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The Internationalization of State Owned Enterprises:

The Impact of Political Economy and Institutions

Saul Estrin

Department of Management,

London School of Economics

Klaus E. Meyer

Department of Management,

China Europe International Business School

Bo B. Nielsen

Department of Strategic Management and Globalization

Copenhagen Business School

Sabina Nielsen

Department of International Economics and Management

Copenhagen Business School

This version October 31, 2012

Acknowledgements: This paper was written while Saul Estrin was on leave at the Department of

Strategy and Entrepreneurship at London Business School. The authors would like to thank Harry

Barkema, Sumon Bhaumik, Mike Peng and Daniel Shapiro for useful discussions around these issues.

Any remaining errors are their own.

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The Internationalization of State Owned Enterprises:

The impact of Political Economy and Institutions

Abstract

State owned enterprises (SOEs) play different roles in different societies. Integrating political

economy and institutional perspectives, we argue that the globalization of SOEs is driven by

each country’s political economy that shapes economic institutions, which, in turn,

influences the strategies of SOEs. Specifically, we suggest that state ownership reduces a

firm’s degree of internationalization, but this effect is moderated by the configuration of

political and institutional factors of the home country. We find evidence for our theoretical

model in our empirical analysis over a unique dataset of 3087 of the largest companies of

the world, representing 47 countries.

Keywords: state-owned enterprises, internationalization, institutions, political economy,

Tobit regression.

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Introduction

Globalization has greatly increased the diversity of corporate players in the global economy.

In 1970, over 65% of worldwide FDI flows originated from the USA and the UK, with most of

the remainder originating from other countries with similar free market economies. Hence,

most theorizing on multi-national enterprises (MNEs) has been based on a profit-maximizing

and market based logic. However, over the past decades, the share of the USA and the UK in

global FDI flows declined to 23% in 2010, while new players increased their share, including

Japan in the 1980s, France in the 1990s and emerging economies such as China from about

2005 onwards.1 This diversification of origins of MNEs has increased the heterogeneity of

institutional arrangements and economic systems from which these MNEs originate.

This heterogeneity has a number of consequences for the types of firms that

emerge. First, in a free market economy, private ownership of business is the norm, and

state ownership is rare, especially after the global privatization wave of the 1980s and 1990s

(Vickers & Yarrow, 1992, Estrin, Hanousek, Kocenda, & Svejnar, 2009). Even so, state-owned

enterprises (SOEs) continue to play an important role in many countries, either to

complement the market in social democratic economies (Hall & Soskice, 2001, Redding

2005) or as a guiding agent for economic development, as in for example Singapore and

China (Fligstein & Zhang, 2011, Lin, 2011, Redding & Witt, 2009, Tipton 2009).

Second, the role of SOEs varies substantially across countries because SOEs are

political as well as economic actors that are owned by the government and hence subject to

multiple, and sometimes conflicting, pressures from the political and economic spheres.

Consider two polar cases as illustration. EU competition policy is designed around the ideal

1 FDI data in this paragraph have been obtained by analyzing the UNCTAD FDI database.

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that no firm should receive undue subsidies, regardless of its ownership (Brenner 2011,

Morgan 2009); SOEs should act ‘as if’ they are private enterprises. On the other end of the

spectrum, SOEs may be strategically deployed to achieve the political objectives of the

owner, for instance a national or provincial government (Buckley et al., 2007; Cui & Jiang,

2012; Wang, Hong, Kafouros & Wright, 2012b). Hence, the actions of an SOE on the global

stage depend on how it is embedded in the political economy of its home country.

In this study, we are interested in a particular type of SOE, namely companies that

are listed on the stock market, but have a government entity as their majority shareholder.

These “listed SOEs” display characteristics of both the state and private sectors. Because the

majority owner is the state, they may be motivated by objectives other than profits, and

these are determined through a political process. Moreover, depending on the country

specific political economy and institutional arrangements, agency problems between the

state as owner and managers of SOEs are likely to emerge. At the same time, private

shareholders – typically financial investors – create pressures for the firm to act more like a

profit-oriented private firm. This constellation can lead to so-called principal-principal

conflicts (Dharwadkar, George, & Brandes, 2000; Young et al., 2008) that affect SOE

performance, attitude toward risk and hence their internationalization strategies (Carcia-

Canal & Guillén, 2008, Chen & Young, 2010).

To assess the impact of state ownership on internationalization, we develop the

literature on SOEs to address three questions. First, how does the state as owner actually

govern its enterprises, and how are these influenced by the political economy and

institutional context? Second, in what ways do the differing objectives of SOEs and private

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firms affect the process of company internationalization? Third, how does the state-

ownership facilitate or constrain access to resources of firms seeking to internationalize?

Our main lenses to approach these issues are the institutional and political economy

perspectives, which we seek to integrate. The institutional perspective investigates the rules

and regulations governing decision makers in businesses, and their impact on strategies and

operations of individual firms (Meyer & Peng, 2005; Peng; Wang & Jiang, 2008). In the

context of SOEs, the agency relationships between owners and management of SOEs play a

critical role as they shape decision makers’ incentives and hence the strategies they

advocate. The political economy approach takes a step further back, to consider the

processes determining the institutions and explaining how they work. In our context,

political economy is concerned with the linkage between the political system of a country

and the actions of politicians operating under these rules, including how they interact with,

and what rules they establish for, business (Acemoglu & Robinson, 2012; 2005; Jensen,

2006; Pagano & Volpin, 2005; Przeworski & Limongi, 1993). These two lines of research are

related as the political system shapes the institutions governing enterprises (Williamson,

2000) but they have not previously been brought together to explain a specific business

phenomenon. In this paper, we focus on the phenomenon of the listed SOEs, which are

simultaneously subject to the political economy of a country as well as market forces.

