%e? 5 11q1
POLICY RESEARCH WORKING PAPER   2450
Which Firms Do                                                     Growth induces foreign
investment, which tends to
Foreigners  Buy?                                                   focus on high-value-added
sectors, on larger and more
Evidence from   the Republic of Korea                              profitable firms, on firms with
low debt, and on firms that
export a large share of
Caroline Freund                                                    output.
Simeon Djankov
The World Bank
Financial Sector Strategy and Policy Department
Financial Economics Unit
September 2000



[i-icy RFSFAXRC1-H WORKING PAPER 2450
Summary findings
Using data on mergers and acquisitions involving Korean             This suggests that consolidation is a two-stage process:
firms, Freund and Djankov identify which sectors and             Firms consolidatc first domestically, then intcrnationally.
firms attracted foreign investment after the liberalization         The authors also find that foreign investment is
of investment activity at the end of 1997.                        focused on high-value-added sectors, on larger and more
They find that domestic acquisitions are similar to            profitable firms, on firms with low debt, and on firms
foreign acquisitions by sector (of both the target and the       that export a large share of output. Their results suggest
acquiring firm), but that international transactions are         that growth induces foreign investment.
larger than Korean transactions.
This paper-a product of the Financial Economics Unit, Financial Sector Strategy and Policy Department-is part of a larger
effort in the department to study the effect of financial liberalization. Copies of the paper are available free from the World
Bank, 1818 H Street NW, Washington, DC 20433. Please contactRose Vo, room MC9-626, telephone 202-473-3722, fax
202-522-2031, email address hvolc,worldbank.org. Policy Research Working Papers are also posted on the Web at
www.worldbank.org/research/workingpapers. Simeon Djankov maybe contacted at sdjankovicbworldbank.org. September
2000. (25 pages)
The Policy Research W/orking Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about
developmient issues. An objective of the series is toget the findings out quickly, even if the presentations are less than fully polished. The
papers carry the names of the authors and shouild be cited accordingly. The findings, interpretations, and con-lusions expressed in this
paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the
countries they represent.
Produced by the Policy Research Dissemination Center



Which Firms Do Foreigners Buy?
Evidence from Korea
Caroline FReund             Simeon Djankov*
* Federal Reserve Board, World Bank and CEPR, respectively. We axe grateful to
Stijn Claessens, Joshua Coval, Simon Evenett, Sung Kwack, Guy Stevens, Bernard Yeung,
Kei-Mu Yi and participants at conferences at the University of Michigan and the Federal
Reserve Bank of Chicago. The views in this paper are solely the responsibility of the
authors and should not be interpreted as reflecting the views of the Board of Governors
of the Federal Reserve System or the World Bank, or any other persons associated with
these institutions. Correspondence: Caroline.L.Freund@frb.gov.






1. Introduction
Foreign ownership has been found to be correlated with industry productivity in many developing
and emerging markets.' This correlation has been interpreted as implying that openness to foreign
investment is an important growth-promoting policy. It is unclear, however, whether foreign own-
ership leads to improved performance or whether high-growth industries and better firms simply
attract more foreign investment. If foreign ownership promotes growth then the optimal policy is
to subsidize foreign investment. In contrast, if foreign ownership is a result of growth then there is
no role for tax incentives or subsidies to foreign investors.
Foreign ownership might improve performance if foreigners transfer better business practices or
technology to the local firm. If these spill over to other local firms then foreign ownership might
enhance sectoral growth as well. Alternatively, increased foreign ownership might be a result of
industry or firm growth. Some sectors may naturally become multinational as they grow, in order
to take advantage of international markets and synergies. In addition, if domestic access to capital
is constrained then firms with high growth potential will attract relatively more foreign capital. In
these cases, while investment facilitates growth, the nationality of ownership is unimportant. This
does not imply that openness to foreign investment is irrelevant to growth, only that there is no
role for subsidies and tax holidays targeting foreign investors.
In this paper we study the pattern of foreign acquisitions in an emerging economy, Korea,
to examine what type of firms and industries attract foreign investment. If foreign investors have
different technology from local investors then we expect foreign investment to originate from and to
target industries where foreign firms have a comparative advantage. We examine all acquisitions of
'Blomstrom (1989) summarizes the literature on positive spillovers from FDI.
2



