tiểu luận research proposal the role of foreign directors on firm performance invietnam

In that context, the role offoreign directors in Vietnam''''s business activities is becoming increasingly important andindispensable.The presence of foreign directors brings many advantage

THE UNIVERSITY OF DA NANG

UNIVERSITY OF ECONOMICS FACULTY OF INTERNATIONAL BUSINESS

Võ Lê Mai Anh Nguyễn Thị Diễm Thảo Class: Group 8 — 47K01.2

Danang, December 2023

CONTENTS 5.200 1

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ABSTRACT

Human resources and capital from foreign investors play an extremely important role in the development of developing countries However, to take full advantage of this advantage, the role of foreign directors also needs to be emphasized Foreign directors not only mobilize capital and expand markets, but also bring innovation, professionalism and internationalization for the company This combination of human resources and international knowledge is a key factor in achieving sustainable growth and success in today's business environment

However, does this really happen to Vietnamese businesses? To find the answer to that question, this article examines THE ROLE OF FOREIGN DIRECTORS ON FIRM PERFORMANCE IN VIETNAM Financial performance is measured by Tobin's Q, ROA and ROE The study tested each model using the Pool OLS least squares method, random effects evaluation (REM) and fixed effects evaluation (FEM)

Key words: Foreign director, Financial performance, Firm performance

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1 Background and necessity of the research topic

In the era of rapidly developing technology and globalization, Vietnam, as a developing country, has emerged as an attractive destination for foreign experts The integration of information technology and telecommunications has created favorable conditions for the country to participate in the global economy In that context, the role of foreign directors in Vietnam's business activities 1s becoming increasingly important and indispensable

The presence of foreign directors brings many advantages to Vietnamese businesses Firstly, they bring with them a wealth of expertise, management experience and advanced methods of developed countries This stream of knowledge and skills contributes to improving the overall performance and quality of business management, thereby promoting competitiveness and paving the way for sustainable development

Second, foreign directors have the ability to establish and promote relationships with international partners Leveraging their extensive network and understanding of global markets, they assist businesses in expanding their customer base, exploring new collaborative projects and identifying potential investment opportunities This plays a key role in scaling the business and accessing untapped markets, thereby driving growth

Third, foreign directors act as invaluable cultural and linguistic intermediaries between Vietnamese businesses and foreign partners Their proficiency in navigating cultural nuances and overcoming communication barriers facilitates the seamless

2

exchange of information and idea sharing By promoting effective cross-cultural collaboration, they lay the foundation for building trust and amplifying the potential for successful international business partnerships

However, despite the manifold benefits of having foreign directors, potential challenges and limitations need to be acknowledged and addressed A pressing concern is ensuring seamless integration and development of local employees and managers alongside their foreign counterparts Effective knowledge transfer processes need to be in place to ensure that local talent is nurtured, developed and given opportunities for career advancement within the company

Furthermore, creating a harmonious balance between the management style and business culture of foreign directors and the local context is another important challenge Deep understanding of Vietnamese culture, customs and values is essential to avoid conflicts and create a cohesive and productive working environment

Finally, it is important to carefully consider whether relying too much on foreign directors could unintentionally lead to a lack of confidence and dependence on Vietnamese businesses Developing and enhancing the management and leadership capacity of local staff and managers is paramount to ensuring sustainable growth and reducing dependence on foreign expertise in the long term

In summary, as the global economy continues to develop and integrate, the role of foreign directors in Vietnam's business landscape becomes increasingly important While their presence brings many benefits to Vietnamese businesses, it is important to stay vigilant and address potential issues to ensure that the participation of foreign directors is genuine bringing positive impact and supporting the long-term development of Vietnamese businesses

2 Research gap

Studies on the impact of foreign directors on firm performance have yielded inconsistent results However, these studies have provided few explanations for this diversity

Research by Oxelheim and Randay (2003) focuses on Nordic companies and shows that companies with board members originating from the UK and US have significantly higher corporate performance This may suggest that having British and American directors may signal the adoption of an Anglo-American corporate governance system, thereby enhancing a company's international orientation

However, the study by Masulis et al (2012) focus on US firms and show that firms with foreign independent directors (FIDs) have poorer performance, especially when the firm has a limited presence in the country where the foreign director is located out there reside The reason given by the author is due to the challenge that FIDs face when attending board meetings because of the long travel distance, leading to reduced monitoring activities