We investigate the political economy and institutional home country influences on

SOE internationalization across a variety of countries, thereby providing a major departure

for international business research. Until recently, studies of international operations of

SOEs were fairly limited apart from a few qualitative studies in the late 1970s (Mazzolini,

1979, Vernon, 1979). Recently, scholarly interest has focused on the increasing role of

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Chinese MNEs that are partially or fully state-owned, and becoming major global players

(Chen & Young, 2010; Cui & Jiang, 2012; Morck, Yeung & Zhao, 2008; Ramasamy, Yeung &

Laforet, 2012; Wang, et al., 2012b; Zhang, Zhou & Ebbers, 2010). Only two recent empirical

papers study internationalization of SOEs from other countries, namely Spain (Garcia-Canal

& Guillén, 2008) and Norway (Knutsen, Rygh & Hvem, 2011). Thus, a major challenge for the

study of SOEs is to move beyond the case of China, which may or may not be a special case,

and to investigate SOEs from a larger range of source countries. This will allow us both to

develop general theory on internationally operating SOEs, and to assess the generalizability

of the findings of the flourishing China-focused stream of research.

By integrating insights from institutional and political economy perspectives, we

develop a theoretical framework and test hypotheses using a new dataset of 3087 firms

derived from information about the largest 5000 listed firms in the world in 2010. We find

that SOEs, on average, are less internationalized, but this effect is positively moderated by

the institutional development at multiple levels of informal institutions, governance

institutions and resource access.

We thus contribute to the international business literature in the several ways. First,

we integrate the political economy and institutional perspectives to advance the theory of

the MNE to the acknowledged, yet rarely systematically investigated relationship between

home country political economy and MNEs (Luo, Xue & Han, 2010; Stopford & Strange,

1991). This approach is particularly relevant to listed SOEs that operate at the intersection

of political and economic spheres. Second, building on Williamson’s (2000) framework of

institutions, we provide a theoretically grounded analysis of internationalization of listed

SOEs; a phenomenon previously addressed only in single context studies (Chen & Young;

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2010, Cui & Jiang, 2012; Garcia-Canal & Guillén, 2008; Knutsen et al., 2011). Third, we are

probably the first study to investigate the contextual moderators of state-ownership on firm

strategies. Fourth, our empirical results grounded in a large unique dataset provide novel

evidence of the patterns of internationalization of state owned MNEs, notably the

moderating influence of political economy factors and institutions.

Political Economy and Institutions of SOE Governance

Listed SOEs have both private and state entities as owners, and hence they are political

actors as well as economic actors. They are political actors because they have been

established or nationalized by representatives of the state to pursue political objectives.

They are also economic actors as they participate in the market economy by creating

economic value, by competing for customers and by being traded on stock exchanges. To

understand this dual role, we integrate political economy and institutional perspectives.

Political economy is a branch of economics that investigates how the rules and

incentives operating within the political system of a country impact on the actions of

political decision makers (Acemoglu & Robinson, 2012; 2005; Jensen 2006). A particular

focus are the rules that law-makers establish for economic actors, such as corporate

governance (Pagano & Volpin, 2005), enterprise subsidies (Robinson & Torvik, 2009) and the

policies toward inward foreign investors (Penrose, 1968; Jensen, 2006). Political and

economic systems are interconnected in that political actors set the rules for economic

actors while economic actors aim to influence political actors, through lobbying (Hillman,

Zardkoohi & Bierman, 1999), corporate donations, or corrupt practices (Cuervo-Cazurra,

2006). For example, , political systems of winner-takes-all democracy tend to be associated

with free markets, while proportional representation democracy, which entails political

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actors having to make compromises and strengthening groups other than the single largest

one, tend to be associated with stronger welfare states. For example, Pagano and Volpin

(2005) found majoritarian election systems to be associated with stronger shareholder

protection and weaker labor protection. On the other hand, political systems of less

effective democratic control allow government’s greater discretion in using national

resources such as SOEs for political or personal ends. The interplay between the institutions

of the political and economic systems thus determines the place of SOEs in society, and the

rules by which SOEs are governed. Political economy ideas have influenced scholars of the

MNE such as Stopford and Strange (1991) but there has been little systematic application of

the political economy perspective to MNEs from the home country perspective and state-

owned MNEs in particular.

We build on the approach of Acemoglu and Johnson (2012) who argue that the

differences in levels of income and wealth between countries are explained by two factors.

The first is institutional; the relationship between “inclusive” political and economic

institutions, such as strong property rights, high general levels of education and clear

incentives for innovation, economic growth and prosperity. The second is the political

economy processes which underlie the selection of inclusive institutions, which Acemoglu

and Johnson (2012) contrast with the emergence of “extractive” institutions that focus on

ensuring the sustained wealth of the elite.

Inclusive institutions are designed in particular to enhance the efficiency of markets

and to reduce uncertainty (North, 1990; Peng et al., 2008). Williamson (2000) categorizes

institutions into a four level hierarchy, each level placing constraints on the ones below. He

places informal institutions (customs, traditions and religious norms), at the top of the

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hierarchy because these are the deepest rooted and the slowest changing. Formal

institutions are located at the second level; the key “rules of the game” that relate to

property rights that are stable and effectively enforced. Weak property rights generate

profound uncertainty in the business environment. Williamson’s third level is governance,

which shapes the way that individuals interact, aligning the governance structure they adopt

with the types of transactions. He places particular emphasis on private governance; for

instance the nexus of formal and informal arrangements underlying the provision of finance

and the development of supply and distribution networks. The three previous levels all

affect the fourth; resource allocation, including corporate strategies and decisions.

International business scholars have frequently analyzed the impact of such

institutions in host countries on for example the inflow of foreign direct investment (e.g.

Bevan, Estrin & Meyer, 2004; Globerman & Shapiro, 2002) and foreign investors’ entry

mode (Meyer, 2001; Meyer, Estrin, Bhaumik, & Peng, 2009). However, there has been less

focus on how internationalization is influenced by institutions in the country of origin,

including the form of ownership, notably the distinction between state-owned and private

firms. We also lack understanding of how institutions in the country of origin affect the

strategies of outward investments.

We develop such a country of origin perspective by analyzing the political economy

and institutions of the home country. Therefore, we develop the political economy

literature to consider the objectives that such SOEs might follow in different political

environments, and integrate this with elements of the institutional and governance

literatures in order to shed new light on the internationalization behavior of SOEs. Private

listed firms normally have as their primary objective shareholder value maximization. In

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contrast, listed SOEs are subject to more complex objectives introduced by the duality of

ownership. We thus first explore the political economy underlying the government

becoming involved in running enterprises in the first place, which allows us to predict a

direct effect on SOE internationalization. This direct effect is subject to pressures of

institutions created by the political economy of the home country; in particular informal

institutions, formal and governance institutions and the state’s access to resources. Figure 1

summarizes these arguments, which will be further detailed in the following sections.

