foreign entry strategies by soes 130501 cover · 2013. 8. 21. · 5...

Home and Host Country Institutions, and the Foreign Entry of State-‐owned Enterprises

Klaus Meyer

Department of Management, China Europe International Business School (CEIBS)

699 Hongfeng Road, Pudong, Shanghai, 201206, China

[email protected], www.klausmeyer.co.uk

Yuan Ding

Department of Finance and Accounting, China Europe International Business School (CEIBS)


Jing Li

Beedie School of Business, Simon Fraser University,

Burnaby, BC, V5A 1S6, Canada

Hua Zhang

Department of Finance and Accounting, China Europe International Business School (CEIBS)


May 1, 2013

Acknowledgements: We thank Lin Cui and Larissa Rabbiosi as well as seminar participants at Copenhagen Business School, University of St. Gallen, and George Mason University for helpful comments on earlier versions of this work. Yuan Ding gratefully acknowledges the financial support of CEIBS Research Center on Globalization of Chinese Firms. The research assistance of Ellen Jiang is greatly appreciated.

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Home and Host Country Institutions, and the Foreign Entry of State-‐owned Enterprises

Abstract

State-‐owned (SO) firms are hybrids acting in both business and political spheres. They may

have preferential access to resources from the state owners, if their strategies are aligned

with their state owners’ political objectives. However, SO firms are also subject to special

institutional pressures from local constituents in host economies. The interaction of these

two effects leads SO firms to adopt foreign entry strategies differently than private firms.

Our empirical analysis of subsidiaries of listed Chinese firms shows how SO firms adapt

mode and control decisions differently from private firms to the conditions in host

countries.

Keywords:

State-‐owned enterprises, political economy, foreign entry strategies, establishment mode,

control, China

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Introduction

State-‐owned (SO) firms have re-‐gained prominence in the global economy with the

emergence of multinational enterprises (MNEs) from emerging economies, and China in

particular. The emergence of these SO firms, however, raises questions about how state

ownership moderates the way these firms act on the global stage (Buckley, Clegg, Cross, Liu,

Voss, & Zheng, 2007, Morck, Yeung, & Zhao, 2008, Wang, Hong, Kafouros, & Wright, 2012b).

Since SO firms are both economic and political actors, we develop an institutional

perspective complementing the theory of the MNE (Dunning, 1993, Hennart, 2009) to

explain how state ownership may lead to variations in the strategies of SO MNEs compared

to their privately owned (PO) counterparts.

Extending recent theoretical work on MNEs and institutions in home and host

countries, we argue that SO MNEs’ internationalization strategy is developed between two

opposing institutional forces. On the one hand, SO MNEs have preferential access to certain

resources (Buckley et al., 2007, Zhang, Zhou & Ebbers, 2010), provided that their strategic

objectives are aligned with their state owners’ broader policy agendas (Chen & Jiang, 2010,

Luo, Xie & Han, 2010, Ramasamy, Yeung and Lafort, 2010, Wang et al., 2012b). On the other

hand, SO MNEs face greater host country institutional pressures in at least some countries

(Cui & Jiang, 2012, Globerman & Shapiro, 2009).

We focus on two aspects of the international strategies of SO MNEs, the choice of

establishment mode (acquisition or greenfield) (Hennart & Park, 1993, Slangen & Hennart,

2007) and the level of control over the foreign operation (Andersen & Gatignon, 1989,

Brouthers, 2002, 2013, Meyer, 2001). Both decisions are affected by institutional pressures

that pertain to SO MNEs in both home and host countries. On one hand, their preferential

but conditional resource access tends to enable acquisitions and higher equity stakes. On

the other hand, host country institutional pressures likely inhibit entry by acquisitions and

high equity stakes.

However, the relative strength of these opposing pressures varies with features of

host economies. Specifically, we propose that host country institutional pressures become

more salient in countries with abundant technological resources that SO MNEs seek and in

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countries with strong market-‐oriented institutions that promote ideologies different from

those of SO MNEs. In these contexts, SO MNEs are discouraged from using acquisitions, and

where acquisitions take place, minority equity investments are used. In greenfield

investments where host country institutional pressures subside, SO MNEs tend to

internalize operations for technology seeking.

We apply these theoretical arguments in the context of China, which has become a

major source of SO MNEs.1 Even after three decades of market-‐oriented reforms (Lin, Cai, &

Li, 1998, Xu, 2011), SO firms remain major players in the Chinese economy, and their

involvement is predicted to persist (Li, Xia, Long & Tan, 2012, Lin, 2011). Many of the largest

companies on the stock exchanges of Shanghai and Shenzhen have a state entity as their

main shareholder, or they are associated with business groups that in turn are controlled by

a state entity (Yiu, 2011). However, while state ownership in, for example, Europe has often

been associated with rigid decision making and rent-‐seeking, and hence lack of

entrepreneurial spirits (Kornai, 1990, Vickers & Yarrow, 1991), at least some Chinese SO

firms have been acting very entrepreneurially, underwent radical organizational change, and

pushed into international markets (Deng, 2009, Tan, 2007, Yiu, 2011). These particular

features have to be taken into account when operationalizing the theoretical arguments for

empirical testing.

We test our hypotheses on a dataset of 390 overseas wholly or partially owned

subsidiaries of listed Chinese MNEs in 2009. Our results illustrate how the opposing forces

of home and host institutional pressures shape the strategies of Chinese SO MNEs. Overall,

SO MNEs are more likely to use acquisitions to enter foreign countries than their PO

counterparts, but they tend to exert less control on their foreign subsidiaries. In acquired

units, the development of the local institutional environment is critical for foreign investors’

choice of control level. In greenfield units, the technology intensity drives the decision in

line with internalization theory (Buckley and Casson, 1976, Hennart, 2009).

We contribute to the literature in international business, especially the study of

interfaces between MNEs and their institutional environment, in several ways. First, we

1 According to the UNCTAD FDI database, Chinese outward FDI flows increased to USD 68 billion in 2010, accounting for more than a quarter of FDI from Asian emerging economies (that is, Asia excluding Japan). Of the Chinese outward FDI, according to the estimates by the Heritage Foundation, ninety-‐six percent of the dollar value from 2005 to the middle of 2012 came from SOEs (Scissors, 2012).

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theoretically explain the interactions of institutions creating conditional preferential

resource access at home, and the opposing institutional pressures in host countries. For

example, although resource access at home may facilitate the use of acquisitions by SO

MNEs, host country market-‐oriented institutional development increases host institutional

pressures on SO MNEs and thus lowers their tendency to use acquisitions. Second, we

extend the study of entry strategies (Brouthers 2002, Hennart, 2009, Meyer et al., 2009a) by

distinguishing the pressures pertaining to control decisions in acquired and greenfield units.

Theory suggests that control decisions in acquired units are more subject to host country

institutional pressures than those in greenfield units, as we empirically confirm. Third,

empirically, we show for an original dataset of foreign subsidiaries of Chinese listed firms

how SO MNEs differ in their foreign entry strategies from their PO counterparts. We find

direct effects of state ownership on establishment mode and control levels, which are

moderated by characteristics of local context of the subsidiary.

Institutions and SO MNEs

State ownership influences in multiple ways a firm’s strategy and its internationalization

strategy in particular. Drawing on institutional theory (North, 1990, Peng, 2003), recent

studies put forward two contrasting theoretical arguments as to how internationalization

strategies are affected by the presence of the state as an owner.

First, the state has access to resources that it may make available to SO MNEs,

including notably financial resources, thus reducing the resource costs compared to PO

firms. These resources enable SO MNEs to pursue more risk taking and more aggressive

internationalization strategies such as engaging in larger investment projects and in

countries generally perceived to be ‘high risk’ (Buckley et al., 2007, Knutsen, Rygh & Hveem,

2011, Wang et al., 2012b, Zhang, Zhou & Ebbers, 2010). However, this preferential resource

access is conditional on SO firms aligning their objectives with the political objectives of the

government and/or other political agents (Chen & Jiang, 2010, Cui & Jiang, 2012, Luo, Xue &

Han, 2010), and hence creates resource dependence (Wang et al., 2012b).

Second, as inward investors, SO MNEs may be subject to different institutional

pressures in host countries, compared to PO firms, because SO MNEs may be perceived not

only as economic agents but also as political agents of their home government (Globerman

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& Shapiro, 2009, Peng, 2002). These pressures induce SO MNEs to make extra efforts to gain

local legitimacy by adapting their entry strategies (Cui & Jiang, 2012).

How these theoretical effects influence a particular set of SO MNEs depends on the

specific context in which they are operating. SOEs are part of both the economic system and

the political system of a country, and hence their genesis is influenced by both systems. In

other words, the concept of “SO firm” may be an emic concept in the sense that it has

different meanings and consequences in different political contexts. For example, the

objectives that state owners impose onto SOEs vary greatly, as the identity of the entities

representing the state owners and the means by which they exert control (Lin, 2011, Yiu,

2011). In consequence, the theoretical arguments need to be carefully contextualized. This

is particularly important for studies of SO MNEs because all but two recent publications

(Garcia-‐Canal & Guillén, 2008, Knutsen et al., 2011) on SO MNEs use China as an empirical

field. Thus, great care needs to be taken not to over-‐generalize, but to disentangle the

context-‐specific empirical evidence and general theoretical arguments. In contextualizing

the theory, thus we have to provide a fine-‐grained analysis of institutions in both home and

host economies (Table 1). We thus first develop the theory in general, before incorporating

specific contextual influences in the development of hypotheses.

*** Insert Table 1 about here ***

Home Institutions: Conditional Preferential Resource Access. SO firms may have

access to resources of the state sector, but such an access depends on the specific

institutions under which the SO MNEs operate. One theoretical polar case is an institutional

environment where exactly the same formal and informal rules apply to all firms

independent of their ownership type. In such a context, SO MNEs’ benefit from state

resources is likely to be limited to, for example, diplomatic support (Knutsen et al., 2011).

