Foreign Direct Equity Investments and Foreign Ownership Premium: the Case of Croatia

Published: 30/4/2020
Publication Working Papers
Issue W-58
Authors Matej Bule and Andrijana Ćudina
Date March 2020
JEL F21, F23, L20, C21
ISSN 1334-0131


foreign direct equity investments, foreign ownership premium

This paper analyses the structure of foreign direct equity investments in Croatia and econometrically tests the existence of a foreign ownership premium among Croatian non-financial corporations. With the use of a novel dataset generated by the merger of two firm-level databases, it is found that in the 2002-2017 period foreign equity investments in non-financial corporations were relatively modest and that the motivation of most of the investments was to expand into the local market (market-seeking FDI), and only partly to increase the efficiency of the investor's business group. As for the mode of entry, most investments were greenfield projects, although brownfield investments were also significant, reflecting the large scale privatization of state-owned enterprises. However, it is found that the industry structure of investments was unfavourable as only a smaller part went into tradable sectors and high-tech industries. Compared to domestically-owned companies, regression analysis has firmly established the existence of an organizational, technological and financial premium of foreign ownership among Croatian non-financial corporations, which differs depending on the size of the company, industrial and regional affiliations, business orientation on local or foreign markets, type of foreign ownership, mode of entry, as well as the origin of the foreign investor. Actually, the foreign ownership premium is higher in small and medium-sized enterprises and those that are oriented towards the local market, and when the concentration of foreign ownership is higher. Also, the premium is higher when the foreign investor originates from a more developed country.