A study on foreign investment activity : focused on KOSDAQ IT industry

Abstract

The South Korean Government abolished all restrictions on foreign portfolio investment in May 1998. The government has gradually relaxed the restriction since 1992 when the Korea Stock Exchange was opened up to get accustomed to the global business environment. After abolition of the investment ceiling, more rational and scientific investment was realized in Korean stock markets. Synchronization between the domestic and USA bourses occurred, and rationalization and restructuring of industries and enterprises was emphasized by the advanced investment skills of foreign investors. After opening up the stock markets, the price of stock owned by foreigners increased in relation to others. Eventually, the Korean stock investment practice changed from rule-of-thumb investment towards investment schemes based on based skill and data. This study focuses on this point, especially in the information technology (IT) firms listed on the KOSDAQ. To analyze the relationship that exists between foreign shares and financial ratios, factor analysis and regression methodology were employed. A number of financial ratios in different scales were verified by carrying out an exploratory factor analysis. Principal component analysis was followed by a varimax rotation on the scores obtained for all 31 ratios. Cronbach``s alpha reliability coefficients and stepwise regression were then verified by solely considering the scores obtained by all the items that made up each factor. For companies based on the rapid development of IT, ratios related to profitability and reliability show a significantly positive relationship with foreign investment. However, in non-IT companies, no financial ratios are related significantly to foreign shares. Compared with IT companies, foreign investment for non-IT companies is inactive. In spite of the meaningful results of this study, some limitations exist. Firstly, financial analysts often differ drastically in their conclusions based on the sam...