In contrast, the literature on China points to numerous substantive preferential

benefits that SO firms receive (Buckley et al., 2010, Yiu, 2011). Chinese SO firms have

significant advantages over PO firms in obtaining government permissions for outward

investment (Wang et al., 2012b).2 Moreover, Chinese SO MNEs face lower de facto capital

2 Chinese firms need three permits before they are allowed to invest overseas: a project license from the National Development and Reform Commission, a foreign-‐exchange conversion permit from the

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costs due to multiple means of state support. First, the state as owner imposes lower profit

expectations than typical private shareholders. For example, according to a Unirule Institute

report, SO firms' average annual return on equity was 8.2 percent between 2001 and 2009 -‐

lower than the 12.9 percent average of non-‐state enterprises (Sheng & Zhao, 2012). Second,

SO firms benefit from lower interest rates than private firms as Chinese authorities make

loans available to SO MNEs via SO banks specifically to facilitate major projects such as

overseas acquisitions (Buckley at al., 2007, Luo et al., 2010, Zhang et al., 2010). 3 Such a

policy of politically motivated loans is fairly open; for example the SO China Development

Bank explicitly followed ‘policy driven development finance’, which is supposed to serve the

strategy of the state and enhances the competiveness of Chinese economy.4 In contrast, PO

firms face considerable obstacles in raising capital from Chinese banks (Allen, Qian, & Qian,

2005). Third, Chinese SO firms benefit from direct and indirect subsidies. Indirect financial

support comes in form of guarantees or soft budget constraints, that is, the implicit promise

of the state owner to cover losses incurred by SO MNEs (Buckley et al., 2007). Unirule

Institute estimates that after accounting for subsidies and preferential policies SO firms

received in China, SO firms actually incurred losses of 1.7 trillion yuan (US$260 billion)

during that period (Sheng & Zhao, 2012).

This preferential access to finance has two consequences; it reduces SO MNEs’

financing costs and enables them to tolerate higher risk. There is evidence of lower

financing costs in that emerging economy MNEs appear to ‘overpay’ for their acquisition

targets, and to offer higher bids for targets in developed economies than acquirers from

developed economies (Aybar & Ficici, 2010, Hope, Thomas & Vyas, 2011). Moreover, while

host country political and economic risk generally deters inward FDI (Kobrin, 1979, Asiedu,

Jin, & Nandwa, 2009), Chinese SO MNEs are found able to finance larger scale projects and

to accept higher levels of political risk than PO MNEs (Ramasamy et al., 2012).

State Administration of Foreign Exchange, and a foreign investment license from the Ministry of Commerce or its local offices (Caixin, 2012:38). The process of obtaining permits can take several weeks, though firms often get pre-‐approval before making a formal bid. Reportedly this process is easier and more likely to be successful for state firms than for PO firms unless the latter are very well connected. 3 SO firms borrowed from banks at a real interest rate of 1.6 percent, while the market rate was 4.7 percent. From 2007 to 2009 they received fiscal subsidies of about 194.3 billion yuan, while their tax burden averaged 10 percent compared with 24 percent for PO enterprises. 4 This policy is stated explicitly in a book by the bank’s chairman, Mr. Yuan Chen (2012).

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The state’s support for SO MNEs, however, is conditional on alignment with

government policy objectives (Wang et al., 2012b). Many traditional objectives of SO firms

relate to overcoming market failure or to pooling large investments to push industrialization

(Kohli, 2004, Musacchio & Lazarini, 2012), and thus SO firms often operate in sectors with

natural monopolies such as utilities and transportation (Vickers & Yarrow, 1992). Neither of

these objectives would support a major internationalization drive of these firms and few of

them grew to become major international players. The policy objectives that the Chinese

government aims to achieve with its SO firms are somewhat different, and include its

outward investment drive. For example, the latest two Five-‐Year (2006-‐2010, 2011-‐2015)

‘National Economic and Social Development Plans’ (Xinhua, 2006, 2011) explicitly establish

goals of “going global” with particular emphasis on overseas acquisition of natural resources

and world-‐class technologies and brands that the Chinese economy lacks (Xinhua, 2011).

Consequently, higher levels of state ownership in Chinese MNEs have been shown to be

associated with more resource-‐seeking motives when investing abroad (Li, Li, & Shapiro,

2012; Wang et al., 2012b).

SO firms have political and economic objectives. Especially those listed on stock

exchanges are subject to external monitoring by financial investors focused on profits (Sun

& Tong, 2003, Zou & Adams, 2008) as well as monitoring through agents of the state. In

China, many state institutional shares are administered by SO asset management companies

such as SASAC, which are pursuing general political objectives, but also aim to improve

financial performance (Wang, Guthrie, & Xiao, 2012a, Yiu, 2011). Moreover, managerial and

state objectives are aligned through career paths. Leading ‘cadres’ of the communist party

often move back and forth between SO firms and public sector entities in their career. Many

leaders of top government agencies or provincial governors have previously been leaders of

SO firms (Brødsgaard, 2012). The prospect of such career moves creates a natural incentive

for managers to take the objectives of political powers deciding over such promotions into

consideration when designing business strategy (Lin, 2011). Hence, managers face strong

incentives to align themselves with national policy objectives, even when they also have to

report to financial investors (Wang et al., 2012b). Evidence of political objectives being

important in listed SO firms is provided by Chen and Young (2010), who found that cross

border M&As by Chinese SO firms have a negative effect on share prices, which is larger the

higher the share held by state entities, presumably because shareholders were concerned

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that these acquisitions were used to pursue political objectives at the expense of

profitability.

Thus, we can conclude that SO MNEs may have preferential access to resources, but

this makes them subject to institutional pressures to align themselves to national policy

agendas. In the Chinese context, and these agendas concern primarily the acquisition of

natural and technological resources that the authorities consider important for China’s

economic development.

Host Institutions: Quest for Legitimacy. The institutional framework of host

economies has been identified as a key determinant of foreign investors’ entry strategies

(Meyer, 2001, Meyer et al., 2009a). However, only recently have scholarly studies

associated this institutional context with differential pressures on firms of different

ownership (Cui & Jiang, 2012). From the perspective of institutional theory, such

institutional pressures on firms of a particular type, here state ownership, arise from the

lack of legitimacy of that type of MNEs. Specifically, societies where the government plays a

very limited role in the economy may find it difficult to appreciate how such SO firms

operate in other countries. Such host institutional pressures push SO MNEs to work extra

hard to attain local legitimacy. For instance, they may reduce the equity stake that they take

in their foreign affiliates to signal their commitment to the norms of the host economy (Cui

& Jiang, 2012). Moreover, host country institutional pressures also increase the risk that

announced M&As fail to be completed, and this effect is bigger if the prospective acquirer is

an SO MNE (Zhang et al., 2010).

The phenomenon of opposition to SO MNEs is not new, though it was largely treated

as singular incidences that – to our knowledge – did not attract scholarly research. Local

opposition emerged for example when countries privatized under an IMF/World Bank

sponsored program, but the privatized firms were acquired by SO firms from other

countries, such as South African utilities elsewhere in Africa, Austrian banks in Eastern

Europe, Russia’s Gazprom in Central and Western Europe (Clifton & Diaz-‐Fuentes, 2010),

and France Telecom taking over Polish Telcom (Kulawczuk, 2007).

These types of legitimacy pressures directed against investors that are state owned

have been particularly prevalent in the case of Chinese MNEs. Specifically, political actors

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allege that Chinese SO MNEs may threaten national security since they lack political loyalty

to the host country and might even be seen as agents of an unfriendly government

supposedly aiming to damage the economic infrastructure of the host country (Globerman

& Shapiro, 2009, 2010, Nyland et al., 2011, Peng, 2012). Questions are also raised about

unfair competition as a result of financing advantages of Chinese SO MNEs (Sauvant, 2010)

as well as limited spillover benefits to the host economy because SO firms are typically less

efficient than their PO counterparts (Globerman & Shapiro, 2010). As a result, Chinese SO

MNEs may face political opposition in host countries from specific interest groups (such as

trade unions), from host country governments, and from civic society more generally

(Sauvant, 2010, Wong, 2013). Such opposition led to refusal of some proposed acquisitions

by Chinese firms (e.g., acquisitions of Unocal by CNOOC in 2005 in the USA and of Rio Tinto

by Chinalco in 2009 in Australia). This evidence suggests that the phenomenon of opposition

to SO MNEs may be substantial in the case of Chinese MNEs, making them a suitable

context to study the effects of such host country institutional pressures.

Hypotheses Development

Designing a foreign entry strategy, foreign investors have to decide whether to acquire a

local firm or to establish a new subsidiary from scratch, that is, a greenfield project (Hennart

& Park, 1993; Slangen & Hennart, 2007), and they have to choose the level of equity control

in the new operation (Anderson & Gatignon, 1989, Meyer et al., 2009a). The two decisions

are not independent (Chari & Chang, 2009; Kogut & Singh, 1988; Chang & Rosenzweig,

2001; Meyer et al. 2009b). Specifically, equity level decisions are influenced by external

conditions in different ways in greenfield and acquisition projects. In acquisitions equity

stakes are likely the outcome of negotiations not only between buyers and sellers but also

between buyers and local regulatory authorities and thus to a larger extent reflects the

positions of local stakeholders. In greenfield investments, the involvement of local

regulatory authorities is much less because greenfield investments, by bringing more visible

benefits such as new job opportunities, are not perceived as a threat to local economic

development as acquisitions are (Globerman & Shapiro, 2010; Sauvant, 2010; Xu and

Shenkar, 2002). Consequently, the impact of local host institutions also varies in their

degree in these two types of entry strategies. We therefore model the entry strategy

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decision in a two-‐stage model as depicted in Figure 1 and explained in the arguments that

follow.