Korean firms in 1998 and 1999 to determine whether international transactions were concentrated
in different industries from domestic transactions. Surprisingly, we find that domestic acquisitions
in this period are very similar to foreign acquisitions by sector of both the target and the acquiring
firm. This suggests that the incentives that drive international acquisitions are similar to those
that drive domestic acquisitions. The main difference between domestic and foreign acquisitions
is the size of the transactions. The median reported foreign transaction value was over 65 percent
larger than the median reported domestic transaction. We also find that the industrial distribution
of foreign acquisitions in Korea mirrors the industrial distribution of multinational operations,
suggesting that certain industries may naturally be multinational. Overall, these results suggest
that internationalization is a form of consolidation, which is not very different from domestic
consolidation, but which occurs on a larger scale.
Second, using data on foreign ownership from 1998 and 1999 and firm characteristics from the
preceding year on nearly all firms listed on the Korea stock exchange (KSE), we examine which
sectors and firms have attracted foreign investment. Any correlation we observe between firm
characteristics and foreign ownership must be a result of foreign preferences because Korea only
opened to foreign investment at the end of 1997. We find that foreign investment in Korea is focused
on larger and more profitable firms, and on firms with relatively low debt ratios. Foreign investment
is also more likely when a greater share of firm output is exported. The evidence suggests that
foreign ownership gravitates towards the better firms.
While our analysis does not directly answer the question of how foreign ownership affects growth,
it does imply that foreigners invest in and acquire the better firms in high growth industries in
Korea. This means that internationalization in ownership is at least partly a result of firm and
industry growth. In addition, it implies that studies which attempt to measure the affect of foreign
3



ownership on industry and firm productivity suffer from identification problem because the high
growth industries and the better firms attract more foreign ownership.2
The paper is organized as follows. Section 2 examines the literature on foreign ownership
and growth, and discusses foreign direct investment in Korea in recent years. Section 3 presents
a theoretical framework explaining foreign acquisitions. Section 4 describes the data. Section 5
examines the theory empirically. Section 6 concludes.
2. Foreign Direct Investment and Growth
Theory suggests that technology diffusion through multinational companies might be an important
source of growth for developing countries.3 There is some empirical evidence that is consistent
with the technology transfer argument. Using industry data, Caves (1974) and Globerman (1979)
test whether the foreign share of employment contributes to labor productivity in a production
function framework. They find evidence of positive spillovers from foreign direct investment (FDI)
in Australia and Canada, respectively. Using industry data from Mexico, Blomstrom and Persson
(1983) and Blomstrom (1986) find evidence of higher productivity and higher productivity growth
in sectors with more FDI. Borensztein et. al. (1998) find evidence of positive spillovers from FDI
in a cross section of countries, provided countries have a minimum level of human capital.
These results, however, may be generated by reverse causality because FDI may be determined
by the level of growth of a sector or a country. Indeed, using firm level data, Haddad and Harrison
(1993) and Aitken and Harrison (1999) find no evidence of positive spillovers in Morocco and
2Aitken and Harrison (1999) argue a similar point. Using plant level data on productivity in Venezuela, they find
that foreign ownership is positively correlated with own-firm productivity, but not with productivity growth. They
interpret this as evidence that foreigners invest in more productive plants, though they cannot rule out that there
are own-firm positive level effects.
3Findlay (1978), Jovanovic and Rob (1989), Grossman and Helpman (1991).
4



