Is Firm Size a Factor in the relationship with foreign direct investment in South Africa?

Introduction

Foreign direct investment plays a central role in shaping corporate behaviour in emerging economies, particularly in capital markets characterised by concentrated ownership structures, information asymmetry, and uneven governance quality (An et al., 2021, Kumari et al., 2023). In such environments, the presence of foreign shareholders in often associated with heightened expectations regarding transparency, financial discipline, and shareholder returns. Dividend payments as a visible and recurring corporate decision, remain one of the most important mechanisms through which firms signal financial stability and mitigate agency conflicts between managers and shareholders (Chen et al., 2024, Abor and Bokpin, 2010). Despite their relevance, dividend policies in emerging markets continue to exhibit significant variation, reflecting deeper structural and institutional challenges. South Africa presents a particularly compelling context for exploring this issue. As one of largest and most sophisticated capital markets in Africa, the JSE has experienced sustained foreign equity participation over recent decades (Sekgosana, 2022, Buzuzi, 2023). At the same time, listed firms have shown a notable decline in dividend payments, raising important questions about the extent to which foreign ownership effectively influences corporate payout behaviour.

This coexistence of increasing foreign investment and weaking dividend distribution highlights a broader scientific problem concerning the transmission of shareholder influence within emerging markets firms. A further dimension of this problem lies in firm heterogeneity. Firms differ substantially in their size, maturity, governance capacity, and access to external fiancé, all of which may condition how external shareholders influence financial decisions (Mehdi et al., 2017, Farooq et al., 2024). Yet it remains unclear whether foreign investors exert uniform pressure across firms or whether their influence depends in firm-level characteristics. In particular, the role of firm size in shaping the strength or weakness of foreign ownership effects on dividend behaviour remains insufficiently understood. This unresolved issue limits a comprehensive understanding of how ownership structures interact with firm characteristics to shape corporate financial outcomes in emerging markets.

Literature review

Foreign direct investment has emerged as a fundamental element of corporate ownership systems in emerging nations, characterised by institutional fragility, concentrated ownership, and enduring knowledge asymmetry (Islam and Beloucif, 2024, Wang et al., 2023). In these contexts, external shareholders significantly influence business financial decisions by affecting governance structures, managerial incentives, and distribution strategies. Dividend policy is significant as it embodies a financial result and serves as a governance tool for corporations to mitigate agency conflicts and convey financial credibility (Kumari et al., 2023, Zhang and Colak, 2022). Comprehending the impact of foreign ownership on dividend decisions necessitates a theoretical framework that synthesises agency theory, signalling theory, and business-specific features, with firm size identified as a crucial variable potentially moderating the influence of ownership (Yahaya, 2025, Mehdi et al., 2017).

Agency theory offers a fundamental rationale for the utilisation of dividend payments to alleviate conflicts between managers and shareholders. In emerging markets, agency issues are frequently intensified by inadequate legal enforcement, restricted transparency, and inefficient internal monitoring systems (Utouh and Kitole, 2024). Dividend disbursements diminish the free cash flow accessible for managerial discretion, thereby constraining opportunistic behaviour and aligning managerial actions with shareholder interests (Emako et al., 2022a). Multiple studies indicate that foreign investors serve as efficient overseers by insisting on enhanced governance standards, increased transparency, and superior financial discipline. Empirical evidence indicates that firms with foreign ownership typically demonstrate diminished agency costs, improved governance quality, and heightened accountability, thereby increasing the probability of dividend payments as a means of shareholder protection (Ganda, 2022, Fon and Alon, 2022, Ogbonna et al., 2022).