*** Insert Figure 1 here ***

Greenfield versus Acquisition

Acquisitions as an entry strategy provide a foreign investor with direct access and control

over resources that are embedded in local firms, thus providing vital advantages over

greenfield entry (Hennart & Park, 1993, Slangen & Hennart, 2007). Traditionally, research

has focused on local assets the entrant acquired locally, such as knowledge of the business

environment and marketing assets. However, the logic equally applies to internationally

transferable assets such as technologies that acquirers aim to redeploy in their global

operations (Anand & Delios, 2002, Meyer et al., 2009b). However, acquisitions typically

require a large up-‐front commitment of capital and entail considerable risks in pre-‐

acquisition assessment and post-‐acquisition integration (Hennart & Park, 1993, Slangen &

Hennart, 2007).

In contrast, greenfield projects enable foreign investors to create a local affiliate

largely in their own image, while avoiding the challenges of taking over an existing

organizations that may require organizational change (Xu and Shenkar, 2002). Yet, they may

find it more difficult to access complementary local resources if these are controlled by local

firms (Estrin et al., 2009, Hennart & Park, 1993). How is this choice between greenfield and

acquisition entry affected by the ownership type of an investor?

From the home institutions perspective, SOEs’ conditional preferential resource

access is particularly important when it comes to acquisitions. First, acquisitions normally

require higher up-‐front investments; greenfield projects in contrast can be started with low

initial capital commitments (Slangen & Hennart, 2007). When acquisitions are subject to

competing bids, the ability of a bidder to mobilize financial resources without delay can be a

critical advantage. Relative to PO firms, SO firms would have an advantage due to their

access to SO banks and, in the Chinese case, easier access to foreign exchange permits.

Second, acquisitions require extensive (and hence expensive) due diligence to

estimate the target firm’s value, which creates considerable challenges when cultural

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differences and inexperienced investors are involved (Brouthers & Brouthers, 2000; Hennart

& Park, 1993; Hennart & Reddy, 1997; Slangen & Hennart, 2008). Third, acquisitions likely

expose MNEs to more risks and a higher probability of failure. Information asymmetry may

result in acquisitions of firms with hidden liabilities, and cultural gaps inhibit trust and add

to the complexity of integrating acquired entities into acquirers’ global operations (Hennart

& Park, 1993, Slangen & Hennart, 2008). Preferential access to resources, especially finance,

may help SO MNEs, compared to their PO counterparts, to accept higher risk levels, and

hence to pursue an acquisition entry strategy.

Moreover, the political objectives to which SO MNEs align include the acquisition of

resources such as natural resources, technologies, and brands that are embedded in local

firms (Wang et al., 2012b). For example, the Chinese government published “a notice on

providing credit support to key OFDI projects encouraged by the state” in which M&A

projects that increase companies’ international competitiveness are eligible for low-‐interest

loans (Luo et al., 2010). Hence, alignment with political objectives encourages SO MNEs’ use

of acquisitions.

In some countries there may be countervailing effects because host institutional

pressures are in particular directed against SO MNEs, as we will discuss below. But as these

effects are specific to some host countries, we suggest that in the main effect, SO MNEs’

resource access advantage enables them more than PO firms to acquire local firms:

H1: SO MNEs are more likely than PO MNEs to choose acquisitions rather than greenfield entries.

Host Institutions: The institutional pressures for legitimacy in host countries are likely

to apply in particular to acquisitions because they are higher profile and potentially involve

short-‐term job losses, whereas greenfield investments bring more visible benefits such as

new production capacities and new jobs (Globerman & Shapiro, 2010; Sauvant, 2010; Xu &

Shenkar, 2002). Theoretically, the long-‐term effect of establishment mode on employment

generation and economic growth is ambiguous because of indirect effects such as crowding

out and productivity increases (Meyer, 2004). However, political discourses rarely consider

such complexities (Globerman & Shapiro, 2010). Hence, acquisitions attract more

institutional pressures on investors to prove their legitimacy, and these pressures affect

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especially entrants that are very different from those in the host economy, such as SOEs.

Yet, in which host contexts are such pressures more likely to emerge and be effective?

First, opposition to acquisitions by SO MNEs is in particular associated with a perceived

threat of these SO MNEs acquiring technology of the host economy, and then using it not

only for their corporate interests, but in the wider interest of the home country (Globerman

and Shapiro, 2010, Peng, 2012, Sauvant, 2010). This includes both perceived economic

threats of losing technological competitive advantage, and perceived security threats of the

technology eventually being used for military purposes. Such perceived threats typically

invoke new regulations that require special screening or approval of acquisitions by SO

MNEs (Sauvant, 2010), which effectively block some acquisition deals by SO MNEs or

discourage them from using acquisitions as an entry mode.

Empirical studies confirm that an important reason for emerging market MNEs to enter

technology-‐rich host countries is to secure technological resources (Deng, 2007; Li, Li, and

Shapiro, 2012; Luo & Tung, 2007; Meyer & Thaijongrak, 2013). From the perspective of host

societies, such take-‐overs may not be a major concern if they occur for purely commercial

reasons, and operations continue at the same site. In the case of SO MNEs, however,

concerns of technology being used in ways that are not beneficial to the host society are

more likely. We therefore expect that in countries with abundant technological resources,

SO MNEs are more likely than their PO counterparts to encounter host country institutional

pressures, and as such, the positive effect of state ownership on acquisition entry is less

salient in these countries.

H2: The relationship between state ownership and acquisition entry (H1) is less positive in

countries with higher endowments of technological resources.

Second, host institutional pressures directed against acquisitions by SO MNEs are

likely to be strong in countries where institutions are geared towards a free market

economy. In these countries, a strong rule of law is established to support a competitive

market economy based on private property rights, promote transparency in business

relationships, and offer strong protection of investors (La Porta et al., 2008). In such a

context, SO MNEs would be perceived as inconsistent with the leading ideology, and

potentially as a threat to the economic system because of their (perceived or real) support

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by their home government and ‘unfair’ advantages arising from that (Globerman and

Shapiro, 2010). Therefore, their acquisitions of local companies are often subject to

additional legal requirements, such as a formal approval by competition authorities

(Sauvant, 2010). Such legal requirements strengthen the positions of local stakeholders and

provide means by which they can prevent the implementation of an M&A deal (Zhang et al.,

2010). Given the central role of shareholders in acquisition processes, of particular interest

is the legal protection of private shareholders in companies. A strong shareholder protection

makes it more complex for acquirers to obtain equity stakes because of requirements for

transparency of the acquisition process, and the need for minority shareholders to approve

a proposed acquisition deal (La Porta et al., 2008).

These arguments suggest that opposition to acquisitions by SO MNEs is particularly

strong in countries with strong legal development. Local stakeholders are both more

motivated and more equipped with legal means to deter acquisitions by SO MNEs.

Therefore, we expect the positive effect of state ownership on the use of acquisitions as an

entry mode to less salient in these contexts:

H3a: The relationship between state ownership and acquisition entry (H1) is less positive in

countries with stronger rule of law.

H3b: The relationship between state ownership and acquisition entry (H1) is less positive in

countries with stronger shareholder protection.

Control of Acquired Affiliates

Foreign investors can attain varying degree of control over their foreign operations

(Anderson & Gatignon, 1989, Meyer et al., 2009b; Zhao, Luo & Suh, 2004). The highest

control is associated with wholly owned subsidiaries, while at the other end of the spectrum

stand minority equity stakes. Foreign investors tend to prefer high control modes especially

when they contribute critical resources that are sensitive to market failure, such as

technologies, or when they wish to transfer such resources unhindered to their parent

organization (Brouthers, 2002; Hennart, 2009, Meyer, 2001). Moreover, high control is

preferred over operations that are strategically important to the investors because they

would not want to negotiate any change with a partner, or risk information leakage (Hill,

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Hwang & Kim 1990). Low control modes are used when few intangible assets are

transferred between the parent and the local operation.

However, in acquisitions the actual control depends not only on the preferences of

the foreign investor but is an outcome of negotiations between the foreign investor and

local stakeholders (Hennart, 2009, Meyer et al., 2009a). A key reason why foreign investors

may compromise their quest for control is that a lower level of control facilitates

establishing legitimacy in the local community (Chan & Makino, 2007; Yiu & Makino, 2002).

In acquired units, this alignment with local institutional pressures is important because local

stakeholders have some means of influencing the outcome of proposed acquisitions, for

example through scrutiny by regulatory authorities (e.g. under competition law) and by the

host country media.

This need to align to local institutions is particularly relevant to SO MNEs because of

their need to demonstrate their local legitimacy. Shared control provides an important

signal that the investor is working with local partners to align to institutional norms in the

host economy (Cui & Jiang, 2012). Furthermore, low level of control limits the ability of the

state owners of the investing firm to impose their objectives onto the local operations, and

thus alleviates suspicions of political actors vis-‐à-‐vis SO firms. Low control level therefore

facilitates local regulatory approval where that is required (Sauvant, 2010). Indeed,

regulatory authorities seldom intervene in acquisition deals where the acquirer takes a non-‐

controlling interest in the target.5 Hence, we propose:

H4: In acquired units, SO MNEs are likely to choose lower levels of control than PO MNEs.

The institutional pressures on SO MNEs to lower their control level in acquired

businesses vary across host countries. Effective pressures on SOEs are associated in

particular, as argued above, with a strong rule of law in general, and with strong protection

of shareholders in particular. Countries with high quality legal systems likely perceive more

ideological inconsistencies between their own economic and legal systems and foreign SO

firms. Such ideological inconsistencies likely lead to distrust in SO MNEs and opposition to

them taking dominant control of an acquired local firm (Cui & Jiang, 2012). As a result,

5 For instance, additional screening and approval by the government are needed in Canada only when foreign SO investors attempt to take controlling interests (“acquisition of control”) in Canadian firms (http://www.ic.gc.ca/eic/site/ica-‐lic.nsf/eng/lk00064.html#p2).