*** Figure 1 about here ***

Objectives of SOEs

In a purely free market conceptualization, in which markets operate costless and without

frictions, there is no role at all for the state in the economy. In this textbook world of

general equilibrium of perfectly competitive markets (see e.g. Estrin, Laidler & Dietrich,

2012), the state either does not need to exist at all, or is limited to securing the efficiency of

markets through enforcements of rules and laws.

However, in practice markets are not all perfect and there is a role for active

government intervention to remedy market inefficiencies (Atkinson & Stiglitz, 1980). This

suggests that SOEs should only serve specific purposes where pure market outcomes are

considered either inefficient or socially undesirable. For example, SOEs may operate in

industries with natural monopolies such as railway networks, electricity distribution, or the

provision of public goods (Aharoni, 1981; Estrin, 2002; Vickers & Yarrow, 1992). The purpose

of state involvement in these sectors is strictly to overcome inefficiencies of domestic

markets, and hence international activities are rarely part of their primary objectives. This

vision of SOEs is consistent with Acemoglu and Robinson’s (2005) inclusive institutions.

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A related vision of the role of the state derives from social democracy, which views

the state as being concerned with the distribution of income as well as with economic

efficiency. The objective of the state is seen as benign; to maximize social welfare, which is

to be achieved not only through attaining the highest economic efficiency but also by

ensuring some degree of equality in the distribution of income and – more importantly – of

opportunity (for a review, see Przeworski & Limongi, 1993). There may well be a trade-off

between efficiency and equality in the allocation of resources, and social democratic

governments will sometimes use taxation or capital allocation to support social rather than

economic objectives. In such a context, the government may also own firms’ as a tool to

attain social goals – for example to ensure employment in less developed regions, higher

wages for disadvantaged groups, or the direct enactment of social policies in the workplace.

A third vision attributes the state a direct role in economic development. For

example, SOEs may pool resources for very large projects that private investors would be

unable or unwilling to finance. Such SOEs played a major role in industrialization drives or

infrastructure construction projects in many developing countries throughout the 20th

century (Prebisch, 1950, Kohli, 2004). Similarly, SOEs in the mining and oil and gas industries

play a key role in mobilizing resources for economic development, either by marketing a

nation’s resources abroad, or by accessing resources outside the country. Thus, SOEs from

for example China and Thailand invest overseas to secure the national supply of oil, gas, coal

and other natural resources (Meyer & Thaijongrak, 2013, Ramasamy et al., 2012).

An extreme version of this view derives from the Marxist tradition, now largely

discredited but with an enormous legacy, and views the state as the embodiment of the will

of the people (Kornai, 1990) and as the guardian of national economic growth. In these state

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communist systems, such as the former Soviet Union, private ownership was outlawed, with

resource allocation and social objectives largely determined by direct fiat through central

planning. Since the fall of the Berlin Wall in 1989, few countries have maintained such an

economic system. However, countries transitioning from planning to a market economy

have often retained a vision of the state as the entity responsible for driving future

economic development. This has brought such countries, like China or Vietnam, into line

with other historically market oriented economies mainly in Asia, such as Singapore, whose

political traditions have also been based on a vision of the state as guiding the process of

economic development, though working with the institutions and incentives of a market

system rather than replacing them with central direction (Tipton, 2009). These “state

capitalist” economies also give major roles to SOEs, though differently from the case of the

social democratic state. In SOEs in this context, profit maximization may be supplemented

not only by social and political objectives, but by broader national development objectives.

In sum, different historical legacies and political processes across countries lead to

variations in the number of SOEs, and in the balance of objectives between them. Countries

heavily focused to free market principles have very few SOEs, and these largely emulate the

behaviors of private firms, including with respect to internationalization. The situation in

more social democratic economies is more complex, depending on the precise reasons why

firms are in state ownership (natural monopolies as against large spill-over benefits for

example) and the balance of pressures to follow efficiency or social objectives. For example,

some SOEs may be specifically set up to create employment, such as entities created to

Roosevelt’s ‘New Deal’ in the USA in the 1930s. More commonly, it may be a secondary

objective that becomes more emphasized when the organization faces economic pressures

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and the suggestion that it needs to cut costs. Political actors invariably aim to protect

employment in their community, and thus are in particular opposed to activities that would

generate employment abroad rather than at home. These political pressures affect private

firms to a lesser degree, and reduce SOEs relative drive to internationalize. More generally,

to the extent that SOEs aim to satisfy social objectives, for example by creating

employment, these will be attained by operating primarily within the home country.

Similar factors apply in state capitalist countries, though the social versus efficiency

trade-offs are further supplemented by trade-offs between the imperatives of growth and

efficiency. One can conceive of a variety of ways in which internationalization may be a

strategy for development that a state seeks to implement through its SOEs. In state

capitalist economies, pressures for social aims, such as job creation and maintenance, may

be offset by political pressures to internationalize to attain development targets, such as

access to natural resources (Wang et al., 2012b). Even so, for reasons of governance

discussed below, SOEs are rarely the most efficient firms, and therefore not the ones most

able to compete on international markets. As such, they are therefore unlikely to be the

favored instruments for the state to internationalize the economy, even in state capitalist

countries. We therefore propose a reduced drive to internationalize in SOEs because the

pursuit of social objectives will not, on balance, be offset by the state objective of

development through trade.

These arguments, however, make the implicit assumption that the state itself takes

an “inclusive” rather than “extractive” form, in the Acemoglu and Robinson (2005) sense.

Extractive states could emerge from a free market system; political economy studies suggest

that extractive elites might exploit a large state, including SOEs, for their own purposes,

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including for the extraction of rents. Moreover, extractive states have emerged from former

socialist economies; perhaps Belarus and Uzbekistan are examples. In these cases, the

objectives of the SOEs become to buttress the political and economic power of the ruling

political elites. As such, they seem likely to be primarily political rather than economic

institutions, and hence even less likely to internationalize than SOEs in inclusive states.