Research by Nguyen et al (2020) pointed out the negative impact of foreign management on the financial performance of Vietnamese enterprises This suggests that the presence of foreign management may not effectively contribute to improving the performance of firms in the Vietnamese context

Research by Phung and Le (2013) further points to negative outcomes from increased foreign ownership in Vietnamese enterprises, suggesting that foreign shareholders may not provide effective monitoring services results in the local context Another study by SUGAI et al (2008) focus on Japanese firms with foreign directors and show that these firms have significantly better performance than similar firms without foreign directors However, the selection method used in this study, which compares companies with and without foreign directors based on similarity in total assets and industry, may be subjective and influence the reliability of the results

Overall, the impact of hiring foreign directors on firm performance remains uncertain and varies depending on the region and how foreign directors are defined Factors such as national language, corporate governance systems and supervisory mechanisms can influence the results

To have a deeper understanding of the factors that may influence the impact of foreign directors and how their participation affects the performance of Vietnamese enterprises, further research is needed

Studies could focus on factors such as national culture, corporate governance systems and specific supervisory mechanisms in the Vietnamese context to assess the impact of foreign directors In addition, consideration should be given to how foreign directors are measured and defined to ensure consistency and comparability across studies

Further studies could also explore other factors such as the skills and experience of foreign directors, the relationship between foreign directors and other board members, and the ways in which they interact with other stakeholders in the company

Overall, hiring foreign directors can bring benefits or drawbacks depending on a variety of factors For Vietnamese businesses, specific research needs to be conducted to better understand how foreign directors are involved and their impact on business performance in the local context

3 Research objectives

The study aims to examine and assess the impact of foreign directors on business operations in Vietnam, specifically focusing on their role in enhancing the performance and competitiveness of Vietnamese enterprises By conducting this research, valuable insights can be gained regarding the significance and influence of foreign managers in the Vietnamese business context

The findings of thisstudy will contribute to the existing knowledge and understanding of the role of foreign directors in Vietnam It will provide important information and useful tools that can assist businesses in making informed strategic decisions By understanding the impact of foreign directors, companies can better leverage their expertise, knowledge, and international perspectives to enhance their competitiveness in the global market

The research may shed light on various aspects, such as the specific contributions and challenges posed by foreign directors in Vietnamese enterprises, the effectiveness of their supervisory roles, and their ability to introduce international best practices and corporate governance standards

The insights gained from this research can be utilized by Vietnamese enterprises to improve their corporate governance practices, enhance their international orientation, and strengthen their competitiveness in the global marketplace Additionally, policymakers and regulatory bodies can benefit from the findings to develop appropriate guidelines and frameworks that facilitate the effective participation of foreign directors in Vietnamese companies

4 Research questions

In this research, I attempt to answer for four research questions:

1 What is the role of foreign directors in business operations in Vietnam?

2 What are the specific benefits and contributions that foreign directors bring to Vietnamese businesses?

3 In improving the performance and competitiveness of businesses, how important

is the role of foreign directors?

4 Are there other factors besides foreign directors that can contribute to the development and success of Vietnamese businesses?

5 The subject and scope of the research

5.1 The subject of the research

The subject of the study: Vietnamese enterprises with foreign directors participating

in the management apparatus

5.2, The scope of the research

The scope of the research includes 427 companies operating in many different industries in Vietnam These companies have foreign directors and were studied over a 5- year period, specifically from 2014 to 2018

Focusing on companies with foreign directors, this study aims to examine the impact

of foreign ownership on financial performance in the Vietnamese business context The companies selected represent a variety of industries and provide a comprehensive sample for analysis

Additionally, excluding businesses in the financial sector and those that do not meet the study criteria will help maintain the focus of the study and ensure that the findings are applicable to the target audience expected research This approach allows for a more targeted and meaningful analysis of the relationship between foreign ownership and financial performance in the selected sample of Vietnamese firms

On the contrary, public ownership often involves a diffuse ownership structure with numerous shareholders, leading to potential conflicts of interest and decision-making processes that prioritize short-term gains The lack of clarity and accountability in public ownership can have a negative impact on executive motivation, important firm decisions, and the ability to address the consequences of decisions resulting from collective ownership