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institutional pressures opposed to high level of control by SO MNEs are likely to be higher in

these contexts.

These effects of a stronger rule of law in particular apply to the protection of

shareholders. Firstly, existing shareholders, with greater bargaining power, may undermine

an SO firm’s efforts to attain controlling interests in local firms. For example, in many

countries, investors are required to make a formal bid for all outstanding shares when

increasing their equity stake beyond certain threshold levels. For example, in Euronext

market, if the large shareholder of the listed company wants to go beyond 30% of the

control right, he/she must make a public bid for all outstanding shares, while Hong Kong

Stock Exchange imposes on the controlling shareholder to make a public bid for all

outstanding shares if the floating shares go below 25% of total issued shares.

Hence, in countries with strong legal development, local stakeholders are more

motivated to block high control by SO MNEs in acquired local companies due to ideological

inconsistencies. Moreover, existing shareholders also have strong power (i.e., legal means)

to protect their interests during take-‐over bids. We therefore expect in these contexts the

negative effect of state ownership on control level to be more pronounced.

H5a: In acquired units, the relationship between state ownership and level of control (H4) is more

negative in countries with stronger rule of law.

H5b: In acquired units, the relationship between state ownership and level of control (H4) is more

negative in countries with stronger shareholder protection.

In high technology host environments, foreign investors face two opposing pressures

from the home and host countries that impact their choice of equity control level. On the

one hand, SO MNEs are more likely than PO MNEs to be driven by resource-‐seeking motives

(Wang et al., 2012b), which in the case of technology would involve swift reverse technology

transfer to Chinese units of the acquiring firm (Chen, Li, & Shapiro, 2012, Child & Rodrigues,

2005). SO MNEs are therefore more motivated to internalize transactions in high technology

host environments in order to facilitate technology transfer.

On the other hand, local stakeholders may be particularly concerned about the

transfer of technology and competences out of the country by SO MNEs. Being aware of the

afore mentioned technology seeking motives, local stakeholders increasingly recognize such

16

underlying motives, which feeds into the institutional pressures differentially targeted at SO

MNEs (Globermann and Shapiro, 2010, Sauvant, 2010). Hence, we do not propose a

moderating effect between state ownership and host technology level on the level of

control in acquired units.

Control of Greenfield Ventures

In greenfield ventures, SO MNEs do not have to deal with approval by competition

and other regulatory authorities, and there are no stakeholders of an acquired firm

perceiving a threat to the technology, or their jobs (Globerman & Shapiro, 2010; Sauvant,

2010). Hence, SO MNEs face less host country institutional pressures to demonstrate their

legitimacy than in acquisition cases. This provides SO MNEs with greater freedom to choose

their level of control. However, relative to PO firms, SO MNEs are still more likely to choose

low control mode because they more likely face an unfamiliar competitive environment in

host countries (at home, SO firms often benefit from some degree of protection), and hence

would benefit more from local partners’ understanding of the local market environment.

Research has shown that MNEs prefer lower level of control when they face stronger

liability of foreignness and are in greater need for local firms’ knowledge contributions (Li,

Zhou, & Zajac, 2009; Yan & Gray, 1994). Hence, like for acquired units, we suggest a

negative direct effect of state ownership on control level in greenfield units:

H6: In greenfield units, SO MNEs are likely to choose lower levels of control than PO MNEs.

When technology transfer is important to the interface between an MNE and a local

operation, then information asymmetries are likely, and hence the MNE would be

particularly likely to internalize this interface (Buckley and Casson, 1976). Hence, the

importance of technology intensity for the choice of control level has been demonstrated in

numerous empirical studies: the higher the level of technology intensity, the higher the

chosen level of control (Anderson & Gatignon, 1986, Hill et al., 1993; Zhao, Luo & Suh,

2004). However, while this literature has traditionally focused on transfers of technology

from parents to subsidiaries, the transfers from a subsidiary to a parent is equally subject to

potential market failures that may lead a foreign investor to internalize a transaction

(Hennart, 2009).

17

It is in this reverse technology transfer, where we see likely differences between PO

and SO MNEs. First, as we have argued above, SO MNEs are more likely to be technology

seeking. Greenfield projects can play important roles tapping into foreign technology

clusters, for instance by recruiting local engineering talent, or by attracting technology

spillovers from local communities (Alcacer & Chung, 2007; Almeida, 1996). SO MNEs would

want to control work on such technologies that ultimately shall support the parent

organization, and the interfaces that facilitate the reverse transfer of technology in

particular. For example, Haier has established extensive research facilities in for example the

United States and Japan whose prime aim is to generate new technologies to be rolled out

across the Haier organization. Such technology sourcing, generation, and transfer is most

effective when it is not subject to compromises with a local partner, and the parent-‐

subsidiary interface is not subject to high transaction costs; in other words, when the

foreign investor has high level of control.

In summary, although SO MNEs in general tend to choose lower control level in

greenfield operations than PO firms, such a tendency is less salient in countries with rich

technological resources. In such contexts, SO MNEs are more motivated to seek and transfer

technologies and higher control level serves these objectives better. Hence, we propose:

H7: In greenfield projects, the relationship between state ownership and the level of control (H6) is

less negative in countries with higher endowments of technological resources.

Methods

Data and Sample

To analyze our research questions, we constructed a dataset of foreign subsidiaries of listed

Chinese MNEs with and without state ownership. Our unit of analysis is overseas

subsidiaries, which include wholly and partially owned subsidiaries of listed Chinese firms.6

We constructed our dataset from all the Chinese firms listed in the Shanghai and Shenzhen

Stock Exchanges in 2009. The development of the Chinese stock market since the early

1990s is closely connected with China’s economic reform, in particular, the reform of SO

enterprises (Sun & Tong, 2003). A major initial political objective of establishing the stock

6 Following international accounting standards, these are reported as subsidiaries (IAS 27, §13), joint control (IAS31, §7) and significant influence (IAS28, §§6-‐7). ‘Significant influence’ is associated with ownership levels of 20% or more and thus still meets the definition of FDI commonly used in the IB literature.

18

markets was to transform SO firms into modern corporations and to improve their

performance. As a result, most of the largest Chinese SO firms, such as Sino Petroleum,

Chinese National Petroleum, China Mobile, and Baosteel are listed on either stock market.

This provides legitimacy for the use of listed firms to study SO firms’ internationalization

activities.

Though the stock market in China was initially designed for SO firms, the share of PO

firms in the stock market has been growing as a reflection of the increasing importance of

the private sector in the Chinese economy. The first group of PO firms was listed in 1992,

and the listing of PO firms was further accelerated by the opening of the Second Board in

2004 and Chinex in 2009, designed to facilitate equity financing for small and mid-‐sized

firms, most of which were PO enterprises.

The identification of SO enterprises in China is complicated by the complex patterns of

ownership change over the past two decades (Yiu, 2011, Zou & Adams, 2008). For our

purposes the critical aspect is whether or not an entity of the state or an organization

indirectly controlled by a state entity has a controlling influence over the firm. Therefore,

following earlier studies (Ding, Zhang, & Zhang, 2008, Jones & Mygind, 1999), we used the

principle of the largest shareholder and defined a firm as SO if the single largest shareholder

is a government department or another entity of the state (including other SO firms),7 and

as PO if it is an individual or a private company. This definition is based on the observation

that, at least in the Chinese context, government entities have a controlling influence even

as minority shareholders as long as no other shareholder holds a larger stake. As of the end

of 2009, among a total of 1,686 Chinese A-‐share listed companies, 914 companies were SO

by this definition.

For the 1,686 listed companies, we then hand-‐collected from their 2009 annual reports

the information on their outward investment activities. Chinese listed firms are required to

disclose information on their subsidiaries, domestic as well as overseas, which includes

location and the listed company’s voting rights and cash flow rights in the subsidiary. We

traced back in the annual reports year by year, in order to find the year of establishment

and data associated with that point in time. Based on this information, we constructed a list

7 Since 2007, China Security Regulatory Commission (CSRC) have required all the listed companies to disclosure in their annual reports the controlling chain and the identity of the ultimate controller of the listed entities, which makes our distinction of SO vs. PO quite reliable.

19

of 1,154 entities invested by listed firms. However, subsidiaries in Hong Kong, Macao and

the tax havens of British Virgin Islands and the Cayman Islands serve primarily as holding

organizations or as financing instruments for operations in third countries, or in fact in China

itself (Ding, Nowak & Zhang, 2010, Hong & Sun, 2006), and hence fall outside the scope of

our research. Moreover, we have taken out observations in the energy, telecommunication

service, and utility sectors because in those sectors, almost all overseas subsidiaries are

controlled by an SO MNE,8 and hence a meaningful comparison between SO and PO MNEs is

not possible.9 After exclusions, we had 569 observations of overseas subsidiaries of Chinese

SO and PO listed companies. Due to missing values on host country variables, our final

sample for regression analysis ranges from 303 to 390 observations. In Table 2, we provide

the list of host countries and the number of investments in our sample.

*** Insert Table 2 about here ***

Variables and Measurements

Dependent variables

We trace each subsidiary back in the annual reports yo the year of its establishment, in

order to determine whether it was established through acquisition or greenfield. Based on

this information, we constructed a dummy variable: acquisition is one if the subsidiary is

acquired and zero otherwise.

We measured an MNE’s level of control in a subsidiary using its cash flow rights in the

subsidiary. 10 As a robustness test, we ran the same tests using voting rights, which may vary

because pyramid ownership structures are quite common in China and other Asian

economies (Yiu, 2011). The difference between these two measures is small, as the

correlation between the two variables is 0.97, and the results of these robustness tests were

substantially identical. Due to space limitations, we do not report them in this paper.