In order to exclude as far as possible SOEs purely serving extractive objectives from

our analysis, we focus on SOEs that are not purely organs of the state. Thus, to be

considered in our analysis, a firm has to be listed on the stock market; and hence be an

independent commercial entity that has degrees of both private and state ownership

(though majority state ownership). These listed SOEs encompass a wide range of

organizations that blend both business and political objectives. In other words, they are

expected to generate profit for shareholders, but they also have a more or less explicit

mandate to support political objectives, either social or developmental (Chen & Young,

2010; Garcia-Canal & Guillén, 2008).

Governance of Listed SOEs

As noted above, the fundamental difference between SOEs and private firms rests in their

objectives: while the former pursue broad sets of more or less clearly defined objectives,

the latter focus exclusively on profits and shareholder wealth maximization. The two types

of objectives combine and conflict in SOEs that are listed on the stock market and hence are

jointly owned by private investors and by the state.

In these listed SOEs the governance problem of SOEs is moderated by the influence

of private shareholders. In particular, with potentially conflicting shareholder objectives,

managers may be able to exploit the lack of clarity in company objectives to ensure an easy

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life for themselves and their employees (see Vickers & Yarrow, 1988; Shleifer & Vishny,

1994). Weaknesses in corporate governance thus can cause inferior performance to what

might be achieved under private ownership, and thus reduce the ability of an SOE to

compete in international markets.

The problem arises from the asymmetry of information held by managers and

owners; outside owners can never have full access to the information about corporate

performance that is in the hands of managers. Thus, it is hard for them to establish whether

poor results are a consequence of unforeseen circumstances or managers exploiting firm

profits for their own purposes. Whenever ownership and control are separated, firm-

specific rents can be used to satisfy management’s aim – for example, lower effort or

managerial power, via the size of the firm – rather than profits. However, a private

ownership system places effective limits on their discretionary behavior, via external

constraints from product and capital markets, and perhaps also the market for managers,

which will place value on previous performance (see Estrin & Perotin, 1991).

It is hard for the state to replicate such market-based constraints. Even listed SOEs

are not fully subject to private capital market disciplines, so the market-based governance

mechanisms cannot be substituted for in full. SOE leaders often operate in a partially

separated managerial labor market and do not compete in the wider one. Moreover,

though the government’s ownership stake is concentrated, the state often lacks does not

have the capacity in the supervisory ministries to undertake the necessary scale and quality

of monitoring. In consequence, weak monitoring of managers and the absence of external

constraints can give management considerable discretion to follow their own private

objectives – rent absorption, asset stripping, employment, or social targets.

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Thus, agency theory suggests that, under such conflicting governance, managers are

distracted from the focus on economic efficiency. These agency problems are exacerbated

when there are multiple types of owners, each with potentially differing objectives.

Managers can exploit the lack of clarity about the aims of the firm to satisfy their own

objectives. This situation has been characterized as principal-principal conflict (Dharwadkar,

George, & Brandes, 2000; Young et al., 2008). Moreover, the presence of shareholders with

different objectives may affect the SOEs attitude to risk, and hence their internationalization

strategies (Chen & Young, 2010, Garcia-Canal & Guillén, 2008).

The particular way that these agency problems play out in practice depends on the

role of the state and the institutional arrangements in the home country. For example, in

free market economies the state as owner may simply seek to maximize profits, and

therefore resolve the principal-principal problem by allowing private owners to control

management. This appears to have been the case following the nationalization of banks

such as Lloyds TSB and RBS in the UK post-2008, where the state appears not to have any

specific mechanisms to ensure governance in pursuit of its own, as against private sector,

interests. This approach, however, assumes that the interests of private owners and the

state are perfectly aligned.

A closely related issue is the softness of budget constraints arising with the political

determination of resource allocation: managers benefit from an implicit guarantee to cover

the losses of an SOE. This acts as a further source of incentive problem, since managers do

not have to bear the consequences of their own actions.

All of these factors suggest that SOEs are likely to be less efficient than their (purely)

private counterparts because they face additional problems of agency and governance. In

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consequence, they will be less competitive than privately owned counterparts and therefore

less able to develop capabilities or ‘ownership advantages’ (Dunning, 1993) that would be

transferable to be exploited abroad, and which are a key driver for international growth

(Kirca et al., 2012). Moreover, the lesser degree of competition faced by SOEs in their home

environment also reduces their opportunities to learn how to engage in the kind of

competitive environments they are likely to encounter in the global economy. This lack of

suitable capability would thus reduce the ability of SOEs to internationalize.

In addition, decision makers in SOEs may have highly bureaucratic decision-making

processes and incentive schemes that discourage the taking of risk. However, international

growth is a high risk activity. The inherent risk averse behaviors of SOEs can thus be

expected to reinforce the negative effect of the lack of capabilities on the scope of

internationalization strategies. Moreover, SOEs will often face pressures to pursue not only

economic objectives but to align their strategies to political imperatives of the government

at the time that usually have a domestic character; only in emerging state capitalist

economies and in special sectors such as the mining industry do they also involve

international scope. Hence, we propose that after controlling for levels of development and

possible industry specific effects, SOEs will have fewer international activities:

Hypothesis 1: SOEs exhibit a lower degree of internationalization than privately owned

enterprises (POEs).

Home Country Institutions as Moderators

While the objectives of SOEs can be expected to lead to a lower degree of

internationalization compared to private firms, these objectives and their implementation

also vary greatly with political and institutional differences between countries. Moreover,

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the political economy literature highlights that institutions and political arrangements do

not evolve independently, but are intimately related (Acemoglu & Johnson, 2005, Pagano &

Volpin, 2005), and hence moderate the relationship between state ownership and

internationalization. We therefore consider the moderating impact of political and

institutional arrangements and follow Williamson (2000) in commencing with the highest

order informal institutions before considering formal institutions, governance and resource

allocation. However, as formal institutions and governance institutions are closely

associated both conceptually and empirically, we merge them into a single construct to

offer a more parsimonious model.

Informal Institutions

Perhaps the most important informal institution, especially when considering the process of

economic development, is corruption. Corruption can occur within all economic systems.

However, because it is associated with the activities of the state – the definition of political

corruption is the abuse of public power, office, or resources by elected government officials

for personal gain (for reviews see Bardhan, 1997; Svensson, 2005) - the possibilities for

corruption expand with the scope of state activities. Thus state ownership is likely to be

associated with corruption, not because individuals working for SOEs are more corruptible

than those working for private firms but because the increased opportunities for corruption.