Venezuela, respectively. This suggests that the earlier findings may be a result of high-growth
industries and countries attracting more foreign investment.
Rather than examining spillovers, we look at what type of firms and industries foreigners invest
in. Our data set provides a unique opportunity to evaluate what type of firm foreigners acquire
because Korea greatly limited foreign ownership until 1998. This means that any correlation we
find between foreign ownership in1998 and 1999 and firm characteristics in 1997 is not a result of
foreign ownership. We examine whether foreign investment results from firm- and sector-specific
growth.
2.1. Foreign Direct Investment in Korea
Until the financial crisis started in October 1997, the Korean corporate sector was virtually closed
to foreign investment. Individual foreigners could obtain only 5 percent of the outstanding shares
of a company, and overall, foreigners could hold a maximum of 20 percent. In December 1997, the
limit was raised to 50 percent for an individual investor, and 55 percent for foreigners collectively.
In May 1998, the limits on foreign ownership in most of the corporate sector were eliminated. In
addition, foreign investors can now buy up to a third of the company without approval from the
Board of Directors, i.e. hostile takeovers are permitted.
The new foreign investment regime led to a boom in FDI. Figure 1 plots the aggregates for 1994
to 1999, which show a large jump in the last three years.4 The three industries experiencing the
largest gains were paper, chemicals, and electronics (Table 1).
4In Korean won, FDI shows an even more rapid expansion in 1997 and 1998, as a result of the won's large
depreciation.
5



Figure 1: Foreign Direct Investnent in Korea
(billions of U.S. dollars)
16
14 -
12
10
8
6
4
2
0 
1994      1995       1996       1997       1998       1999
The changes in the legal limits to foreign ownership, combined with the large supply of company
shares following the financial crisis, makes the Korean sample an excellent choice to study the
investment patterns of foreigners. Within a very short period of time a number of companies
changed hands. This natural experiment allows us to test several hypotheses that we derive in the
next section.
3. Theoretical Framework
Existing theories of foreign direct investment highlight the importance of intangible firm-specific
assets and location in making the decision to choose FDI over other means of servicing a foreign
market.5 In general, two conditions should be satisfied if a firm is better off investing in the
country than exporting. (i) There is a locational advantage to operating abroad, perhaps because
of transport costs or tariffs. (ii) The investing firm has an advantage over host country firms,
for example, in technology, managerial skills, or brand name and marketing. FDI theory has
traditionally focused on greenfield investment, where the intangible asset is assumed to be the
5Markusen (1995) surveys the literature.
6



property of the parent.
In this paper we focus on a specific type of direct investment, foreign acquisitions, which are
likely to be undertaken for similar reasons to greenfield investment. In addition to location and
technology, foreign acquisitions may also be undertaken in order to gain access to assets held by a
host-country firm. We therefore incorporate the possibility of firm-specific assets that local firms
have and that foreign firms need in order to market their products effectively.
We model the decision to invest in a local firm, taking into consideration the effects on parent
sales as a result of firm-specific assets of the host country target firm, and the effect of parent-
specific assets. In evaluating the return on the investment, a firm will incorporate the expected
effect on own company and subsidiary profits when purchasing a company. A foreign firm will
acquire a large share of a domestic firm if the value of the acquisition is greater than its value to a
domestic company. We assume the investment can change the value of each firm (target and parent)
because of synergies resulting from the use of intangible assets. The net value of the investment is
the gain from acquisition above the cost of acquiring the firm at the market price. The net value is
the change in value of the host-country firm plus the change in the value of the home country firm
as a result of the investment. Acquiring a foreign firm is optimal if the following condition holds:
XAV;I + AVF > XAVD1 + AVD.                             (3.1)
where x is ownership share, AVF/ is the change in the value of the acquired firm given foreign
investment, AVF is the change in the value of the foreign parent firm, AVDI is the change in the
value of the acquired firm given domestic investment, and AVD is the change in the value of the
domestic parent firm given the investment. The left-hand side is the value of the acquisition to the
foreigner and the right-hand side is the value of the same acquisition to a domestic bidder.
Hence, for the foreign investor to succeed in acquiring the firm, she must offer at least as much
7