Explanatory variables

Our main explanatory variable is state ownership, which we measured using the

8 There is only one overseas subsidiary controlled by PO while 22 of them by SO in energy sector. Among three subsidiaries in telecommunication services and 18 in utilities, none of them belong to PO. 9 We thank the action editor for this suggestion. 10 For example, when a listed parent company holds 80% ownership in a son company and this son company in turn holds 80% ownership in an overseas subsidiary, the parent firm’s voting right in the overseas subsidiary is 80% and cash flow right is 64%.

20

ultimate controlling shareholder approach discussed above. Hence, we defined a dummy

state that equals to one if the firm’s ultimate controlling shareholder is a state entity, or

owned by a state entity, and zero if it is an individual or a private company. We drop a few

companies that have other types of ultimate ownership, such as foreign and collective. Note

that in China collectively owned companies are typically “township and village enterprises”,

which are controlled by town or village governments and are different from either state-‐

owned or private firms (Naughton, 1994).

Three variables capture the host country moderators. To capture a country’s level of

technological resources, we measured host technology by the log value of a country’s

annual number of patent applications to the U.S. Patent and Trademark Office, divided by

the country’s GDP per capita to control for the size of the host economy (Buckley et al.,

2007, Kogut & Chang, 1991). The patent information was collected from the OECD Patent

Statistics.

Our rule of law variable is based on the Law and Order dimension in the International

Country Risk Guide (ICRG) database published by Political Risk Services (PRS). This dimension

is an assessment of the strength and impartiality of the legal system, as well as the popular

observance of the law. The ICRG indicators are among the most widely used measures for

quality of institutional environments (e.g., Hall and Jones, 1999). Shareholder protection in

the host country is measured by López de Silanes, La Porta , Shleifer and Vishny’s (1998)

anti-‐director index, which captures the easiness for outside investors to protect themselves

against the expropriation of either the controlling shareholders or the managers. The index

is formed by adding 1 when: (1) the country allows shareholders to mail their proxy vote to

the firm; (2) shareholders are not required to deposit their shares prior to the General

Shareholders’ Meeting; (3) cumulative voting or proportional representation of minorities in

the board of directors is allowed; (4) an oppressed minorities mechanism is in place; (5) the

minimum percentage of share capital that entitles a shareholder to call for an Extraordinary

Shareholders’ Meeting is less than or equal to 10% (the sample median); or (6) shareholders

have pre-‐emptive rights that can only be waived by a shareholders’ vote. The index ranges

from 0 to 6.

Control variables

Our control variables capture variations at multiple levels (subsidiary, parent firm, and

21

host country). At subsidiary level, we included international experience, which is the

difference in years between the parent’s first establishment of a foreign subsidiary and the

focal overseas subsidiary. At parent firm level, we controlled for firm financial characteristics

in the year before the establishment of the focal subsidiary, which include parent size (total

assets), parent profitability (return on assets (ROA)), and parent leverage (total liability over

total assets). The data were obtained from the WIND database published by Wind

Information.

At host country level, in addition to the country level variables mentioned earlier, we

firstly included political risk based on the Government Stability dimension in the ICRG

database (Asiedu et al., 2009, Buckley et al., 2007). Government stability assesses the

government’s ability to carry out its declared programs as well as its ability to stay in office.

The maximum score for government stability is 12. To facilitate the interpretation of the

results, we used 12 minus the government stability score to obtain the measure for political

risk. Thus, a higher number implies higher risk. Second, we included the market

capitalization of the host economy as a proxy for the liquidity of the stock market, which is

obtained from the World Bank. The rationale for including this control is that a developed

stock market enhances investors’ ability to finance operations locally and enables more

flexible ownership arrangements (López de Silanes, La Porta , Shleifer & Vishny 1997).

To control for the ‘distance’ between home and host countries, a key concern in earlier

entry mode research (Slangen & Hennart, 2007, Estrin et al., 2009, Tihanyi et al., 2005, Zhao

et al., 2004), two measures were obtained from Dow’s distance indices (Dow & Karunaratna,

2006), namely democracy (dem distance) and education (edu distance). Moreover,

geographical distance was computed based on the latitude and longitude of the city where

the Chinese firm is located and the capital city of the host country. It was measured as the

log of geographic distance in kilometers. The information is from the CEPII.

Finally, we included nine industry dummies based on Global Industry Classification

Standard two-‐digit industry classification to control for industry effects.

Model Specification

We have two sets of regressions to estimate:

(1) Probability(Acquisition) = f (state, country-‐level-‐variables, interactions, controls)

22

(2) Level of control = f (state, country-‐level-‐variables, interactions, controls)

We used a Logit model to estimate the probability of acquisition (vs. greenfield)

being chosen as the establishment mode and to test H1 to H3. Level of control has a

distribution with a high number of observations at the upper limit of 100%, such that we

chose a Tobit model to capture this non-‐linear distribution (Tobin, 1958; Wooldridge, 2002).

We present the level of control regressions for three different samples, for acquisitions to

test H4 and H5a/b, for greenfield projects to test H6 and H7, and then for the full sample as

a robustness test.

Results

Table 3 provides descriptive statistics of our sample and illustrates some characteristics of

Chinese SO and PO MNEs as well as the T-‐tests of their mean differences. It provides already

some interesting contrasts between SO and PO regarding their FDI entry mode as well as

their level of control in their foreign invested firms: SO tend to use more acquisitions while

PO prefers greenfield. Nonetheless, we must be cautious in interpreting these univariate

differences that might be driven by other differences between these two subgroups. We

also notice that 60.3% of foreign invested firms belong to the SO parents. In line with

characteristics reported in earlier studies, the SO firms in our sample are more than two

times larger by assets, while PO firms are more profitable in terms of ROA, 11.88%

compared to 9.36% for SO firms. SO also have more international experience than PO.

*** Table 3 about here ***

Table 4 reports the correlation matrix for the variables. We observe that host

technology and shareholder protection are correlated at 0.6; in order to avoid the

multicollinearity problem, we do not include them in the same regression analysis and

instead enter them separately in different models.11


We start our analysis by estimating a Logit regression of establishment mode choice.

Table 5 reports the results with positive coefficients indicating a preference for acquisitions

11 In order to reduce the length of the paper, the descriptive statistics for the subsamples used in Tables 5 and 6 are available from the authors upon request.

23

and negative coefficients for greenfield entry. The overall model quality is moderately good

as indicated by Pseudo-‐R² statistics in the range of 11% to 14%. Column 1 includes only the

direct effect of state ownership and the control variables. As the host-‐country variables are

correlated with each other we first introduce them one at a time (columns 2 to 4) and then

combine two not highly correlated moderating effects (column 5).


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

acquisition is positive in all specifications, and remains stable at high significance in all

regressions. This suggests that the resource advantage that strengthens SO MNEs’ ability to

finance acquisitions overrides any contrarian host country institutional pressures.

In countries with high level of host technology endowments, we find that

acquisitions are more likely; the direct effect is positive but not significant. Hence, host

technology principally may be attractive for foreign investors. To test our Hypothesis 2, we

turn to the interaction effect between host technology and state, which is negative and

significant (p<5%) in both columns 2 and 5. Hence, as predicted SO firms are less likely than

PO firms to acquire local firms in countries with high levels of technologies. As argued

above, this is likely due to institutional pressures against foreign investors to be stronger

where potential transfer of valuable technology to foreign state entities is concerned.

Meanwhile, in columns 3 and 5, the critical effect is the interaction effect of rule of

law with state, which is positive and not statistically significant, and hence fails to provide

support for Hypothesis 3a. However, we find support for Hypothesis 3b in column 4, which

suggested that stronger roles of minority shareholders, as reflected in stronger shareholder

protection would deter in particular SO firms. While the direct effect is positive and not

significant, the moderating effect with state is negative and significant (p<10%). Hence,

shareholders in existing firms may use their power under such legislation to create obstacles

to acquisitions, especially when the potential acquirer is an SO MNE.

Of the control variables, only the parent size is consistently significant across

specifications; hence as one would expect companies with more resources are more able to

finance foreign acquisitions. It is important to note that the size control in the regressions is

24

crucial since SO firms are significantly larger than PO firms and so the high significance of

the state dummy in all regressions is obtained after controlling for the size.

Turning to the choice of the level of control, we report three sets of results

respectively for the subsample of acquired units (Table 6), for greenfield projects (Table 7)

and – as a robustness test – for the full sample (Table 8). Our theoretical considerations

suggested that the local context variables impacting on the level of control in subsidiaries

vary between greenfield and acquisition entries, and hence we have to turn to Tables 6 and

7 respectively to assess our hypotheses. Although we did not hypothesize the interaction

effects of legal development and state in the greenfield entries, we reported these results as

robustness checks. The pseudo-‐R2 statistics are in the range from 5% to 8% in the

acquisitions subsample, and 4% in the greenfield sub-‐sample, suggesting some noise in the

data.

*** Tables 6 and 7 here ***

With respect to the direct effect, we predicted that in both situations, state

enterprises would take a lower equity stake as a means to build local legitimacy and to

acquire local knowledge (Hypotheses 4 and 6). We find this prediction supported in both

subsamples at 10% level (column 1), and this results holds in most regressions even after we

introduce the moderating effects (columns 2 to 5). Thus, SO MNEs are not using (or do not

succeed in using) their resource advantage to acquire higher stakes in their foreign

operations, but they aim to align to host institutions by taking lower equity stakes in both

acquired and greenfield operations. Meanwhile, the strength of this effect is moderated by

the host country conditions.

In terms of host institutions, we note that the direct effects of rule of law and of

shareholder protection are significant in the case of acquisitions: when the local institutional

environment strongly supports a market economy, firms tend to take higher equity stakes.

