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Exploring the role of government involvement in outward FDI from emerging economies

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Abstract

We explain the mechanisms through which government impacts the internationalization of emerging-market enterprises (EMEs). Rather than merely viewing internationalization as the result of differences in resource positions, we demonstrate that an important source of variation is the idiosyncratic manner in which EMEs are affiliated with government agencies. Although government involvement has a strong effect on international expansion, this effect is contingent upon the level at which the firm is affiliated with government and the degree of state ownership. Different types and levels of governments have different objectives, exert different institutional pressures on EMEs, and impact their willingness and ability to internationalize differently. Government involvement influences the level of overseas investment, its location (developed vs developing countries) and its type (resource- vs market-seeking). These effects depend on firms’ own resources and capabilities, suggesting that not all firms possess equal ability to internalize government-related advantages and respond to institutional pressures. By demonstrating that resource-based and institutional constructs are highly dependent on one another, we enhance understanding of how EMEs succeed in expanding overseas, and why governments matter.

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Notes

  1. In cases where governments own EMEs, they can effectively control management, and therefore coercive pressures are required to a lesser extent to change firm behavior.

  2. The dataset does not allow us to identify the mode of entry (e.g., greenfield vs mergers and acquisitions).

  3. Different versions of this dataset have been used in previous studies (e.g., Liu et al., 2009).

  4. Chinese firms have invested overseas only in recent years. We only have two years of data, and some Chinese firms do not invest in two consecutive years. We therefore treat our data as cross-sectional rather than unbalanced panel data.

  5. ARIES incorporates all privately owned firms in this category.

  6. Following a reviewer's suggestion, we used the squared term of firm size to examine potential non-linear effects. This term, however, was statistically insignificant.

  7. Fan et al. (2006) have been publishing the report on the progress of marketization in China's regions annually since 2001. This measure has been used in several other studies (e.g., Ying, 2006). This comprehensive composite index evaluates the consistency of a province's policies and institutions regarding economic freedom in five key areas: the role of market relative to government; the development of the private sector; the development of commodity and factor markets; and the development of free-market institutions. Twenty-six indicators are employed to assess these five dimensions and calculate a marketization index. The values of the index (for 2005) range from 4.445 to 10.407.

  8. Lagged variables for 2004 were employed, as China did not conduct industrial census before 2004.

  9. Despite a few high-profile Chinese mergers and acquisitions that attracted much interest and discussion, the majority of Chinese investors are medium-size enterprises, and the amount of investment is fairly small. For example, Chinese firms invested US$1.3 million on average in 2007, which is much lower than the average figure for developed countries (around US$6 million).

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Acknowledgements

Chengqi Wang acknowledges financial support from the British Academy (SG-090409), Natural Science Foundation of China (71273035) and Nottingham University Business School. Junjie Hong acknowledges financial support from the Program for New Century Excellent Talents in University, Humanity and Social Science Project (NCET-10-0335). We thank the Area Editor, Ishtiaq Mahmood, and three anonymous reviewers for their guidance during the review process. We also thank the research assistance provided by Ziliang Deng.

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Correspondence to Chengqi Wang.

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Accepted by Ishtiaq Mahmood, Area Editor, 5 June 2012. This paper has been with the authors for three revisions.

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Wang, C., Hong, J., Kafouros, M. et al. Exploring the role of government involvement in outward FDI from emerging economies. J Int Bus Stud 43, 655–676 (2012). https://doi.org/10.1057/jibs.2012.18

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