The Differential Effects of Minority State Ownership Types on the Internationalization of Emerging Market Multinationals from Democratic States.

VerfasserArreola, Fernanda
PostenRESEARCH ARTICLE

1 Introduction

The relationship between businesses and the government has been a topic of interest in the International Business literature for many years (Boddewyn and Brewer 1994). A popular approach to this topic is to explain the effects of having a close proximity to the government by looking at these interactions as politicalties, or "boundary-spanning personal and institutional linkages" (Sun et al. 2012, p. 68).

Political ties are more salient for firms doing business in and from emerging markets (Guillen and Garcia-Canal 2009; Peng et al. 2008). Emerging market multinationals (EMNEs) build political ties as a way to overcome institutional voids or to motivate state actors to provide them with resources and preferential treatment (Faccio et al. 2006; Khanna et al. 2005). Despite the fact that political ties are pervasive across all emerging economies, empirical research on their potential outcomes has mostly focused on the Chinese context (Sheng et al. 2011; Li et al. 2008, 2009; Shi et al. 2014). China has unique economic and political systems that diverge from the political economy of western democracies, which we consider, limits the external validity of the findings.

We explain this by pointing to the political economy literature on political survival (Bueno de Mesquita et al. 2003) which posits that representative democratic rulers from emerging economies make different decisions than authoritarian ones concerning the provision of public and private goods to their supporters. We draw from this literature to advance our hypotheses that democratic governments use different types of political ties arising from minority state ownership in domestic multinationals to balance the provision of these goods and maximize political survival. State ownership is theoretically and empirically relevant because it grants the firm access to government resources while allowing the government to gather information regarding the firm's strategy and corporate governance (Wu et al. 2012). The phenomenon of minority state ownership is pervasive in emerging economies, representing 20-30% of all companies in which the state has equity (Musacchio and Lazzarini 2014).

We argue that minority state ownership has a dual purpose: It serves as a channel for the delivery of private goods, such as direct subsidies, preferential treatment and information to the elite group of multinationals, and it also serves as a grabbing hand to divert private investments to the provision of local public goods like jobs. While the former boosts international expansion, the latter hinders the internationalization of these firms. We investigate the differential effects of two types of minority state equity: Ownership by state institutional investors, which encompasses pension funds and development banks; and ownership by state agencies and state-owned enterprises (SOEs), such as the national treasury, government agencies, or state-owned enterprises under full control of the government. Because these two types of ownership have different governance profiles, we argue that governments use the former to boost the international expansion of their national champions, and the latter to hinder internationalization.

We test our hypotheses in the context of Brazil. The country provides a suitable context: It is a vibrant democracy with political party fragmentation, competitive elections and where the government uses equity ownership to implement a state-centric industrial policy (Pargendler 2015). We develop a multi-method research design. First, we estimate fixed-effect and instrumental-variable regression models to measure the hypothesized effect and, then, we unveil the underlying mechanisms in an in-depth case study. The qualitative analysis exposes the influence of state-ownership on the corporate governance of the firm and produces an effect on its internationalization.

We aim at delivering three contributions. First, we theorize about the effects of state ownership on the internationalization of domestic multinationals in democratic states using a theoretical framework that unifies existing empirical research in authoritarian and democratic states. Second, we show under which conditions minority state ownership ties have positive and negative effects on the internationalization of EMNEs. Finally, we unveil some of the mechanisms through which state actors, as minority shareholders, influence the governance of multinationals and affect their internationalization.