However, this benefit does not accrue to SO investors. As proposed in Hypotheses 5a and

5b, they are less likely than PO firms to obtain higher equity stakes in acquired units in more

institutionally developed countries. These moderations of state with rule of law and

shareholder protection are both confirmed at 5% level (Table 6, columns 3 and 4). This

supports the argument that in rule of law countries, SO MNEs are perceived as inconsistent

25

with the dominant ideology, and thus have to make extra efforts to attain local legitimacy

for their acquired units. This argument carries particular weight where minority

shareholders have a strong leverage on how the company is sold to a foreign investor. By

limiting themselves to a lower level of equity, SO MNEs can signal that they operate

consistently with the principles of a market economy. However, no such effects of host

institutions emerge from our analysis of greenfield entries (Table 7, columns 3 and 4),

suggesting that these entries by SO MNEs are less subject to host institutional pressures

than their acquisition entries.

The effects of host countries’ technological resources are reported in column 2 of

Table 6. The direct effect for host technology, proxied by patents per capita, is not

significant in either specification. As suggested in Hypothesis 7, in greenfield operations we

find that SO MNEs are more likely in technology rich countries to increase their control

(Table 7, column 2). This supports our argument that SOEs perceive greater transaction

costs in their technology management – including the attraction of spillovers from local

clusters and the transfer of technology to the parent. Hence, they have stronger incentives

than PO firms to internalize such transactions. In acquisitions, as expected, we find no such

effects (Table 6, column 2), presumably because in high technology countries, concerns

about the ‘loss’ of technology are creating pressures that inhibit foreign take-‐overs of local

firms.

Turning to control variables, we note them to be in line with expectations. Large

companies take higher levels of control in acquired units. In addition, we find that political

risk in the host country has a negative effect in greenfield units, suggesting that shared

control provides a means to manage exposure to political risk in newly created units.

*** Table 8 here ***

Table 8 reports a robustness test on the propositions H4 to H7 based on a regression

over the full sample. The essence of these results is that the effects for host technology and

rule of law also translate to the full sample, which rules out results being considered by

idiosyncrasies of the sub-‐samples, such as multicollinearity. However, our theoretical

arguments and the results in Tables 5 and 6 suggest that an aggregation of the two sub-‐

samples is methodologically problematic, and may lead to inappropriate interpretations.

26

Specifically, some of the effects significant in Table 8 may not apply to all types of foreign

entry.

Discussion

SOEs, Institutions and Foreign Entry

The strategies of MNEs are influenced by interplay of institutions in home and host

economies. This is particularly evident in the case of SO MNEs, where representatives of the

state influence decisions not only as regulators, but as owners of the firm. Theoretical

considerations suggest two main effects. In the home country, institutions provide SO MNEs

preferential access to resources that is conditional on alignment to government policy

objectives, and which enables them to draw on greater financial resources, especially when

it comes to acquiring resources overseas (Luo et al., 2010, Wang et al., 2012b). In the host

country, institutions impose pressures on SO MNEs to demonstrate their legitimacy that are

more intensive than those faced by their private counterparts (Cui & Jiang, 2012).

These opposing forces of home and host country institutions lead to variations in the

entry strategies that SO MNEs choose in different host countries (Figure 1). In technology-‐

rich host countries, SO MNEs find many of the resources they are aiming to access. When

they are free to choose, they thus aim to attain high levels of control of operations to be

able to scan local technology and transfer it to units outside the country. This we find

supported in the study of control in greenfield operations (Table 7, column 2 and 5).

However, SO MNEs face adverse institutional pressures motivated by local stakeholders

perceived loss due to possible transfers of technology out of the country. These pressures

inhibit acquisitions by SO MNEs, and when they do acquisitions, their pursuit for higher level

of control faces local oppositions.

In countries with high levels legal development, local stakeholders are firstly more

likely to perceive ideological inconsistencies between themselves and SO MNEs, and

secondly have more means to translate such opposition into actions that undermine foreign

acquisitions (Table 6, column 3 and 5). We find such opposition in particular confirmed with

respect to the role of minority shareholders in foreign acquisitions: where they enjoy strong

legal protection, they are more likely to deter take-‐overs by SO MNEs (Table 6, column 4).

Moreover, we observe that host country institutions that generally facilitate foreign

27

investors to higher level of equity in acquired units (i.e. the direct effects of rule of law and

shareholder protection), do not apply to SO MNEs. Compared to PO MNEs, SO MNEs are

taking lower levels of control in acquisitions. Hence, pressures for local legitimacy in

countries with high legal development induce SO MNEs to reduce their level of control in

acquired units.

Our results also demonstrate the interdependence of establishment mode and

control level decisions, specifically the potentially varying dynamics of control decisions in

greenfield and acquired units. In acquisitions, local stakeholders have considerably more

ways to influence the establishment of the foreign owned entity, for example through

regulatory bodies such as those enforcing competition law, or through actions of minority

shareholders. This suggests that certain institutions may affect acquisitions and greenfield

projects in different ways, as emphasized in Figure 1. This insight is important for future

research on entry strategies (Kogut & Singh, 1988; Chang & Rosenzweig, 2001; Meyer et al.

2009a), as well as for the interpretation of existing studies on levels of control of foreign

subsidiaries.

China and Beyond

We have focused on the general theoretical arguments that can be expected to be

valid beyond specific contexts.12 This approach provides potentially context-‐free theory

relevant for SO MNEs from other origins, especially from other emerging economies.

However, based on our own extensive work on a variety of emerging economies, we are

aware of the context specific effects impacting on empirical findings, that often imply that

the empirical findings of a single country per se are valid only context bound (Meyer, 2007;

Tsui, 2007). Hence, we need to reflect very carefully what aspects of our arguments are

potentially generalizable, and what assumptions we made are context specific.

On home country institutions, we have argued that SO MNEs face preferential access

to resources if they align their objectives to the objectives of the government. We suggest

that this statement allows theoretical generalization, i.e. it would apply to SO MNEs from

other origins as well. However, in generating hypotheses from this general theoretical

insight, we had to make some assumptions regarding two concepts in that general

12 We thank the special issue editor’s guidance on this matter.

28

statement. Firstly, what resources do SO MNEs have preferential access to? In the case of

China, these resources both eclectic and substantial, and critically include financial

resources that enable firms to make investments overseas (Buckley et al., 2007, Luo et al.,

2010, Wang et al., 2012b). In other contexts, these resources may be far more limited to for

example support through diplomatic representation, as in Norway (Knutsen et al., 2001). In

fact, under EU law, direct support by governments to SO firms is normally illegal (Brenner,

2011, Morgan, 2009). Secondly, what are the objectives that governments as owners expect

SO firms to align to? Potentially, a very wide range of objectives apply, such as overcoming

market failure in markets of natural monopolies and generating employment in a particular

geographic area. We have argued that in the case of China, a very central objective is the

acquisition of technological resources overseas, and that to this end the government makes

financial resources available. However, we cannot generalize this statement to other

countries without an in-‐depth analysis of the objectives of government policy of the

pertinent country.

With respect to host country institutions, our general theoretical statement is that

host country institutions differentially create pressures to demonstrate their legitimacy on

foreign investors perceived in the host society to be operating in ways that is ideologically

inconsistent with the dominant ideology of the host society. This statement we believe is

generally valid, and hence represents general theory. In operationalizing for empirical

testing, we argued that state ownership is perceived to be inconsistent with the principles

of a market economy in countries with high rule of law oriented institutions. This

operationalization may be valid for SO MNEs from many countries. However, we have to

recognize the possibility of alternative explanations applying specifically to China: It may be

that the combination of state ownership and the firms’ origins from a country not

recognized officially as a market economy by host governments that causes the effect. It

may also be that state ownership is a convenient smoke screen used by domestic interest

groups with protectionist motives, rather than the true source of the adverse institutional

pressures (Nyland et al., 2011).

Future research may address the generalization questions by investigating SO MNEs

from other contexts, and investigate how the general theory arguments can be

operationalized in those contexts. This approach should further enhance our understanding

29

of what theoretical statements are indeed valid universally, while theoretical statements

based on (perhaps implicit) assumptions about a context are not directly transferable to

other contexts.

This discussion leads us to a more general point with major implications for how

research in international business is conducted. Scholars in the field handling simultaneously

general theories with claimed universal validity and distinct local contexts in which these

theories are operationalized should pay close attention to the implicit assumptions about

their context that they are making as they are operationalizing their general theory

constructs. Moreover, scholars should explore options for deeply contextualized theorizing

to explain phenomena in the context they are analyzing, without limiting themselves ex ante

to effects that they would expect to be relevant elsewhere (Tsui, 2007).

Empirical Limitations and Future Research

As usual for empirical studies, limitations arise from the nature of the dataset. We

have prioritized comprehensiveness aiming for an inclusive coverage of listed Chinese firms,

starting out from a complete list of firms listed on Shanghai and Shenzhen stock exchanges,

and using a wide variety of archival sources to construct our explanatory variables. This

approach, however, has limitations in that we have a substantive number of missing

variables, especially on host countries because a high share of Chinese investments goes to

countries for which commonly used indices are not available. Moreover, our use of archival

data precludes capturing perceptions of decision makers of the pivotal variables such as

institutional pressures in the host economy. Future research may thus use survey

instruments to complement our archival data.

Another limitation is the correlation between various variables that measure

characteristics of the host economy. In addition to the reported results, we have also

experimented with measures to capture institutional development, but these were highly

correlated with the two variables we report, rule of law and shareholder protection. Since

we already have a wide variation of host countries including both emerging and

industrialized economies, further widening the range of hosts is not possible. Perhaps,

future research may use a time series approach to investigate the impact of institutional

30

changes over time. However, most institutional variables are fairly stable over time, which

imposes limits on the power of such tests.