While several studies examine the role of corruption for foreign direct investment

(FDI), the vast majority of these studies focus on the role of corruption in the host country

and its (mostly) negative association with inward FDI (for reviews, see Cuervo-Cazurra,

2006; 2008). Much less is known about the role of home country corruption for outward

FDI. Cuervo-Cazurra (2006) investigated the sensitivity of FDI to host country corruption

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and found it to be modified by the country of origin of the FDI. His findings that host country

corruption results in relatively higher FDI from other countries with high levels of corruption

point to the importance of home country corruption for internationalization behavior. To

the best of our knowledge, the role of home country corruption in relation to

internationalization of SOEs has thus far not been studied systematically.

As a high level institution (Williamson, 2000), corruption can be viewed as

independent from state ownership; however, it may moderate the impact of state

ownership on internationalization. If the home country institutional environment is highly

corrupt, then bureaucrats may view SOEs as an opportunity to extract rents, and attempt to

organize them in ways that enhance the potential for bribery. Such rents can for the most

part only be obtained if the SOE is operating in the domestic economy; international

activities are outside the scope of the bureaucrats. Indeed, being accustomed to bribery and

other ways of circumventing contracts and rules of law may discourage such SOE managers

from effectively entering into business transactions abroad; particularly in countries where

the level of corruption is lower (Cuervo-Cazurra, 2008). Hence, corrupt bureaucrats are

likely to be opposed to internationalization because the ‘rents’ that they can extract are

predominantly domestic, and international operations are not under their control. The more

corrupt is the bureaucratic system, including the SOEs, the stronger is this motivation of

bureaucrats to keep firms focused to the domestic economy. Hence:

H2: The higher the freedom from corruption, the less negative is the relationship between

state ownership and internationalization.

Institutions of Corporate Governance

The institutional arrangements with the most profound impact for the governance of SOEs

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are probably the operations of domestic capital markets. These rely especially on

Williamson’s (2000) second level of institutions, formal institutions, and notably property

rights. In private firms, capital markets serve both as benchmarks to assess corporate

performance and as basis for incentive schemes such as stock option plans that help

overcoming principal agent conflicts (Fama & Jensen, 1983; Filatotchev & Wright, 2011).

Moreover, as capital markets become more liquid, they can more easily support the market

for corporate control that represents one of the key governance mechanisms for privately

owned enterprises, as well as for publicly listed SOEs. Moreover, governance arrangements

are likely to be more effective when capital markets are more developed, because there will

be more external agents evaluating company performance and there will be more

competition in the market for the shares of SOEs. This resolution of certain aspects of the

agency problems of SOEs is strengthened since well-developed stock markets also imply

that managers may be incentivized through the use of share ownership or stock options.

Hence, scale and liquidity of the capital market influence the balance of enterprise

objectives between profits and social ones.

Thus, the governance problems of SOEs relative to private ones will be increasingly

addressed as the capital market becomes more developed. This implies that SOEs are under

higher pressures to improve efficiency and to develop resources that enable competition in

competitive markets, which also provide a foundation for international growth. Hence,

barriers to internationalization deriving from agency differences to private firms will be

reduced. Moreover, with the increased transparency provided by capital markets SOEs are

increasingly likely to be assessed against private firms, which provide strong incentives to

emulate their strategies. Hence, capital market development is likely to reduce the negative

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effect of SOE on internationalization:

H3: The more developed the domestic capital markets, the less negative is the relationship

between state ownership and internationalization.

Institutions governing resources access

Williamson’s (2000) lowest tier of institutions is resources available to firms, and we now

consider how state-ownership might facilitate or constrain the access to resources. It has

frequently been argued that SOEs may enjoy an (unfair) advantage over private firms,

because they enjoy preferential access to certain critical resources (Nee, 1992). These

resources may also be important when developing operations internationally.

The extent to which a government actually provides such benefits depends on both

the political ideology and the government’s ability to provide resources. In the European

Union, which follows free market principles in this respect, government support conflicts

with the principles of competition policy. This explicitly rules out national government

providing subsidies to firms, including SOEs (Morgan, 2009). Although in practice there are

exceptions and disputes as to what constitutes an unfair protection, it is fair to assume that

subsidies are more limited in some countries than in others. On the other hand, in state

capitalist economies, such supports can be very important. They can include for example (1)

explicit or implicit state guarantees that facilitate access to financial resources, including

both direct subsidies and indirect benefits such as bank loans from state-controlled banks

(Buckley at al., 2007; Luo et al., 2010; Zhang et al., 2010), (2) preferential access to

protected domestic markets that allow SOEs to generate cash flow, and/or (3) preferential

access to information and research provided by government-associated agencies and

research institutes (Kotabe, Jiang & Murray, 2011). In free market and social democratic

22

economies such support tends to be more subtle and indirect, including for example

support through diplomatic services that help opening doors and gaining access to key

decision makers (Knutsen et al., 2011).2 These political economy factors determine to what

extent a government will use its resources to assist in the internationalization of its firms.

The government’s ability to provide resources depends on the resources that it has

at its disposal. The most liquid such resources that can also be invested overseas, and are

under control of the state are the accumulated currency reserves of the country, themselves

an outcome of past economic policies. A government which has high reserves is in a much

stronger position to use SOEs to reinvest its funds. In the fact, the large currency reserves

create pressure to identify suitable overseas investment targets to avoid sharp currency

appreciation.3 Moreover states that have accumulated reserves as result of past trade

surpluses and a strong currency are in a better position to use their domestic resources to

acquire assets abroad, because acquisition targets appear relatively ‘cheap’. Hence:

H4: The higher the country’s accumulated currency reserves, the less negative the

relationship between state ownership and internationalization.

Methodology

Sample and Data

The initial sample for this study was drawn from the Worldscope database and included the

world’s 5000 largest firms based on sales in 2010. This sampling was purposeful as we

sought to include all large publicly listed enterprises (regardless of ownership) in order to

ensure a comprehensive but representative population of firms from a variety of countries

2 This claim of SOEs having preferential access to resources is particularly advanced by opponents of Chinese

MNEs operating in North America (for critical reviews see Globerman & Shapiro, 2009; Peng, 2012). 3 Sovereign wealth funds are a special case of this form of SOE, but they are not listed SOEs and therefore not

part of this study.

