibia, Lesotho, and Eswatini is positively influenced by export activity.

The sex of a manager is important in influencing firm growth only when we control for firm-level of variables. When controlling for the country-level heterogeneity, it no longer plays an important role in influencing firm growth. Older firms have a lower likelihood of realizing positive growth compared to younger firms. Yang and Meyer (2019) also found that younger firms tend to grow more rapidly than older ones due to their ability to acquire efficiency. Considering country-level variables, the quality of institutions does not matter for firm growth in SADC. Krasniqi and Branch (2018) found mixed results when using different institutional variables. Some institutional variables were important in influencing firm growth, while others were not. Furthermore, the volume of credit to the private sector does not matter for firm growth, while, as expected, a higher GDP growth rate drives positive firm growth. Becket al. (2005) also found that firms in faster growing economies have higher growth rates. Contrary to expectations, inflationary periods are associated with positive firm growth. However, Blakley and Sti (1989) posit that, although improbable, conditions under which inflation may be beneficial to firm growth do exist.

Robustness Check

Table VI reports the logistic regression marginal effects results of the relationship between foreign-owneship and firm growth as measured by growth in sales. Like in the previous results, the coefficient of foreign-owneship is positive and significant in all specifications. Therefore, foreign-owned firms are more associated with positive growth than locally-owned firms in SADC, even when a different measure of firm growth, growth in sales, is used. This finding aligns with previous studies conducted by Yudaevaet al. (2003) and Choi and Park (2019), who found that foreign-owned firms tend to be more productive than domestically-owned firms. In line with resource-based and agency theories, this could be attributed to the fact that foreign-owned firms have better access to critical resources such as capital, advanced technology, and skilled management. These resources enhance their productivity and enable them to expand their operations and sales. Additionally, their global market knowledge and extensive networks facilitate the effective navigation of local challenges and the exploitation of growth opportunities (Ndofiepi, 2024).

Table VI. Foreign-Ownership and Sales Growth

Variables	(1)	(2)	(3)
Foreign-ownership	0.0740***	0.0660***	0.0305*
	(0.0218)	(0.0220)	(0.0223)
Access to finance		−0.0036	−0.0231***
		(0.0052)	(0.0055)
Manager’s gender		0.0264	0.0053
		(0.0173)	(0.0172)
Export activity		0.0230	0.0283
		(0.1840)	(0.0181)
Firm age		−0.0030***	−0.0020***
		(0.0005)	(0.0004)
Firm size		0.0002	0.0001
		(0.0002)	(0.0002)
GDP growth rate			0.0052***
			(0.0015)
Inflation			0.0083***
			(0.0012)
Credit to private sector			−0.0002
			(0.0004)
Quality of institutions			0.0020***
			(0.0006)
Time dummy			−0.0178***
			(0.0047)
Observations	4,527	4,527	4,527
Pseudo R2	0.1104	0.1063	0.1047

Conclusion

The purpose of the study was to investigate the influence of foreign ownership on firm growth in SADC. Based on the findings, there is a positive influence of foreign ownership on firm growth in the SADC region. These results hold for both measures of firm growth, namely, growth in employment and growth in sales. This then implies that holding all else equal, foreign-owned firms in SADC are more likely to experience growth compared to locally-owned firms. Therefore, the creation of an enabling policy environment that stimulates growth, in particular for locally-owned firms, such as the development of policy frameworks that are supportive of innovation, competitiveness, and entrepreneurship, is imperative. Such frameworks will facilitate the growth aspirations of locally-owned firms operating in the SADC region.

Investments in capacity building are also equally crucial. Allocating resources towards education, skills training, technology transfer programs, and improved access to finance, especially for locally-owned firms, will enhance the capabilities and competitiveness of firms and, in turn, also make a significant contribution to overall economic growth. Encouraging partnerships and collaborations between local and foreign-owned firms is also of paramount importance. These partnerships facilitate knowledge exchange, technology transfer, and the sharing of best practices, ultimately driving competitiveness and growth. Therefore, the locally-owned firms would be in a position to compete and catch up with foreign-owned firms. While this study has provided valuable insights into the impact of foreign ownership on firm growth in the SADC region, it is important to acknowledge certain limitations that may have possibly influenced the findings. One significant limitation is the lack of control for other factors, such as managers’ experience and managers’ education level, owing to a lack of data that could potentially influence firm growth. Moreover, the study also focused solely on the impact of foreign ownership without considering specific industry dynamics or regional variations within the SADC region.