Policy and Management Implications

Policy makers in host countries may be most interested in our findings in view of the

controversial nature of SO MNEs in some places (Globerman & Shapiro, 2009, 2010, Peng,

2012, Sauvant 2010). We find some support for the preferential resource access by Chinese

SO MNEs compared to Chinese PO firms. Whether that represents an unfair advantage is,

however, a more complex question as Chinese financial markets tend to make it difficult for

PO firms to raise capital (Allen et al., 2005). Hence our findings may be as much indicating

weaknesses of the PO MNEs as strengths of SO MNEs. Moreover, SO MNEs presumably face

more challenges raising capital in host country capital markets, which precludes clear

conclusions whether the preferential access at home (relative to PO firms) represents an

unfair advantage overseas.

Our results are also consistent with the view that SO MNEs strategically acquire

sought after resources such as technologies abroad (Deng, 2009; Luo & Tung, 2007).

However, we also find evidence that they make deliberate efforts to attain local legitimacy,

notably by taking lower equity stakes in their acquired subsidiaries in countries where

ideological sensitivities are likely to be high. Hence, in a world of increased diversity of

capitalisms, SO enterprises are building bridges across economic systems. Anecdotal

evidence from Australia, Canada and the USA illustrates this pattern. For example, Yanzhou

Coal Mining Company successfully acquired Felix Resources in 2009 and merged with

Gloucester Coal in 2012 by following the guidance of the Australian Treasury by, among

others, being listed on the Australian Securities Exchange and reducing equity shares in

subsidiaries (The Conference Board of Canada, 2012). According to A-‐capital, a consultancy,

transactions that involve minority equity investments accounted for 70% of total deal value

in the second quarter of 2012. Hence, “Going for a minority stake is increasingly recognized

a way to tap into high quality assets that would otherwise not be for sale and significantly

reduces integration & PR [public relations] risks” (A-‐capital, 2012).

For home country politicians, especially those involved in SO firms as owners, our

study points to limits to the political influence over such firms when they operate abroad.

31

They are operating in competitive market environments, and hence their ability to pursue

political objectives is constrained by their need to satisfy private shareholders, and by the

rules of the game in the host economy. The host country government, with the goal to

protect the fair play environment for local firms, might impose additional entry barriers on

SO firms and force them to make some suboptimal decisions, which can be detrimental to

the value creation of SO firms.

For managers in SO enterprises, we show how they can use the additional

institutional pressures they are exposed to in the home and host countries to their own

advantage. SO firms can leverage their ownership ties to the home country government to

secure scarce resources. Although host country institutional pressures make SO firms lower

control level in their acquired subsidiaries, such an approach may also be beneficial for SO

firms who have entered the international business arena only recently. It lowers their

investment risk and provides learning opportunities and an option to increase their control

level and equity share once they learn, for example, how to achieve legitimacy among

stakeholders in the host country.

Conclusions

SO MNEs have risen to prominence in the global economy with the emergence of

MNEs originating from emerging economies (Buckley et al., 2007, Morck et al., 2008, Wang

et al., 2012b). They operate in a complex interface of home and host country institutions,

and their strategies have to navigate between these multiple of institutional pressures. A

wide variety of institutional arrangements of the country of origin influences SO MNEs’

strategy, in particular their conditional preferential access to resources in return for

alignment to political objectives. In addition, host societies may interact with SO MNEs

differently than they would with PO firms. In particular, host countries that are rich in

technological resources and have high levels of legal and stock market institutions tend to

impose more pressure on SO MNEs to demonstrate their legitimacy. In consequence, the

foreign entry strategies of SO MNEs are less likely in form of acquisition, and if it is an

acquisition, levels of control tend to be lower. This interplay of home and host institutions

creates challenges for future research not only on SO MNEs, but on all forms of MNEs.

32

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Tables and Figures

Figure 1: Host Country Institutions and SOE Entry Strategy

37

Table 1: Political Economy Arguments and their Contextualization

Theoretical perspectives

General theoretical statement

Contextualization to China Examples of other contextualization

Resource access

The state controls certain resources that may be made available to SO MNEs at preferential conditions. Such resource access, however, is conditional on alignment with government’s policy priorities.

The Chinese state makes resources such as finance available to SO MNEs under preferential conditions compared to PO MNEs (Buckley et al., 2007, Ramasamy et al, 2012, Yiu, 2011, Zhang et al., 2010). Chinese SO MNEs are encouraged to seek resources overseas, especially natural resources and technologies (Luo et al., 2010, Deng, 2009, Ramasamy et al., 2012, Wang et al., 2012b).

Norwegian SO MNEs benefit from state resources such as diplomatic support that help manage costs or risks associated with “weak property rights, weak rule of law and high corruption” (Knutsen et al., 2011, H1). Such support may however be conditional on high standards of human rights (Knutsen et al., 2011, H2).(a)

Host institutions

Host societies exert normative and regulatory pressures on foreign investors to align themselves with the norms and practices of the host country, and such pressure focuses in particular on investors seen by the host society with suspicion.

Chinese SO MNEs are seen with suspicion in countries with a free market economy because some political players consider them as benefiting from unfair advantages, or as agents of the Chinese government (Cui & Jiang, 2012, Globerman & Shapiro, 2009, 2010, Sauvant 2010).

Why should our country follow IMF advice to privatize our firms if the acquirers are SO MNEs from another country? E.g. in Eastern Europe in the 1990s or Africa in the 2000s.

Note: (a) This argument was hypothesized but not actually empirically supported by Knutsen et al. (2011).

38

Table 2: list of host countries and the number of investments in our sample

Note: the four Panama investments are all related to shipping business, but not offshore financial vehicles .

Host country Acquisition Greenfield Total

Argentina 0 1 1 Australia 5 14 19 Bangladesh 0 2 2 Belgium 3 2 5 Brazil 0 4 4 Canada 5 6 11 Colombia 0 1 1 Czech Republic 0 2 2 Denmark 1 1 2 Egypt, Arab Rep. 0 1 1 Ethiopia 0 1 1 Finland 2 2 4 France 1 3 4 Germany 4 15 19 Ghana 0 1 1 India 0 10 10 Indonesia 1 5 6 Iran, Islamic Rep. 0 1 1 Italy 3 6 9 Japan 7 12 19 Jordan 0 3 3 Kazakhstan 1 0 1 Korea, Rep. 0 9 9 Liberia 1 24 25 Luxembourg 1 4 5 Malaysia 3 6 9 Mexico 0 2 2 Mongolia 0 4 4 Netherlands 13 11 24 Nigeria 0 1 1 Pakistan 0 1 1 Panama 4 0 4 Philippines 1 5 6 Poland 1 1 2 Qatar 1 1 2 Romania 1 0 1 Russian Federation 2 7 9 Singapore 7 23 30 Slovak Republic 0 1 1 South Africa 2 5 7 Spain 0 3 3 Sri Lanka 2 0 2 Sudan 0 1 1 Suriname 0 1 1 Switzerland 0 1 1 Taiwan 0 1 1 Thailand 4 1 5 Turkey 1 1 2 Uganda 0 1 1 Ukraine 0 1 1 United Kingdom 4 8 12 United States 20 57 77 Venezuela, RB 1 1 2 Vietnam 0 13 13 Total 102 288 390

40

Table 3: Descriptive Statistics

Full sample SO sample PO sample Difference

between SO and PO

Variables Mean S.D. Min Max Mean S.D. Mean S.D. T statistic acquisition 0.262 0.440 0 1 0.319 0.467 0.174 0.381 0.145*** level of control 84.262 22.449 12 100 80.955 23.366 89.277 20.035 -‐8.322*** state 0.603 0.490 0 1 n.a. n.a. n.a. n.a. n.a. host technology 3.375 1.917 0 9.733 3.369 2.036 3.382 1.765 -‐0.013 rule of law 4.512 1.110 1.125 6 4.528 1.176 4.488 1.005 0.04 shareholder protection 3.630 1.477 0 5 3.534 1.461 3.764 1.493 -‐0.23 international experience 4.374 5.383 1 29 5.902 6.271 2.058 2.121 3.844*** market capitalization 85.444 56.317 0 249 89.247 61.889 79.678 46.216 9.569 political risk 3.033 1.595 0.500 6.917 3.010 1.589 3.069 1.608 -‐0.059 geo_distance 8.803 0.723 5.922 9.873 8.835 0.723 8.756 0.723 0.079 edu_distance 0.947 0.513 0.019 1.901 0.920 0.534 0.988 0.479 -‐0.068 dem_distance 1.548 0.602 0.001 2.059 1.549 0.556 1.546 0.669 0.003 parents size 0.090 0.142 0.002 1.137 0.119 0.168 0.045 0.067 0.074*** parent ROA (RMB 100billion) 10.361 6.872 -‐7.043 50.139 9.359 6.712 11.879 6.855 -‐2.52*** parent leverage 0.499 0.167 0.112 0.943 0.496 0.164 0.504 0.172 -‐0.008 * p < 0.10, ** p < 0.05, *** p < 0.01

41

Table 4: Correlations

Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1. level of control 1.000

2. state -0.098* 1.000

3. host technology 0.056 -0.064 1.000

4. rule of law -0.053 -0.085* 0.322* 1.000

5. shareholder protection -0.015 -0.118* 0.603* 0.198* 1.000

6. international experience 0.039 0.313* -0.103* -0.242* -0.129* 1.000

7. acquisition -0.212* 0.155* -0.014 0.124* -0.100* -0.080 1.000

8. market capitalization -0.082 -0.034 0.351* 0.480* 0.622* -0.190* 0.014 1.000

9. political risk -0.114* -0.020 -0.086 -0.040 -0.094* -0.054 0.097* -0.130* 1.000

10. geo_distance 0.213* 0.086* 0.259* -0.153* 0.077 0.097* 0.052 0.020 -0.389* 1.000