23

and industries with both private and public ownership structures in order to maximize

variability in our data. Thomson One Banker was the source for firm level data, except for

the ownership data, which came from the Orbis database. Country level data was obtained

from the Heritage Foundation and the World Bank. Due to missing data on some variables,

our sample size was reduced to 3087 firms based in 47 countries, of which 143 were SOEs.

Variables and Measures

The dependent variable, firm degree of internationalization was measured as foreign sales

to total sales ratio (FSTS). As we are primarily concerned with entities where the state has a

majority ownership stake, state-owned enterprise (SOE) was operationalized as enterprises

with more than 50% state ownership as indicated in the Orbis database.

Market capitalization or market value was measured as the share price times the

number of shares outstanding as a percentage of GDP (World Bank, 2010). Freedom from

corruption is an index composite of rule of law, limited government, regulatory efficiency,

and open markets based on the 2010 Index of Economic Freedom published by the Heritage

Foundation. Currency reserves is the total reserves held by a country, including holdings of

monetary gold, special drawing rights, reserves of IMF members held by the IMF, and

holdings of foreign exchange under the control of monetary authorities (World Bank, 2010).

Finally, we controlled for the development of the domestic economy via GDP per capita.

Industry variables were measured based on 3-digit SIC codes. Industry concentration

is an indication of the number and relative power of firms in an industry. It was measured as

the percentage of sales accounted for by the top four firms within an industry. Industry

growth was measured as the annual compound growth rate, calculated by taking the nth

root of the total percentage growth rate, where n is the number of years in the period being

24

considered (Dean & Meyer, 1996). We also controlled for resource-based industries,

operationalized as a dummy variable for industries with SIC codes smaller than 1500.

Following prior studies, product diversification was measured using the entropy

measure of firm diversification (Hoskisson et al., 1993; Palepu 1985). The entropy values

were calculated with the formula Σ pi ln(1/pi) where P is the percentage of segment sales of

the total firm sales and (1/P) is used as a weight to account for the importance of each

business segment. The literature suggests that differences exist in the way

internationalization affects performance of large vs. small firms (Lu & Beamish, 2001). We

therefore controlled for firm size measured as the logarithm of employees. As the firm’s

own resources and capabilities constitutes a key driver of internationalization (Kirca et al.,

2012), we included R&D expenditures in the analysis. However, since this variable was

missing for a relatively large proportion of the sample, we followed prior research (e.g.

Greene, 2003; Singh, 2008)and recoded all missing values of R&D with 0 and added a

dummy variable indicating whether data on R&D was available or not.

Table 1 provides descriptive statistics (means and standard deviations) and

correlations between the variables in our regression analysis. Freedom from corruption and

GDP per capita appear highly correlated (0.88). Therefore, we conducted a variance inflation

factor (VIF) analysis to assess multicollinearity. The analysis generated as a highest value

5.58, which is well below the recommended benchmark of 10 (Hair et al., 1995).

Table 1 about here

Analysis

Given the nature of our dependent variable, degree of internationalization, which is subject

to left-censoring (firms that decide not to internationalize abroad may have only domestic

25

activities; the degree of internationalization has a limit value of zero), we used a Tobit

(Tobin, 1958) model to estimate our equations. Conventional regression techniques, like

OLS, can provide inconsistent parameter estimates when applied to data that include a large

proportion of limit observations; it may yield a downwards-biased estimate of the slope

coefficient and an upwards-biased estimate of the intercept (Greene, 2003: 764). A Tobit

model is specified as follows:

Y*

i = Xi β +Ɛi

where Ɛi ~ N(0,σ 2). Y* is a latent variable that is observed for values greater than 0 and

censored otherwise. The observed Y is defined by the following measurement equation:

Y* if Y* > 0

Yi =

0 if Y* ≤ 0

Results

Table 2 provides our main results of the Tobit estimations. Model 1 shows the base

equation with only the control variables included. Model 2 shows the partial analysis

including all direct effects and model 3 is the full model with all interactions.

Table 2 about here

With respect to Hypothesis 1 we find that the direct effect of state ownership on firm

internationalization is negative and significant at P<0.001 level (Model 2). Even after

including the moderating effect (Model 3), the result is still negative but significant only at

P<0.05 level. Hence, we find support for the hypotheses but also indications that this effect

is critically moderated.

We use the full model (Model 3) to assess our hypotheses regarding the moderating

effects. In accordance with Hypothesis 2 we find that freedom from corruption has a strong

26

positive moderating effect on the SOEs-internationalization relationship (β=0.01, p<0.001).

This supports our argument that under conditions of low corruption (informal institutions),

SOEs are more likely to internationalize (or less unlikely to internationalize compared to

POEs). Hypothesis 3, which proposed a positive moderation of market capitalization on the

focal relationship, also received support (β=0.00, p<0.05), suggesting that formal

institutional governance mechanisms increase the likelihood of SOEs internationalization.

Finally, hypothesis 4 predicted a positive moderation of institutional access to resources on

the SOE-internationalization relationship. This hypothesis also obtained strong support

(β=1.17-7, p<0.001) in support of our theory. Together, the results provide strong evidence

in support of our theoretical framework as outlined in figure 1; while SOEs internationalize

significantly less than POEs, on balance, this relationship is conditioned in important ways by

the unique configurations of political and institutional environments of the home countries

from which these SOEs originate.

As robustness test we also ran these regressions including the moderating effects

one at a time. These regressions resulted in moderating effects signed in the same direction

as in the full model, and at equal or higher levels of significance. As further robustness tests,

we substituted some of the moderating effects with other measures for the same

theoretical construct. For example, in accordance with our theory we used the protection of

intellectual property rights in place of freedom from corruption to gauge the role of formal

institutions, and we found the results to be substantially identical. However, as these two

variables are highly correlated (r=0.94), we were unable to include them simultaneously in

the full model of our analysis. These results are available from the authors upon request.

27

With respect to control variables, we note in particular positive and highly significant

effects of R&D intensity (β=0.02, p<0.001) and resource-based industries (β=0.18, p<0.001).

These results may be interpreted as testimony of the importance of access to valuable

resources in order to create transferable ownership advantages when investing abroad

(Dunning, 1993, Kirca et al., 2012), irrespective of ownership. R&D intensity indicates that

on balance, firms that invest in building innovative capabilities may be better positioned to

reap the benefits of international competition. Moreover, resource-based industry sectors,

such as mining, oil and gas, also emerge as highly internationalized.