as the domestic investor. Equation (3.1) yields two hypotheses regarding foreign acquisitions. First,
foreign direct investment (FDI) is more likely if foreign acquisition boosts the local firm's profits
by more than a domestic acquisition would (AV;I - AVLI > 0). For example, the value of the
target firm will increase if the foreign investor transfers technology or managerial skills to the
domestic firm. This suggests that foreign investors will target firms in industries where foreigners
have better technology or skills. Hence, the industrial distribution of foreign acquisition targets
should be different from the industrial distribution of domestic acquisition targets.
Similarly, if acquisition helps the foreign firm's sales in the local market by more than it would
boost another domestic firm's sales, then foreign direct investment is more likely (AVF - AVD > 0).
That is, FDI in a host country firm may help the foreign parent's profits by improving access to
the market. In this case, the acquiring firm is likely to be from an industry that wants greater
access to the Korean market. This implies that foreign acquirers are likely to come from different
industries than their domestic counterparts.
Whether technology transfer or access to the Korean market is the purpose of investment is
difficult to distinguish empirically because parents and affiliates tend to be in the same industry.
Hence the first hypothesis is that if an intangible asset, be it technology transfer or access to the Ko-
rean market, is the main reason for investment then foreign acquisitions and domestic acquisitions
are likely to be in different industries.
Second, if domestic access to capital is constrained or domestic firms tend to be small then
foreign acquisition will be more likely in larger companies. If domestic firms are capital constrained
then the right hand side of equation (3.1) will be small when the transaction size is large, i.e.
there will be no domestic bidder. Similarly, if domestic firms are smaller than foreign firms, then
there will be fewer domestic bidders when the target firm is large. The second hypothesis therefore
s



stipulates that transaction size will be a key determinant of foreign investment.
4. Data
We first examine mergers and acquisitions in Korea (December 1997 to July 1999) to look for
consistency with the hypotheses derived above. Since the ownership limit to foreign investors was
raised to 50% in December 1997, the ownership data for 1998 and 1999 is particularly appropriate for
hypotheses testing. Data on mergers and acquisitions in Korea are from Securities Data Corporation
(2000). The data include the 4 digit SIC code of the target and the acquiring firm and detailed
information about the transaction. We supplement these data with data on 631 firms that were
listed on the Korea Stock Exchange in 1998.6
The firm-level financial data for 1997 are primarily from the Worldscope database. The World-
scope database covers publicly traded companies in 51 countries. Foreign investment is from the
Handbook of Listed Companies, Daewoo Securities (1998 and 1999). In cases where the World-
scope data were missing or incomplete, we collected additional company information from Wisenet
Korea.7 This internet server provides detailed financial information, including income statements
and balance sheets, for listed companies in Korea. We use 1997 financial data because this is what
investors observed at the time they made their investment. In addition, this means there is very
little possibility of an effect of foreign ownership on firm characteristics.
We also collect data on business group affiliation, as this is recognized in previous studies to
be an important feature of the Korean corporate sector (Claessens, Djankov, and Lang, 2000).
6fIn January 1998 760 firms were listed on the Korean Stock Exchange. Financial data for 28 firms which filed for
bankruptcy in 1998 were unavailable. Another 101 firms reported incomplete ownership or unconsolidated financial
data.
'The data were downloaded from their website: www.wsn.co.kr.
9



Information on company affiliation with the top 30 chaebol is provided by the Korean Fair Trade
Commission on an annual basis. We use group-affiliation data from the 1994-1997 lists of business
groups. This is because the 1998 list contained a number of ownership changes, which would have
biased our results. Several debt-ridden business groups were forced to sell bankrupt firms in 1997
and 1998, which were in some cases subsumed into larger business groups and/or taken over by
foreigners. A firm's openness to foreign investment is thus related to its membership at the time of
divestiture. The list of chaebol is fairly robust from 1994 to 1997, with the same chaebol occupying
the top 25 spots throughout the period. There was some variation among the bottom five chaebol,
with three chaebol leaving the list by 1996 or 1997. In the interest of comprehensiveness, we follow
all companies affiliated with the 33 chaebol that appear on the Korean Fair Trade Commission lists
in 1994-1997.
5. The Pattern of FDI
5.1. Mergers and Acquisitions
The theoretical framework suggests that if technology transfer or access to local distribution net-
works were important, then the industries of targets of foreign investment and the industries of
foreign acquiring firms and domestic acquiring firms should be different. Figures 2 and 3 show the
percentage of foreign and domestic transactions by target industry and parent industry, respec-
tively. In general foreign investors target firms in similar industries to Korean firms. The simple
correlation among 2-digit SIC industries is 0.84 and the rank correlation is 0.88. The industries of
the acquiring firms are also very similar, with a simple correlation of 0.91 and a rank correlation of
0.82. This suggests that to the extent that international synergies exist, they are broadly similar
to domestic synergies. Still, it is worth noting that some industries tend to attract somewhat more
10