2 Research Background and Hypotheses

2.1 The Differential Effects of Political Ties

Research on political ties suggests that firms can gain political favors, special treatment and fiscal incentives as a result of their closeness to the state (Hillman 2005; Faccio et al. 2006). While research on these ties originally pointed to how they led to higher performance outcomes, recent studies posit that, under specific circumstances, they may actually lead to neutral or negative results (Sun et al. 2012). In the case of emerging economies, empirical research shows similar conclusions (Cheung et al. 2010; Sun et al. 2015). Zhu and Chung (2014) provide evidence on the negative effects of political ties associated with rival parties on unrelated diversification. Cheung et al. (2010) show the adverse effects of state-ownership concentration on excess returns to minority shareholders. Li et al. (2008) point to the efficiency level of ties, indicating the inverse U-shape effect of the interaction between foreign firms and political ties on performance.

There are different levels of analysis for studying political ties. Sun et al. (2012) catalogue these levels in four archetypes: Organizational linkages (established by structural links), interpersonal relationships (as those held between managers and politicians), and finally two types of personal-organizational linkages (either between political actors and key firms, or between managers and political institutions). For our study, we focus on one source of organizational linkages: The minority state-ownership as a political tie. Ownership ties yield direct access to the firm and therefore the possibility of a higher degree of direct influence by the state (Wu et al. 2012). Minority state ownership is a "new form of state involvement that does not entail majority state control" (Inoue et al. 2013, p. 1776). While minority state ownership is a key feature of emerging economies (Peng and Luo 2000; Inoue et al. 2013), equity holders are diverse and range from national development banks to fully state-owned firms (Bremmer 2009; Wu 2011).

2.2 Minority State Ownership and the Internationalization of EMNEs

The empirical literature on the effect of political ties through state ownership in EMNEs has recently seen an exponential growth due to the importance of Chinese multinationals in the world. Previous research on non-Chinese firms focused on the internationalization of SOEs from a resource-seeking perspective, that is, as vehicles for securing global cash flow (Choudhury and Khanna 2014) or for seeking resources needed locally, such as oil and minerals (Choudhury and Khanna 2014). The first empirical works on outward FDI of Chinese state-owned multinationals also focused on securing raw materials to be used back at home (Cai 1999). Later, Zhang and Van Den Bulcke (1996) modeled OFDI coming from China as an instrument to balance an entrepreneurial or profit driven orientation with the influence of the governmental bureaucracy. Nolan (2001) shows that the direct advantages received by the government, such as loans, procurement and protected markets, are the major reason for success of Chinese multinationals with large state ownership.

Recently, empirical studies build on the importance of the degree of state ownership as determinants of the outcome of the internationalization of the firm. Child and Rodrigues (2005) argue that the role of the state in Chinese firms will be distinctive when it retains "some (but not total) ownership in the companies" (p. 400). Buckley et al. (2007) argue that Chinese firms profit from their degree of state-ownership to access lower cost capital that allows them to undertake riskier projects. Pan et al. (2014) find supportive evidence on the positive effect of state ownership for reducing the effects of the heterogeneity of foreign institutional environments on subsidiary ownership. Some case studies illustrate the positive effect of minority ownership on FDI such as that of TCL, one of China's largest cellphone manufacturer (Deng 2009). Finally, Cui and Jiang (2012) show that firms having the state as owners increase their dependence on home country resources.

This previous empirical research indicates that the state ownership on EMNE serves the dual purpose of alleviating market failures and implementing public policies (Cuervo-Cazurra et al. 2014). While the existing research has added considerable knowledge about the relationship between state ownership and internationalization of EMNEs, we argue that focus on the Chinese context has prevented new discoveries. Because democratic governments face different constraints that those of authoritarian regimes, we hypothesize that state ownership heterogeneity produce differentia] outcomes on the internationalization of EMNEs from these countries.

2.3 Hypothesis Development

We develop hypotheses about the differential effects of minority state ownership on the internationalization of EMNEs from democratic states with free and competitive elections. We argue that because of the differences in political institutions, governments from these countries come to different decisions concerning how to use minority state ownership to affect the strategy of domestic multinationals. To derive our hypothesis, we first describe the reasons why democratic governments make particular decisions concerning the balance of public and private goods provision. Second, we detail why minority...

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