Dividend policy is elucidated by signalling theory, which posits that dividends communicate reliable information regarding a firm’s performance and future potential, especially in scenarios marked by information asymmetry. In emerging markets, where the quality of financial reporting may fluctuate, dividends act as discernible indicators of financial stability and managerial assurance (Appiah-Otoo et al., 2023). Empirical research indicates that corporations that pay dividends are frequently regarded as less risky and more transparent, hence bolstering investor trust. Foreign investors, often encountering more significant informational obstacles than local investors, may prioritise dividend signals to evaluate firm quality. Studies demonstrate that foreign ownership amplifies reputational apprehensions and intensifies the demand on companies to uphold regular dividend distributions as a signal of governance robustness and long-term sustainability (Wang et al., 2022, Saha et al., 2022).

Although robust theoretical arguments connect foreign direct investment to dividend distributions, actual evidence is inconsistent. Numerous research indicates a favourable correlation between foreign ownership and dividend proclivity, attributed to monitoring and signalling incentives; nevertheless, some claim conditional or negligible impacts. These discrepancies are frequently ascribed to variations in institutional environments, ownership concentration, growth prospects, and financial limitations. Evidence indicates that in companies with robust investment prospects or restricted access to external financing, the retention of earnings may be favoured over dividend disbursement, even in the presence of foreign owners. In these instances, foreign investors may endorse reinvestment methods focused on long-term value generation instead of immediate cash distributions (Saha et al., 2022, Osei and Kim, 2023, Shaari et al., 2022, Liu et al., 2023). This research indicates that the impact of foreign ownership on dividend policy depends on unique firm conditions.

The size of a firm has long been recognised as a significant determinant of dividend behaviour and is pivotal in influencing the manifestation of ownership effects. Large corporations generally produce more consistent cash flows, capitalise on diversified businesses, and encounter reduced earnings volatility, all of which augment their ability to maintain regular dividend distributions. Moreover, multinational corporations typically possess enhanced access to capital markets, thereby diminishing their need on retained earnings for financing investment endeavours. Empirical evidence from both developed and emerging markets consistently indicates a positive correlation between firm size and dividend propensity, implying that size reflects both financial capability and organisational maturity (Emako et al., 2022b, Udeagha and Breitenbach, 2023, Rehman et al., 2024).

In addition to financial capability, the size of a corporation is intricately associated with the quality of governance and the efficacy of monitoring. Large corporations typically function with more established governance frameworks, encompassing larger boards, enhanced board independence, and specialised committees, hence improving oversight and mitigating information asymmetry. These governance tools augment managerial accountability and improve responsiveness to shareholder desires, including requests for dividend distributions. Empirical evidence indicates that firms with robust governance frameworks are more inclined to implement shareholder-aligned payout policies, thereby underscoring the significance of firm size as a governance-related determinant affecting dividend decisions (Saidi and Ochi, 2023, Mahbub et al., 2022, Ali et al., 2023, Abdul-Mumuni et al., 2023).

Conversely, smaller enterprises frequently encounter elevated operational unpredictability, intensified expansion pressures, and more pronounced finance limitations. These circumstances often lead to a preference for retaining earnings rather than distributing dividends. Liquidity constraints and strategic priorities may hinder smaller enterprises’ capacity to distribute dividends, even with foreign owners involved. Empirical research from emerging and transitional economies demonstrates that smaller firms exhibit more erratic dividend behaviour and diminished responsiveness to shareholder oversight in comparison to larger firms (Ilyas et al., 2023, Gasparėnienė et al., 2022, Rauf et al., 2023). This indicates that the scale of a firm moderates the impact of foreign investor influence on dividend policy.

The relationship between foreign direct investment and business size constitutes a significant yet unresolved aspect of dividend policy study. Large corporations offer a more favourable setting for foreign investors to implement effective oversight, owing to improved disclosure standards, increased analyst coverage, and more sophisticated governance structures. These attributes enhance the transfer of ownership influence on dividend decisions, potentially intensifying the effect of foreign investment on payment behaviour. Numerous studies indicate that the monitoring advantages of foreign ownership are more evident in large, established enterprises, where agency issues are more apparent and governance procedures are more efficient (Shinwari et al., 2022, Behera et al., 2024, Nupehewa et al., 2022). Nonetheless, alternative studies indicate inconsistent interaction effects, underscoring the necessity of analysing this link within certain institutional contexts.