foreign direct investment, such as chemicals and machinery; while others, such as primary metals
and petroleum tend to attract more domestic investors.
Flgure 2: The Indutrlal Breakdown of Takeover Targets
0.250-                                            _
0.200
0.150
ooso  | 1  =1rlCFalFn qnin  ninS1kl1    13  1~~~~~~~~~ Foo~nOfw
0.100
[0050
0000    *'FLn-
i~~~~~~~~~~~~~~~~~~- X
E E               2A.               H
!~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Figure 3: The Induirlal Breakdown of Parent Firns
0.300
0.1000
0.000                                      F
-Al   E   ~                 E     E
9    *E   5~~~~~~~~~~~~~
S
One major difference between international transactions and domestic transactions is their size.
Of the 73 domestic transactions for which information was available, the median transaction value
was $35 million. Of the 109 foreign acquisitions for which transaction data was available the median
value was $58 million. Foreigners behave similarly to domestic investors, except that they operate
on a larger scale. This is consistent with the predictions of the model if domestic firms are capital
constrained or are in general smaller than international investors. In these circumstances, large
transactions are more likely to be uncontested domestically.
11



While foreign takeovers look roughly similar to domestic takeovers by industry, they also mirror
world industry. Table 2 shows the industrial distribution of the top 100 multinational companies
(MNCs) and of Korean acquisitions. Of the 10 main industries where multinationals are prevalent,
7 were in the top 10 industries for international takeovers of Korean firms. This suggests that
certain industries, especially electronics and chemicals, are more likely to have foreign ownership.
Moreover, as shown in the bottom panel of Table 3, electronics and chemicals are also the top two
value-added industries in Korea in 1995, implying that these are important growth industries where
Korean technology is not lacking.
In sum, the industrial distribution of foreign acquisitions in Korea is similar to that of Korean do-
mestic acquisitions and to the industrial distribution of multinational companies worldwide. Thus,
the same industries that benefit from national economies of scale also benefit from international
economies of scale. One difference between domestic and international acquisitions is size, as inter-
national transactions are larger. This suggests that there is a two-stage process of consolidation,
first firms consolidate nationally, then they consolidate internationally. In addition, some high-
growth industries such as chemical and electronics are more prone to international consolidation.
Next, we evaluate firm level data on ownership to get a better understanding of what foreigners
bought in Korea following the 1997 financial crisis and the subsequent removal of barriers to foreign
ownership.
5.2. Explaining foreign ownership
In this section, we examine how firm- as opposed to industry-level characteristics affect foreign
ownership. Our focus is on ownership by large foreign investors, but the available ownership
data give total foreign holdings of each firm. In order to identify firms that have a single major
foreign holder we make several adjustments. First, we assume foreign direct investment is present if
12



