The impact of foreign capital on profitability: the case of Portuguese manufacturing SMEs

Abstract

The objective of this paper is to empirically examine the relationship between the firms’ ownership and control structure, in particular the presence of foreign capital, and its profitability. The literature about performance determinants is abundant, however, the relation between profitability and ownership and control structure is much less studied. The performance of the Portuguese economy is still highly dependent of foreign investment inflows directed to the manufacturing sector, a sector mainly comprised of SMEs that are responsible for the majority of job creation, innovation and exports. This paper uses a balanced panel data of 5.722 firms for the period from 2010 to 2017, researching if the presence of foreign capital influences financial performance, and controlling the effects of other variables such as size, age, exports, indebtedness and sector of activity. Finally, possible non-linear effects or moderating and interaction roles between variables are also tested. Our results evidence that, despite foreign firms higher levels of profitability, the degree of foreign ownership and institutional difference generally showed a non-significant relation with profitability. Nevertheless, there seems to exist a non-linear relation between the development level of the country of origin of the share capital and profitability, with the results indicating that firms with share capital originated from more advanced countries attain a higher financial performance.