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Foreign Direct Investors as Change Agents: The Swedish Firm Experience


  • Kathy S. Fogel,

  • Kevin K. Lee,

  • Wayne Y. Lee,

  • Johanna Palmberg

Address for correspondence: Kathy S. Fogel, Sam M. Walton College of Business, University of Arkansas, Fayetteville, AR 72701, USA. Tel: +1-479-575-5301; E-mail:


Manuscript Type


Research Question

Prior studies examine corporate governance either at the firm level, with limited attention paid to societal culture and norms, or at the nation-state level, with limited attention paid to the management practices of firms. In this study we examine the impact on the corporate governance of Swedish firms brought about by foreign investors. We argue that in countries like Sweden with strong culturally embedded norms and control exercised by dominant domestic shareholders, control-seeking foreign investors can act as agents of change to improve firm performance through more efficient capital utilization and labor productivity.

Research Findings

We find that the entry of foreign equity investors over the years 1992–2008 surrounding Sweden's formal admission to the European Union in 1995 enhanced the financial performance of large publicly traded, domestic owner-controlled firms in Sweden. The heightened performance of Swedish firms was not simply a result of cross-border portfolio investments by institutions as the literature on shareholder activism implies. Rather, significant advancements in firm performance occurred only when an increase in voting participation by foreign direct investors was coincident with a decrease in the excess voting power of the largest domestic shareholder, which gave foreign equity investors a critical “voice” in the management of the firm.

Theoretical Implications

Informal institutions influence corporate governance by aligning corporate goals with socially acceptable outcomes. Corporate governance practices, if culturally embedded, cannot be easily displaced even when the gains in economic efficiency are large. Corporate owners stand to benefit from the maintenance of the status quo and may not welcome radical changes that can lead to a “creative destruction” of their market power and political dominance. Foreign portfolio investors who focus solely on cash flow rights of the firm cannot effectively change decision making in the boardroom. Foreign direct investors, who actively seek voting shares and control rights, will have the utmost potential to effect change in corporate governance by advocating for new corporate priorities and objectives at board meetings.