foreign ownership exceeds 10 percent. Should foreign ownership be below 10 percent we assume it is
portfolio investment. Second, we consider only firms that are also in the merger and acquisition data
from Securities Data Corporation (2000) or have a foreign ownership share exceeding 25 percent.
67 of the 103 firms with FDI in 1999 fall into this category.
Table 3 presents summary statistics of the ownership data on publicly-traded firms in Korea
in 1998 and 1999. The 1999 sample is smaller because several dozen firms went bankrupt or were
delisted from the Korea Stock Exchange in 1999. In the 1998 sample, 156 firms (25 percent of the
sample) had foreign ownership exceeding 10 percent. The summary statistics suggest that firms
that attracted significant foreign investment were larger and more profitable than the average firm
in the sample in both 1998 and 1999. In contrast, the characteristics of firms that attracted only
foreign portfolio investment (0<FI<10) were similar to the sample averages in both 1998 and 1999.
To evaluate how these variables affect the decision to make a large investment, we estimate
the likelihood of receiving foreign investment in excess of 10 percent. Specifically, the dependent
variable, Fl, is a binomial variable and equals one if foreign ownership exceeds 10 percent and zero
otherwise. The estimating equation is
Pr(FI = 1) = F(X*)
Pr(FI =  O) = 1-F(X*),
where X* is a vector of characteristics of the firms in the sample, including firm size, firm profitabil-
ity, firm debt, and access to distribution. We measure size by log of assets and log of sales (ASSET,
SALE), profitability by the ratio of earnings before interest and taxes (EBIT) to total sales, and
we proxy for access to distribution channels and government preference with a dummy for mem-
bership in a top 33 chaebol (CHAEBOL). We use debt-asset ratios instead of debt-equity ratios
(FDEBT) because several firms report negative book value of equity. We expect the coefficients on
13



ASSET, SALE, EBIT, and CHAEBOL to be positive, as they should increase the probability of
foreign investment. If foreigners buy only the better firms then the coefficient on FDEBT should
be negative. Alternatively, over-indebted firms may be more likely to be vulnerable to takeover,
suggesting the coefficient might be positive. We also include (2-digit SIC) industry fixed effects in
all regressions,
The first three columns of Table 4A report the coefficient estimates from this regression equation.
They were estimated using both Logit and Probit. The results are very similar in both cases so we
report only the Logit estimates. All three variables-size, profitability, and chaebol membership-
increase the likelihood of foreign investment. EBIT and DEBT are negatively correlated (the simple
correlation coefficient is -0.37). When debt is not included the coefficient on profitability is positive
and highly significant. Firms with greater debt are significantly less likely to receive substantial
foreign investment, suggesting that highly indebted firms, although perhaps in greater need of
foreign capital, do not attract foreign ownership.8
Next, we look for evidence on capital shortages using data on chaebol affiliation. We include
business group data since domestic investment in Korea often comes via the firm's group affiliation,
as most chaebol have affiliated banks and non-bank financial companies. If groups have limited
access to capital, then we expect the group debt variable to positively impact foreign ownership of
their affiliates. We include the log of group assets (GASSET) and group debt-asset ratios (GDEBT).
We expect group assets to negatively impact foreign ownership since these groups can subsidize
firms more easily.
8Kang and Stulz (1997) evaluate the effect of firm characteristics on foreign ownership in Japan and find similar
results for firm size and leverage. They interpret this as evidence that foreign investors do not hold the market
portfolio. Our results suggest that some of the relation that they are picking up is because ownership data also
contains merger and acquisition activity, which should not be expected to mirror the market portfolio.
14



The results are reported in the fourth column of Table 4A. The group variables have the expected
signs. Firms acquired by foreigners are more likely to belong to debt-ridden groups and less likely
to belong to groups with large assets. This suggests that firms belonging to capital constrained
groups are more likely to have foreign ownership.
In the final column of Table 4A, we include the export share of the firm's output in the regression
equation. There are two reasons why export share might positively impact foreign ownership. First,
firms with a large export share may benefit more from foreign ownership if foreigners have greater
access to global markets. This follows the case in the theoretical section where the foreign parent
adds more value to the target than a domestic parent would add. Second, foreigners may have better
information about firms which also serve their home market. This is akin to a lower transaction cost
because less information about the target needs to be acquired by the foreign parent, which implies
that a Korean exporting firm is more likely to be acquired than an otherwise similar Korean firm.
We find that firms that export a large share of output are more likely to attract foreign investment.
Next we use the 1999 data to test the robustness of these findings and further distinguish
portfolio investors from merger and acquisition activity. First, we examine how firm characteristics
affect the likelihood of receiving positive foreign investment, i.e., the dependent variable is 1 if
foreign ownership is greater than 0. Second, we estimate the likelihood of receiving foreign portfolio
investment, defined as foreign investment between 0 and 10 percent. Third, we use the same
binomial variable defined above (foreign investment greater than 10 percent) on the 1999 ownership
data. And finally, we evaluate a more restrictive binomial variable, which is 1 only if the firm is
known to have been a target of foreign acquisition in the past or has foreign ownership share
exceeding 25 percent.
The results are reported in Table 4B. The first column reports the results for the likelihood of
15