11. edu_distance 0.004 -0.107* 0.525* 0.737* 0.128* -0.220* 0.146* 0.171* 0.046 -0.013 1.000

12. dem_distance 0.033 -0.040 0.566* 0.596* 0.189* -0.196* 0.184* 0.377* 0.236* 0.171* 0.756* 1.000

13. parent size 0.004 0.094* -0.080 -0.021 0.041 0.147* -0.020 0.083 0.048 0.026 -0.089* -0.047 1.000

14. parent ROA 0.049 -0.107* 0.020 0.073 -0.006 0.054 -0.018 -0.021 -0.055 0.047 0.117* 0.063 0.040 1.000

15. parent leverage -0.025 0.064 -0.026 0.036 -0.020 0.007 0.044 0.160* 0.059 -0.037 -0.053 -0.006 0.271* -0.285* 1.000

Note: * p < 0.05

42

Table 5: Results of Logit models predicting the probability of acquisition entries

(1) (2) (3) (4) (5) state 0.705** 1.807*** 0.689** 1.580** 1.968*** (0.313) (0.696) (0.315) (0.805) (0.731) host technology 0.224 0.258 (0.159) (0.163) state * host technology -0.336** -0.380** (0.170) (0.178) rule of law 0.002 -0.177 (0.272) (0.313) state * rule of law 0.211 0.328 (0.277) (0.312) shareholder protection 0.089 (0.180) state*shareholder protection -0.333* (0.201) international experience -0.058* 0.006 -0.053 0.009 0.005 (0.034) (0.043) (0.034) (0.044) (0.043) market capitalization -0.001 -0.002 -0.002 0.002 -0.002 (0.003) (0.003) (0.003) (0.004) (0.004) political risk 0.097 0.092 0.098 0.050 0.090 (0.106) (0.114) (0.106) (0.121) (0.114) geo_distance 0.264 0.268 0.309 -0.279 0.300 (0.234) (0.248) (0.242) (0.337) (0.253) edu_distance 0.325 0.059 0.319 0.379 0.063 (0.450) (0.473) (0.447) (0.643) (0.472) dem_distance 0.054 0.190 -0.155 0.243 0.134 (0.429) (0.471) (0.504) (0.548) (0.601) parent size 5.665*** 5.531*** 5.365*** 4.976*** 5.180*** (1.310) (1.395) (1.311) (1.330) (1.395) parent ROA -0.014 -0.013 -0.016 -0.012 -0.016 (0.021) (0.023) (0.021) (0.024) (0.023) parent leverage 0.170 -0.334 0.112 -0.272 -0.442 (0.926) (1.028) (0.939) (1.023) (1.039) constant -4.421** -4.816** -4.493* -0.218 -4.268 (2.178) (2.358) (2.535) (2.997) (2.633) Pseudo R2 0.139 0.145 0.142 0.118 0.148 χ² 62.393 56.786 63.611 43.508 58.002 P(χ²) 0.000 0.000 0.000 0.0007 0.000 N 390 326 390 303 326 Notes: Standard errors in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. Nine industry dummies are included.

43

Table 6: Results of Tobit models predicting level of control (acquisitions sample)

(1) (2) (3) (4) (5) state -23.840* -22.306 -32.934** 45.627 -66.812** (12.934) (24.281) (13.461) (28.363) (31.168) host technology -0.968 -6.598 (6.391) (7.316) state * host technology -0.297 9.105 (6.339) (7.402) rule of law 23.827** 32.880** (9.342) (12.699) state * rule of law -26.426*** -32.115** (9.531) (12.595) shareholder protection 24.676*** (7.501) state*shareholder protection -17.689** (7.532) International experience -2.198* -1.265 -2.289* -1.935 -1.684 (1.276) (1.460) (1.241) (1.378) (1.454) market capitalization -0.102 -0.057 -0.164* -0.331** -0.202 (0.086) (0.110) (0.094) (0.143) (0.134) political risk 0.041 -2.091 0.161 -1.815 -1.723 (3.586) (4.090) (3.486) (3.772) (4.004) geo_distance 1.155 -0.949 -3.204 3.996 -4.671 (9.712) (10.695) (9.751) (10.487) (10.605) edu_distance -14.195 -14.664 -18.631 -31.453* -36.033 (14.108) (19.344) (16.270) (17.559) (26.281) dem_distance 16.748 28.550 17.887 19.783 32.398* (15.772) (17.800) (15.230) (21.087) (18.043) parent size 82.915*** 74.147** 96.525*** 75.853** 87.020*** (30.082) (31.598) (29.889) (32.277) (31.338) parent ROA 0.391 0.025 -0.107 -0.829 0.066 (0.834) (1.082) (0.829) (0.980) (1.053) parent leverage -45.275 -49.107 -56.334 -71.247 -63.327 (43.132) (46.512) (42.289) (46.025) (45.674) constant 115.503 118.731 74.687 55.488 72.362 (93.848) (104.289) (96.462) (97.612) (106.679) Pseudo R2 0.047 0.045 0.059 0.076 0.059 χ² 30.190 25.606 38.277 42.620 33.812 P(χ²) 0.017 0.109 0.0036 0.0005 0.0274 N 104 96 104 92 96 Notes: Standard errors in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. Nine industry dummies are included.

44

Table 7: Results of Tobit models predicting level of control (greenfield sample)

(1) (2) (3) (4) (5) state -19.382*** -50.342*** -19.637*** -42.468** -55.018*** (7.247) (16.751) (7.277) (20.631) (17.298) host technology -5.020 -5.877 (3.777) (3.850) state * host technology 8.481** 9.834** (4.263) (4.411) rule of law 0.199 6.148 (6.417) (6.861) state * rule of law -6.399 -9.622 (6.699) (7.157) shareholder protection -6.340 (4.241) state*shareholder protection 7.804 (5.140) international experience 1.313 -0.753 1.146 -1.019 -0.775 (0.836) (1.020) (0.854) (1.079) (1.024) market capitalization -0.157** -0.137* -0.129* -0.039 -0.143* (0.069) (0.074) (0.075) (0.098) (0.081) political risk -4.462* -5.774** -4.666* -5.182* -5.776** (2.551) (2.656) (2.577) (2.911) (2.671) geo_distance 11.052** 6.106 10.140** 4.126 5.687 (4.653) (4.742) (4.745) (7.564) (4.766) edu_distance 8.352 -4.949 12.793 -1.411 -6.820 (10.228) (11.201) (11.774) (12.344) (13.562) dem_distance 10.154 15.101 9.823 27.845** 15.683 (9.643) (11.179) (9.666) (13.815) (11.210) parent size 2.758 -0.470 10.029 20.006 6.057 (38.323) (38.183) (38.849) (39.782) (38.468) parent ROA -0.053 0.095 0.000 0.226 0.149 (0.463) (0.541) (0.470) (0.584) (0.543) parent leverage -23.380 -5.005 -20.992 5.012 -1.862 (22.171) (23.311) (22.329) (24.672) (23.442) constant 38.687 105.154** 38.971 83.406 82.631 (43.706) (47.241) (52.875) (67.909) (53.675) Pseudo R2 0.042 0.038 0.043 0.036 0.040 χ² 54.493 42.283 56.143 35.136 44.114 P(χ²) 0.000 0.0006 0.000 0.0060 0.0009 N 288 232 288 213 232 Notes: Standard errors in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. Nine industry dummies are included.

45

Table 8: Results of Tobit models predicting level of control (full sample)

(1) (2) (3) (4) (5) state -22.682*** -40.783*** -23.267*** -27.327* -50.114*** (6.080) (12.760) (6.123) (16.086) (13.547) host technology -3.783 -5.184* (2.948) (3.043) state * host technology 5.163 7.661** (3.187) (3.372) rule of law 6.643 12.231** (5.182) (5.787) state * rule of law -12.008** -13.849** (5.325) (5.830) shareholder protection -0.532 (3.584) state*shareholder protection 3.064 (4.021) international experience 0.664 -0.951 0.492 -1.638** -0.984 (0.649) (0.783) (0.661) (0.826) (0.785) acquisition -21.441*** -14.316** -20.597*** -19.034*** -13.440** (5.820) (6.009) (5.812) (6.241) (5.972) market capitalization -0.130** -0.106* -0.122** -0.083 -0.143** (0.054) (0.060) (0.059) (0.082) (0.067) political risk -3.899* -5.373** -3.686* -5.472** -5.055** (2.029) (2.114) (2.044) (2.344) (2.111) geo_distance 8.381** 3.790 7.585* 0.676 3.352 (4.028) (4.179) (4.100) (6.238) (4.174) edu_distance -0.102 -7.607 1.751 -9.412 -14.647 (8.145) (9.126) (9.471) (10.205) (11.460) dem_distance 13.219* 17.880** 12.477 26.380** 19.252** (7.961) (8.690) (7.947) (11.536) (8.727) parent size 47.212** 49.354** 56.063** 60.367** 53.454** (21.560) (21.331) (22.479) (23.486) (21.597) parent RoA -0.078 0.146 0.017 0.242 0.225 (0.383) (0.429) (0.387) (0.454) (0.429) parent leverage -32.177* -17.530 -26.915 -10.611 -12.061 (18.156) (19.455) (18.309) (20.476) (19.504) constant 63.446* 115.071*** 35.685 110.273* 71.951 (37.872) (40.831) (44.526) (56.176) (45.214) Pseudo R2 0.037 0.034 0.040 0.037 0.038 χ² 73.445 57.689 78.823 57.302 63.732 P(χ²) 0.000 0.000 0.000 0.000 0.000 N 390 326 390 303 326 * p < 0.10, ** p < 0.05, *** p < 0.01

Notes: Standard errors in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. Nine industry dummies are included.

foreign entry strategies by soes 130501 cover · 2013. 8. 21. · 5...

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