Are Foreign Investors Locusts? The Long-Term Effects of Foreign Institutional Ownership

In an era of increasing financial globalization, many analysts have expressed fears that a dispersed and globalized shareholder structure may be harmful to corporate investment, undermining firms’ future growth and performance. In fact, many policy makers have voiced protectionist sentiments with regard to foreign capital flows which might represent “hot money” in search of short-term profits, with little regard for firms’ long-term prospects. These views were famously vocalized over a decade ago by Franz Müntefering, the then chairman of the German Social Democratic Party (SPD), when he compared foreign investors to an invasion of “locusts” stripping companies bare. At SPD’s convention he stated that “(…) we support those companies, who act in interest of their future and in interest of their employees against irresponsible locust swarms, who measure success in quarterly intervals, suck off substance and let companies die once they have eaten them away.” The concern regarding “locust” foreign capital is that it might lead to asset stripping to boost short-term profits, delocalization of production, and adoption of unfriendly labor policies.