The South African stock market provides a particularly pertinent context for exploring these matters. The Johannesburg Stock Exchange is among the most advanced markets in Africa and has had consistent international equity involvement in recent decades. Simultaneously, dividend payout ratios among publicly traded companies have decreased, prompting enquiries over the efficacy of foreign shareholder oversight (Le et al., 2023, Lestari et al., 2022). South African companies demonstrate considerable variability in size, ownership concentration, and governance quality, rendering the market conducive for exploring whether firm size influences the relationship between foreign direct investment and dividend policy. Previous studies in South Africa have predominantly concentrated on general dividend determinants or board attributes, with little emphasis on the combined influence of foreign ownership and firm size (Nupehewa et al., 2022). Comprehensive studies on emerging markets suggest that institutional quality, governance structures, and firm attributes collectively influence dividend behaviour in manners distinct from those observed in developed economies (Lestari et al., 2022). Current research indicates that foreign direct investment affects dividend policy via agency-reducing and signalling mechanisms, that business size is pivotal in determining dividend behaviour, and that the evidence concerning their interplay is equivocal. Theoretical and empirical gaps highlight the necessity for additional research on how business size influences the effect of foreign ownership on dividend decisions in emerging countries. Therefore, the purpose of this study is to investigate whether firm size moderates the relationship between foreign direct investment and the likelihood of dividend payments among JSE-listed firms. Based on the above synthesis of prior literature, the study proposes the following hypotheses:

Research methods

This paper employs a quantitative research design to investigate whether firm size moderates the relationship between foreign direct investment and dividend payments behaviour among firms listed on the JSE. The methodological approach is structured to ensure transparency, replicability and logical consistency, in accordance with academic research standards. The procedure of the study consists of data selection, variable construction, model specification and estimation (Nazzal et al., 2025). The study is based on secondary data obtained from audited annual financial statements of firms listed on the JSE. Ownership information, including foreign shareholding data was extracted from the shareholder disclosures contained in firms’ annual reports. Financial and governance variables were collected from published financial statements and corporate governance reports. The sample comprises non-financial firms listed on the JSE over the period 2021–2024 financial institutions were excluded due to their distinct regulatory requirements and dividend distribution frameworks, which are not direct comparable with those of non-financial firms. The initial sample included all non-financial listed firms with available ownership and dividend data. Observations with missing values or inconsistent disclosures were excluded to ensure data reliability. After data cleaning, the final sample consisted of 320. Table 1 provides an overview of the research procedure to be followed as well as the variable definitions which were applied.

Results

Discussion

The results of this study provide clear evidence that FDI positively influences the likelihood of dividend payments among JSE-listed firms, and that this relationship is significantly shaped by firm size. These findings substantiate H1 and are consistent with theoretical expectations from agency theory and signalling theory. More importantly, they contribute new empirical insights to an area where previous research has produced mixed or context-specific conclusions. In contrast to studies such as Thirumalaisamy (2013), Arif-Ur-Rahman and Inaba (2021), which found that foreign investors may prefer earnings retention when growth opportunities are high, the present study demonstrates that in South Africa, foreign ownership is associated with a higher propensity to pay dividends. This finding aligns more closely with Kumari et al. (2023) and Wang et al. (2022), who reported that foreign shareholders in emerging markets often demand cash distributions as a mechanism to mitigate agency risks and ensure managerial discipline.

The South African context which includes characteristics of high ownership concentration, persistent information asymmetry, and a significant foreign institutional investor presence are likely factors that amplify these monitoring incentives. Thus, the study extends prior research by showing that, even in an environment where firms have reduced dividend payouts overall, foreign ownership continues to exert upward pressure on dividend decisions (Yahaya, 2025). The moderating effect of firm size, which supports H2, further differentiates this study from earlier work that has reported inconclusive or insignificant interactions between size and FDI (Corvino et al., 2019). The present results show that larger firms are substantially more responsive to foreign investor preferences for dividend payouts compared to smaller firms. This is in line with Chen et al. (2024), who argue that firm maturity and size strengthen monitoring mechanisms and reduce information asymmetry. Unlike smaller firms, larger firms typically possess more stable earnings, broader capital access, and more developed governance structures, all of which facilitate alignment with foreign shareholder expectations. The finding therefore adds nuance to the literature by demonstrating that the FDI–dividend relationship is not uniform across firms, but depends critically on firm size within the South African market.