receiving positive foreign investment. It suggests that smaller and more leveraged firms are less
likely to receive foreign investment. The second column reports the results when the dependent
variable is foreign portfolio ownership. It suggests that firms which receive foreign portfolio invest-
ment are not very different from the average firm. To the extent that this represents the average
foreign portfolio investor, it suggests that foreign portfolio investors choose the average market
portfolio, as theory predicts.
The third column in Table 4B examines the likelihood of receiving foreign investment above
10 percent. The signs and significance of all of the variables, except for the variable indicating
membership in a chaebol, are robust to the 1999 data. The group debt and asset variables were
never significant, suggesting that the surviving indebted groups were not capital constrained in
1999. This may also be simply because the most indebted groups drop out of the 1999 sample.
The last column reports the results when the subset that contains firms acquired by foreigners is
used. Size and debt again appear to be the main determinants of attracting large foreign ownership.
Comparing columns 3 and 4 with columns 1 and 2, exporting is only positive and significant
when the dependent variable is extensive foreign ownership. This suggests that informational
asymmetries, which should be present for both portfolio and direct investment, are not the reason
that foreign investors choose firms that export. Rather, the parent firm provides an intangible
asset to the target, perhaps in international distribution and marketing, that another domestic
firm would not.
6. Conclusion
In this paper, we examine how firm and industry characteristics affect foreign ownership. We
find that foreign acquisitions are larger than domestic acquisitions but are similar to domestic
16



acquisitions by industry. We also find that foreign takeovers of Korean firms are in the same
industries where the world's largest multinational corporations operate, implying that there is a
higher equilibrium level of internationalization, as characterized by sales and ownership, for these
industries. Together, these results suggest that internationalization is a form of consolidation, which
is not very different from domestic consolidation, but which occurs on a larger scaLe.
Using data on nearly all firms listed on the Korean Stock Exchange, we find that foreign investors
disproportionately target larger and more profitable firms, exporting firms, and firms with low debt
ratios. We interpret this as evidence that the correlation between foreign ownership and growth
found in earlier work may be the result of foreigners investing in better and bigger firms, and not
a result of technology transfer from foreign investment.
17



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Table 1: Foreign Direct Investment in Manufacturing
(Accepted Cases, in mn. U.S. dollars)
1997  1998  Growth Rate
Food            851   718       -15.6
Textile and Clothing   85    18        -79.2
Paper and Lumber      196  1,644      788.9
Chemicals         235   755       222.0
Petrochemicals       3    0.8       -70.5
Fertilizer         -    0.2         -
Medicine          44    134       207.2
Cerammics          54    279       419.6
Metals           14      7       -50.1
Machinary          166   587       253.7
Electricity and Electronics  291   1,377  373.2
Transport Equipment    395   180       -54.4
Other Manufacturing     16    33       108.6
Total           2,348  5,734    144.2
Source: Ministry of Finance and Economics.
20



Table 2: Industrial Distribution of Foreign Acquisitions
A: Top 10 Industries* of 100 largest Multinational Corporations
Industry                        Top 100 MNCs    Percent of Total
Electronics                           17               0.213
Chemicals                             16               0.200
Automotive                            14               0.175
Food and Beverages                    12               0.150
Diversified                           4                0.050
Telecommunications                    5                0.063
Trading                               4                0.050
Machinery and Engineering             2                0.025
Metals                                3                0.038
Construction                          3                0.038
Total                                 80               1.000
B: Top Ten Industries Involving Foreign Acquisitions in Korea
Acquisitions in Korea Percent of Total
Chemicals                             25               0.185
Electronics                           19               0.141
Machinery                             19               0.141
Trading                               15               0.111
Telecommunications                    13               0.096
Services                              13               0.096
Food and beverages                    10               0.074
Automotive                            9                0.067
Paper and Allied products             7                0.052
Textile mill products                 5                0.037
Total                                135               1.000
Source: United Nations 1998, SDC, and Korea Statistical Yearbook 1997.
* Excludes petroleum. Table continues on the next page
21



