Home country institutions and the internationalization of state owned enterprises: A cross-country analysis

Abstract

National institutions shape the ability of civil society and minority shareholders to monitor and influence decision-makers in listed state owned enterprises (SOEs), and thereby their strategies of internationalization. We argue that the weaker are such controls, the more likely such decision makers pursue self-serving motives, and thus shy away from international investment. Listed SOEs’ strategies will thus be more similar to those of wholly privately owned enterprises (POEs) when these controls are more effective. Building on Williamson's (2000) hierarchy of institutions, we examine how home country institutions exerting normative, regulatory, and governance-related controls affect the comparative internationalization levels of listed SOEs and POEs. Based on a matched sample of 153 majority state owned and 153 wholly privately owned listed firms from 40 different countries, we confirm that, when home country institutions enable effective control, the internationalization strategies of listed SOEs and POEs converge.

Introduction

State owned enterprises (SOEs) differ from wholly privately owned firms (POEs),¹ for example in terms of their governance (Gedajlovic and Shapiro, 1998, Rodríguez et al., 2007); attitude to risk (Borisova et al., 2012, Garcia-Canal and Guillén, 2008); and access to resources (Morck et al., 2008, Wang et al., 2012c). Yet, despite the increasing global role of SOEs (Bruton et al., 2015, UNCTAD, 2014), the impact of the state as an owner on firms’ internationalization remains underexplored.

We start from the proposition that the processes owners use to shape the strategies of their firms depend upon the institutional framework under which they operate. Hence, even firms with similar types of ownership may make different strategic choices when institutional contexts vary (Peng et al., 2008, Xu and Meyer, 2013). Yet, how specific institutions affect the behavior of particular types of firms remains an insufficiently understood question in strategic management research (Bruton et al., 2010b, Holburn and Zelner, 2010, Murtha and Lenway, 1994, Peng et al., 2008). We follow Williamson (2000: 608) in arguing that “ownership is not determinative but needs to be examined in conjunction with the support, or the lack thereof, of the mechanisms of governance”. Our research question is therefore: Under what conditions – in terms of home country institutions – do state owners facilitate or constrain corporate strategies of internationalization?

POEs are generally presumed to prioritize profit oriented motives such as shareholder wealth maximization. They invest overseas when international investments are expected to be in the long run more profitable than domestic alternatives (Dunning, 1993). On the other hand, fully state owned organizations, such as government departments, follow primarily political agendas. Our interest focuses on companies with a mixed ownership structure – an increasingly important phenomenon in international business (Bruton et al., 2015). If a state entity controls a majority (more than 50%) of the quoted equity, it has a decisive voice in company decision-making, and the firm qualifies as a “listed state owned enterprise” (listed SOE). Then it is subject to political as well as business interests, potentially faces principal–principal conflicts (Lubatkin et al., 2005, Young et al., 2008), and is likely to pursue a wider range of corporate objectives (Benito et al., 2011, Estrin and Perotin, 1991). We thus compare the strategies of POEs without any state-ownership and listed SOEs. We do not consider and exclude from our empirical analysis firms with minority equity stakes held by the state.

Our theoretical lens is the institution-based view, which investigates how rules and regulations govern decision makers in businesses, and thereby influence firms’ strategies (Kostova et al., 2008, Meyer and Peng, 2016, Peng et al., 2008). While researchers have recognized the importance of both home and host country institutions for international strategies, most empirical work has focused on host country characteristics (e.g., Delios and Henisz, 2003, Meyer et al., 2014) or the distance between home and host countries (e.g., Estrin, Baghdasaryan, & Meyer, 2009, Tihanyi, Griffith, & Russell, 2005). In contrast, the influence of home country institutions has been largely neglected (Henisz and Zelner, 2010, Morck et al., 2008).

We use Williamson's (2000) synthesis of ‘new institutional economics’ to explore the impact of home country institutions; he identifies institutions at three levels that shape managerial decision-making. These home country institutions moderate the direct impact of state ownership on internationalization, which may be positive or negative. We argue that the greater the extent to which decision makers in SOEs are subject to effective control through the institutional structure, the less SOEs are likely to deviate from profit-oriented motives. When controls through institutional structures are weak however, ‘insiders’ such as politicians, lobbyists and SOE decision makers and managers are more able to pursue personal goals, for example providing benefits for their supporters or extracting private rents (Faccio, 2006, Goldeng et al., 2008, Shleifer and Vishny, 1994). These rents are normally (though not exclusively) identified and extracted domestically. However, the stronger are the institutional controls over these SOE insiders, the more SOE internationalization strategies will resemble those of POEs.

Our empirical analysis tests these predictions using a matched sample methodology (Dehejia & Wahba, 2002). Starting from a dataset comprising the World's 5000 largest listed firms, we identified all SOEs (of which there were 153), and then matched them with 153 POEs in the same dataset. We find that the internationalization of SOEs is conditioned by the effectiveness of institutions at each of the three levels of the institutional hierarchy in constraining opportunistic behaviors.

We contribute to the management literature by advancing the institutional perspective to examine the acknowledged yet rarely systematically investigated relationship between home country institutions and MNE strategies (Meyer and Thein, 2014, Morck et al., 2008, Nielsen and Nielsen, 2010). Second, we extend the institutional perspective (Bruton et al., 2010a, Henisz and Zelner, 2010, Khanna and Rivkin, 2001, Peng et al., 2008) by exploring how institutions affect an increasingly significant form of ownership, namely state ownership of listed firms (Bruton et al., 2015). To this end, we develop a theoretical framework of the interaction between national institutions and the strategies of SOEs. Third, we are one of the first to investigate how national context moderates the effects of ownership on firm internationalization strategies. While earlier studies suggest that ownership directly influences internationalization (Cui and Jiang, 2012, Garcia-Canal and Guillén, 2008, Tihanyi et al., 2003), our empirical results show how this impact is conditioned by the institutional environment.