International ownership and firm performance in Middle East and North African economies

Issues of economic development and the interaction of multinational enterprise (MNE) presence and formation and success of small and medium-sized enterprises (SMEs) in developing countries have dominated the research agenda at various policy levels. One major element of successful development in Africa is the formation of a viable local industry and in particular small and medium-sized enterprises. Another major element is the development of export-capability into international markets of developed and emerging economies. The presence of multinational enterprises (MNEs) and their interaction with local SMEs may play a major role here.

Diversified ownership, including foreign MNE owners, promotes growth and development by local firms and industries by providing equity and debt financing, by transferring technology to local SMEs, and by creating export opportunities due to vertical integration or due to the building of supplier relations. On the other hand, MNEs may crowd out local economic activity and thereby hinder local development of SMEs and of a related viable export sector.

Furthermore, large shareholders and institutional investors can be seen as potential controllers of equity agency problems as their increased shareholdings can give them a stronger incentive to monitor local managerial behaviour and firm performance. Corporate governance and in particular ownership structure can be an effective tool to control the opportunistic behaviours of management.

So far only a few studies have attempted to examine this relationship for African economies and there remain large gaps in our knowledge concerning the relationship between economic development, MNE presence, and SME formation and success. This paper aims at filling this existing research gap by investigating SMEs in the MENA region. We examine the impact of ownership structure on firm performance using cross sectional data from companies in the MENA region for the years 1985 to 2011. Results indicate that diversified ownership is associated with higher firm performance measured in sales, profits and exports. Furthermore, firms with substantial international ownership tend to perform better than those with only local private and/or state ownership.

JEL classification: F20, L22, M10

Keywords: MENA, FDI, firm profitability, ownership, globalization