The significance of leverage, sales growth and board size also offers important insights. The positive association between leverage and dividend payments contrasts with traditional expectations, which suggest that highly leveraged firms restrict dividends due to debt-servicing obligations. However, this finding mirrors evidence from other African and emerging markets (e.g., Soto and Edeh (2025), Mohammadiyan (2024)), where dividends are used strategically as a credibility or signalling mechanism to reassure both creditors and investors of financial soundness. Similarly, the positive coefficient on sales growth supports the notion that growing firms in emerging markets may use dividends to signal stability, enhance market valuation, and retain investor confidence. The positive relationship between board size and dividend propensity reinforces agency theory predictions that stronger governance structures promote shareholder-aligned financial policies.

Overall, this study contributes to the literature by clarifying that in South Africa, foreign ownership remains a strong determinant of dividend policy and that this influence is significantly amplified by firm size. By comparing these findings with prior international and regional studies, the analysis demonstrates that the interplay between FDI, firm size, and payout decisions is shaped by contextual governance and market characteristics. These insights help to resolve some of the inconsistencies in previous research and broaden understanding of dividend policy determinants in emerging markets.

Conclusion

The purpose of this study was to examine whether firm size moderates the relationship between FDI and the likelihood of dividend payments among firms listed on the Johannesburg Stock Exchange. The results show that FDI is positively associated with dividend propensity, and that this relationship becomes significantly stronger in larger firms. Additional findings indicate that leverage, sales growth, and board size also exhibit positive associations with dividend payments, highlighting the influence of financial structure and governance on payout behaviour. Based on these findings, the study concludes that foreign investors play a meaningful role in shaping dividend policy in South Africa and that this influence is amplified within larger, more mature firms. These results underscore the importance of considering firm characteristics when assessing the impact of foreign ownership on financial decisions, and they provide new empirical evidence on how governance mechanisms operate within emerging markets.

For corporate managers, the findings underscore the importance of aligning dividend policy with investor expectations, particularly when firms have a significant proportion of foreign ownership. Managers should be aware that foreign shareholders may interpret consistent dividend payments as a sign of governance strength and corporate reliability, which in turn can support the firm’s reputation and ability to attract further investment. Strengthening governance structures, including enhancing the oversight role of boards, can further ensure that payout policies are in line with shareholder interests while promoting financial sustainability.

For policymakers and regulators, transparency in ownership structures and the need to strengthen shareholder protection mechanisms. Clear and accessible disclosure of foreign ownership can help market participants and regulators assess the potential influence of FDI on corporate financial decisions. In addition, reinforcing corporate governance frameworks can safeguard the rights of both domestic and foreign investors, thereby encourage sustainable dividend practices and support the long-term development of the capital market. From an investment perspective, firm size is an important factor when assessing the likelihood of dividend payments in South African firms. Investors seeking stable dividend income may be more likely to find such opportunities in larger companies with a notable level of foreign shareholder participation. Furthermore, evaluating governance quality, leverage, and sales growth can provide further insight into the sustainability of dividend payments and the financial resilience of the firm.

Future research could differentiate between various types of foreign investors, such as institutional versus individual or strategic versus portfolio investors, to assess whether their influence on dividend policy differs. Additionally, extending the analysis to include firms listed on other African or emerging market exchanges could provide comparative evidence and enhance the generalisability of the findings. By exploring these dimensions, future studies could build a more comprehensive understanding of the interplay between FDI, firm size, and dividend policy across different institutional and economic contexts.