It is important to note that ownership structure is just one aspect influencing business efficiency, and other factors such as management practices, market conditions, and regulatory frameworks also play significant roles However, ownership theory

underscores the advantages of concentrated ownership, particularly private ownership, in promoting the alignment of interests and driving superior operational efficiency 1.2 Agency Theory

The representation theory, initially proposed by Jensen and Meckling (1976) and further developed by Fama and Jensen (1983), provides a framework for understanding the relationship between executives (representatives) and owners in a company and its impact on operational performance According to this theory, owners recognize that executives possess specialized skills and knowledge in company management, leading them to hire and delegate management responsibilities to these executives

Executives, acting as agents on behalf of the owners, are responsible for the day-to- day management of the company However, conflicts of interest can arise between owners and executives as each party seeks to maximize their own benefits To address these conflicts and improve operational performance, owners must bear agency costs, as outlined in the representation theory

Agency costs consist of several categories of expenses Firstly, control costs involve compensating controllers who monitor and inform shareholders about any self-serving activities or decisions made by executives These controllers play a crucial role in ensuring that executives act in the best interests of the owners and the company as a whole

Secondly, bonding costs are incurred to prevent negative consequences resulting from dishonest actions or behavior by executives These costs are aimed at establishing mechanisms to align the interests of executives with those of the owners and mitigate the risk of opportunistic behavior

Lastly, residual losses refer to charges associated with the damages caused by agents who misuse their power or act in their own self-interest, resulting in financial losses for the company These losses represent the potential negative outcomes that can arise when conflicts of interest are not properly managed

By accepting agency costs, owners aim to mitigate conflicts of mterest and create incentives for executives to act in the best interests of the company (Jensen & Meckling, 1976) This, in turn, is expected to enhance the operational performance of the company The representation theory provides a valuable framework for understanding the dynamics between owners and executives and the importance of managing agency costs

to improve operational performance By recognizing the inherent conflicts of interest and implementing mechanisms to align the interests of both parties, companies can strive for more effective governance and decision-making processes that ultimately contribute to better operational performance

2 Concepts and definitions

2.1 Relationship between ROA and ROE

ROA measures the profitability of a company in relation to its total assets It shows how effectively a company utilizes its assets to generate profits A higher ROA indicates better efficiency in utilizing assets to generate income This ratio is commonly used to assess the operational performance and efficiency of a business Comparing the ROA of different companies within the same industry can provide insights into which companies are making better use of their assets to generate profits

ROE, on the other hand, focuses on the return generated specifically on the shareholders’ equity It measures the profitability of a company in relation to the shareholders’ investment ROE considers both the profitability of the company and the level of risk associated with the capital structure A higher ROE indicates that the company is generating stronger profits in relation to the shareholders' investment It is an important metric for investors as it provides insight into the company's ability to generate returns for its shareholders

However, it's crucial to note that a high ROE alone doesn't always indicate a healthy financial position If a company achieves a high ROE by taking on excessive debt, it can

be a cause for concern High debt levels increase financial risk and can potentially strain the company's ability to meet its obligations in the long run Therefore, investors should

consider both the ROE and the level of debt in order to assess the financial health and sustainability of a company

Additionally, it's important to compare ROA and ROE together to gain a more comprehensive understanding of a company's financial performance If a company has a high ROE but a low ROA, it suggests that the company is relying heavily on debt financing, which can be risky Investors may be concerned about the company's ability to generate profits from its assets and its overall financial stability

Tobin's Q = Market Value of the Firm / Book Value of Assets

If Tobin's Q is greater than 1, it indicates that the market value of the firm exceeds the book value of its assets, suggesting that the firm has the potential to generate higher value than its existing assets In cases where Tobin's Q is less than 1, it may suggest that the market value is lower than the book value, implying that the firm is not generating equivalent value to its assets

Tobin's Q is used to assess investment performance, the attractiveness of a firm to investors, and its ability to create value for shareholders It can also be used to compare performance among firms within the same industry or over time

2.3 Foreign director

Researchers have shown interest in the impact of foreign management on financial performance Various measures of financial performance, such as Tobin's Q, ROA, ROE, and ROS, indicate that having board members of diverse nationalities leads to higher financial performance Studies conducted in Korea by Choi et al (2007) and in Malaysia

by Saleh et al (2009) demonstrated the positive effect of foreign management on financial performance Oxelherm and Randoy (2003), studying firms in Norway and