Discussion

Our results shed novel insights on the phenomenon of globalization of SOEs. We

started from the observation that SOEs play different roles in different societies, which are

driven by the political economy shaping the institutional framework under which SOEs work.

Following Williamson (2000), we distinguished between different hierarchies of institutions.

This approach led us to distinguish between informal institutions (e.g. corruption levels),

governance institutions (e.g. stock market development), and state access to resources (e.g.

currency reserves). Our empirical tests not only show support for the individual hypotheses,

but demonstrate that the effects of these three levels are complementary in explaining how

the degree of SOE internationalization is conditioned by the political and institutional

context of the home country.

Implications for theory

The integration of political economy and institutional perspectives pushes forward our

understanding of how MNEs are embedded in their home country, and why it matters for

international business. Traditional work on the MNE makes an implicit assumption that the

28

home context has a neutral effect, and that internationalization is driven by firm-specific

resources (Kirca et al., 2012), though resources of the home country have recently been

recognized as a source of such firm-specific resources (Nielsen & Nielsen, 2010; Wan, 2005;

Wan & Hoskisson, 2003). Some scholars of specific contexts have also pointed to

government policy as a means to help firms mobilize resources, for example in Japan in the

1960s/1970s (Ozawa, 1985) and China in the 2000s (Buckley et al., 2007, Wang et al.,

2012b). Yet, there is little theorizing on how specific home country political institutions

interact with MNEs of different ownership types in driving internationalization.

The actual relationship of home governments and MNEs outward investment is

considerably more complex, as has been recognized by some scholars (Stopford & Strange,

1991), but rarely analyzed systematically. To this end, our political economy perspective

proposes that the role of home governments may indeed be varying across different types

of home economies, in particular with respect to state-owned MNEs. The political economy

of a country shapes the institutions under which SOEs operate, and thus both the resource

they may potentially exploit and explore abroad, and the incentives to do so. This political

economy perspective thus provides an important indication of the linkage between home

country political and institutional influences on the globalization of domestic SOEs.

Our study is among the first to systematically investigate these influences. Based on

3000 listed firms across 47 different economies, of which 143 had majority state ownership,

we provide the first large-scale, multi-country test of the Williamson (2000) multi-level

hierarchy of institutions. Our results provide strong evidence for the moderating effects of

home country political institutions on the propensity of listed SOEs to internationalize. This

focus on a specific breed of SOEs that are subject to potentially conflicting motives and

29

drivers by virtue of their dual ownership structure, with the state as majority owner and

private investors as minority owners, provides new insights into SOE strategic behavior and

extends our understanding of the conditions under which such complex enterprises operate

in the global economy.

We have focused on these hybrid types of organizations that blend elements of

private and public, and which offer new avenues for internationalization and competition if

they can resolve the potential conflict and reap the benefits of being backed by the state yet

operating under efficiency constraints more similar to private companies. This combination

of characteristics of traditional SOEs and private firms, may make listed SOEs very potent in

political games abroad and thus enable them to become formidable global competitors.

Traditionally, business research on SOEs has primarily drawn on agency theory and

variations thereof (Estrin & Perotin, 1991; Vickers and Yarrow, 1991; Estrin et al, 2009), and

established that, due to the prevalence of agency conflict, SOEs typically are less efficient.

An extension of this approach suggests that, due to the lesser efficiency, SOEs are less likely

to develop resources that would enable them to compete abroad, and hence are less likely

to internationalize. This we proposed in Hypothesis 1 and found empirically supported.

However, this agency perspective needs to be extended to capture the broader

environment in which the SOE is operating. We suggest that political economy provides an

appropriate approach to do so because the political economy shapes the institutions under

which an SOE is operating. Future research may further extend this approach by modeling

the interdependence between the political economy, perhaps in terms of electoral systems,

the specific economic institutions that we included in our analysis, and corporate strategy.

30

Economic institutions likely are at least in part mediating the effect of political institutions,

and it would be theoretically interesting to explore how such mediation may takes place.

Limitation and future research

The first set of limitations of our empirical study arises from the nature of the dataset. We

aimed to study the most important firms and to cover companies from a wide variety of

home countries with different political and institutional configurations; a precondition for

studying home country effects. However, this focus on large firms implies that we have little

specific to say about smaller SOEs. One might argue that smaller SOEs can draw on fewer

state resources and are subject to local rather than national politics, which would moderate

their internationalization behavior. Comparing large and small SOEs thus would be one road

for future research.

Second, our dataset is of a cross-sectional nature, relating the current

internationalization to current ownership and institutional frameworks. This type of study

always leaves open the possibility of reverse causality, though we believe this to be a limited

problem in our study because our explanatory variables are at a higher level than our

dependent variable, and individual SOEs are unlikely to influence their political and

institutional context (at least in the short-to-medium term) – though all SOEs in a country

together may well influence their institutional context. This issue could be addressed in

future research by analyzing changes over time on the basis of panel data. Such a study may

also be able to accommodate a larger set of country-level variables simultaneously,

including notably the formal institutions level as represented by property rights protection.

Third, our political economy approach suggests that firms in specific countries are

indeed subject to specific influences that emerge in one country but not in others. Such an

31

argument has been made in particular for China, where the involvement of the state and

the party is particularly intensive, and where mechanisms of governance have developed

specific forms such as state asset holding companies (Wang et al., 2012a) and career paths

taking managers back and forth between governmental entities and SOEs (Brødsgaard,

2012; Lin, 2011). Our study might thus suffer from an aggregation bias, which suggests

complementing our cross-country study with country-specific studies that enrich our

framework with locally relevant variables. Another possibility would be a multi-level

modeling approach, but such techniques cannot easily handle non-normally distributed

dependent variables.

Fourth, future research may incorporate the analysis of performance impact of

internationalization of SOEs and their private counterparts. Considering financial

performance, we have noted in our theoretical discussion that SOE strategic decisions are

less likely to be efficiency and profitability oriented, which suggests that we would expect a

less positive effect of internationalization on performance for SOEs compared to POEs –

independent of the theoretically unclear relationship of internationalization on performance

in general (Kirca, et al., 2012).