Table 2 continued
C: Value Added in Korea
Korean Value Added
Electronics                         24.99
Chemical and allied products        14.85
Motor vehicles and equipment        13.08
Industrial machinery                12.89
Primary metals                      10.92
Textile mill products                8.82
Mining                               7.71
Fabricated metals                    7.45
Rubber and misc                      6.28
Apparel and other                    5.25
Source: Korea Statistical Yearbook 1997.
22



Table 3: Summary Statistics, 1998 and 1999 ownership data
(1997 sales and assets data in mn. $US)
1998                       1999
O<FI<10  FI>10  Total    10>FI>O  FI>10  Total
Number of observations    254       156    631        306      103    525
Average Foreign        3.09    22.69   6.96       2.37     26.33   6.54
Share             0.40     0.25   1.00       0.58      0.20   1.00
Average firm assets      976     4971   1850       1687     5006   2006
Minimum firm assets      17.1     31.1   16.0       17.1     32.3   16.0
Average firm sales      827      1943   893        882      1813   897
Minimum firm sales       13.0     23.9   6.5        6.5      15.8   6.5
Average firm debt/assets    0.72    0.75   0.74       0.71     0.70   0.70
Average firm EBIT*/Sales    0.02     0.06   0.01       0.03     0.19   0.03
E Earnings before interest and taxes
23



Table 4: Explaining foreign investment
A: Regressions on 1998 Ownership Data
(1)      (2)      (3)       (4)      (5)
ASSET       0.78***            0.66***  0.71***  0.71***
(0.10)            (0.10)   (0.10)   (0.10)
SALES                 0.80***
(0.10)
EBIT         1.11      1.40     1.15     1.18      1.22
(0.92)   (0.97)   (0.99)    (1.0)    (1.01)
CHAEBOL                          1.34***  1.56***  1.66***
(0.25)   (0.44)   (0.45)
FDEBT       -2.16***  -1.96***  -3.02***  -3.23***  -3.32***
(0.73)   (0.71)   (0.77)   (0.78)   (0.79)
GDEBT                                     2.92*    3.03*
(1.53)   (1.55)
GASSET                                   -0.28**  -0.31**
(0.13)   (0.13)
EXPORT                                             0.01***
(0.004)
Fraction Correct   0.79    0.78      0.80     0.81     0.81
Number of Obs.   631       631       631      631
R-Square       0.22     0.22     0.27      0.27     0.24
24



Table 4 continued
B: Regressions on 1999 Ownership Data
(FI>0)  (O<FI<10)  (FI>10)  (FI>251MA)
ASSET        1.14***     0.07      0.77***    0.93***
(0.16)    (0.08)     (0.11)      (0.14)
EBIT         -0.83      -0.73     2.29**       2.11
(0.99)    (0.69)     (1.13)      (1.41)
CHAEBOL         0.81*      0.18       0.30        0.12
(0.42)    (0.75)     (0.31)      (0.32)
FDEBT        -2.89***     0.19     -3.61***    -4,13***
0.89      (0.28)     (0.97)     (1.21)
EXPORT        -0.004   -0.009***   0.01***    0.01***
0.004     (0.003)    (0.004)    (0.006)
Fraction Correct   0.83      0.62       0.82        0.89
Number of Obs.    525        525        525         525
R-Square       0.27       0.06       0.21        0.20
Significant at the ***1% level, ** 5% level, and *10% level.
Standard errors in parentheses.
All regressions run with industry dummies (not reported).
25



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Survey                                                                        87297