Implications for management

Our study points to some behaviors of listed SOEs that are of potential interest to both

policy makers and competing businesses. First, our theoretical discussion outlined the

institutionally moderated agency conflicts to which SOEs are likely to be exposed. In

focusing on listed SOEs, we inferred them to be less subject to social objectives and more

profit oriented due to the presence of private shareholders. The listing of SOEs thus

32

represents an institutional change that likely contributes to aligning the behavior of SOEs

and private firms, enabling SOEs to become players in the global economy.

Second, we observed that improvements of institutions along the dimensions of

corruption and capital market developments also create positive moderating effects that

reduce the negative impact of state-ownership on internationalization, and hence bring

SOEs closer to the strategies of private firms. This finding may be extended to suggest that

improvement along these aspects of informal and governance institutions would reduce the

scope of agency conflicts in SOEs, and thus improve the economic performance of SOEs.

Finally, in terms of the broad question of this special issue, how will the presence of

SOEs change the global economy, our findings suggest that if the institutions under which

these SOEs operate are increasingly aligned with the institutions faced by private firms, then

the presence of SOEs in the global economy is unlikely to have a major impact. If on the

other hand, SOEs operate under different sets of institutions that for example allow for

higher levels of corruption or less transparent capital markets, then their role in the global

economy is likely to be different. While our study suggests that their degree of

internationalization is lower, those that are operating internationally blend economic and

political objectives and are therefore embedded in the political economy and the

intergovernmental relationships between the two countries.

Conclusion

SOEs have emerged as major players in the global economy, and if the long term trend

toward more heterogeneity of countries of origin continues, they are here to stay. Our study

demonstrates that the different roles SOEs play in different economic and political systems

translate into different propensity to engage in international business. In particular, we

33

found that SOEs are less likely to internationalize, but the lesser international business

activity is moderated by the political and institutional development of the country of origin.

Our study thus suggests that the political economy of the home country plays an important

role in explaining international business patterns across countries. Hence, future studies of

the MNE should incorporate such country of origin effects to a greater extent than has

hitherto been done.

34

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40

Figure 1: Theoretical Framework

State

Ownership Internationalization

Informal

institutions

Formal and

governance

institutions

Resource

access

institutions

H1 H2

H3 H4

41

TABLE 1

Descriptive Statistics and Correlations

Variable Mean S.d. 1 2 3 4 5 6 7 8 9 10 11 12 13

1. Internationalization 0.32 0.32 1.00

2. State-owned enterprise 0.05 0.21 -0.12 1.00

3. R&D intensity 1.38 3.49 0.26 -0.07 1.00

4. R&D presence 0.51 0.50 0.23 -0.06 0.39 1.00

5. Product diversification 0.74 0.52 0.12 0.02 0.01 0.05 1.00

6. Firm size 9.25 1.37 0.21 0.07 0.07 0.11 0.21 1.00

7. Firm age 53.01 45.58 0.11 -0.07 0.02 0.08 0.12 0.09 1.00

8. Industry growth

9. Industry concentration

10. Resource-based industry

0.03

0.64

0.05

0.06

0.20

0.21

-0.03

0.02

0.06

0.03

-0.06

0.07

0.11

-0.10

-0.08

0.03

0.06

-0.02

0.02

0.00

-0.04

0.01

-0.04

-0.05

-0.00

0.02

-0.06

1.00

-0.03

-0.23

1.00

0.19

1.00

11. GDP per capita

12. Market capitalization

13. Freedom from corruption

14. Currency reservesa

10.33

107.50

28.25

551.93

0.86

67.04

8.33

649.25

0.22

0.13

0.28

-0.29

-0.38

0.01

-0.34

0.17

0.13

-0.03

0.12

0.04

0.08

-0.10

0.09

0.14

0.05

-0.04

0.06

-0.02

-0.05

0.04

-0.02

0.02

0.18

-0.05

0.20

-0.12

-0.02

0.01

-0.03

0.07

0.07

0.02

0.07

-0.01

-0.04

0.01

-0.04

-0.01

1.00

0.07

0.88

-0.35

1.00

0.23

-0.16

1.00

-0.37

a Currency reserves is in $ billions.

All correlations = .04 or above are significant at p<.05

42

TABLE 3

Estimation of the Tobit Models for Internationalization

Hyp. Variable Model 1 Model 2

Model 3

Intercept -1.50 (0.10) ***

0.30 (0.18) 0.38 (0.18) *

R&D intensity 0.02 (0.00) *** 0.02 (0.00) *** 0.02 (0.00) ***

R&D presence 0.11 (0.02) ***

0.16 (0.01) ***

0.16 (0.01) ***

Product diversification 0.07 (0.01) ***

0.07 (0.01) ***

0.07 (0.01) ***

Firm size 0.06 (0.01) ***

0.08 (0.00) ***

0.06 (0.01) ***

Firm age 0.00 (0.00) ** 0.00 (0.00) + 0.00 (0.00) *

Industry growth -0.20 (0.12)

-0.06 (0.12)

-0.06 (0.11)

Industry concentration -0.01 (0.04) -0.02 (0.03)

-0.02 (0.03)

Resource-based industry 0.18 (0.03) ***

0.18 (0.03) ***

0.18 (0.03) ***

GDP per capita 0.10 (0.01) *** -0.07 (0.02) *** -0.08 (0.02) ***

Market capitalization 0.00 (0.00) **

0.00 (0.00) +

Freedom from corruption 0.01 (0.00) ***

0.01 (0.00) ***

Currency reserves -0.00 (0.00) ***

-0.00 (0.00) ***

(H1) State-owned enterprise -0.14 (0.04) *** -0.09 (0.05) *

(H2) Freedom from corruption X State-owned 0.01 (0.00) ***

(H3) Market capitalization X State-owned 0.00 (0.00) *

(H4) Currency reserves X State-owned 1.17-7

(2.14)-8

***

χ2 670.13

*** 1070.90

*** 1120.37

***

Log-likelihood -1640.75 -1440.37 -1415.63

McFadden's pseudo R2 a 0.170 0.271 0.284

a McFadden's pseudo R2

as Tobit regression does not have an equivalent to the R-squared that is found in OLS regression.

N = 3087; 833 left-censored and 2254 uncensored observations + p<0.10, * p<0.05, ** p<0.01, *** p<0.001