Examining the boundaries of the firm an institutional-resource based approach to transnational M&A performance : an empirical analysis

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Examining the Boundaries of the Firm

An Institutional-Resource Based Approach to Transnational M&A

Performance

An Empirical Analysis

Master Dissertation: MSc. Business Administration

Track: International Management

Supervisor: Dr. Johan Lindeque Second reader: Mr. Erik Dirksen M.Sc. Student: Aidan E. Hwang

Student ID: 10967923 Date of Submission: 25/3/2016

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Statement of Originality

This document is written by student Aidan E. Hwang who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating

it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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List of Abbreviations

CSA: Country Specific Advantage

SOMNE: State Owned Multinational Enterprise FDI: Foreign Direct Investment

FSA: Firm Specific Advantage MNE: Multinational Enterprise M&A: Merger & Acquisition SOE: State Owned Enterprise GDP: Gross Domestic Product JV: Joint Venture

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Acknowledgements

I would like to express my thanks and gratitude toward my supervisor Johan Lindeque for his useful insight, comments, and remarkable professional attitude throughout this entire learning process of this master thesis. Additionally, I would like to express my thanks to the entire staff at Amsterdam Business School for helping me create a strong foundation for business research and for introducing me to the topics that have been explored in this paper. I would like to also thank all my friends (both familiar and new) and family for helping me make the most out of my education abroad; Without them I would not have been able to put the pieces together. I am truly grateful for this experience of studying abroad and I wish for the future to bring nothing but success to Johan, my friends, and my family.

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4.6.3 Performance ... 26 4.7 Comparison of Pressures ... 26 4.8 Controls ... 26 4.9 Analysis ... 27 4.9.1 Analysis with SPSS ... 27 5. Results ... 28 5.1 Join Ventures ... 28 5.2 Mergers ... 30 5.3 Acquisitions ... 31 6. Review of Results ... 33 7. Discussion ... 34 7.1 Limitations ... 36 8. Conclusion... 37 9. Tables ... 39 10. References ... 45

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Examining the Boundaries of the Firm:

An Institutional-Resource Based Approach to Transnational M&A

Performance

1. Abstract

The purpose of this research is to investigate the impact of institutional pressure and resource dependencies on outward investing state-owned multinationals by analyzing entry mode performance. For the purpose of this study, SO-MNE entry mode performance is understood as the operational revenue a firm collects during a fiscal year. This work aims to apply and extend the theory of both the institution and resource based view by integrating the firm differences experienced by state owned multinationals. Specifically, this work demonstrates how SOMNE entry mode performances can shift in differing institutional contexts and varying resource dependent environments.

Modes of entry such as acquisition, merger, or joint-ventures allow firms to combat different types of market inefficiencies, transaction costs, and failure (Pan & Tse, 1999). For example, in a weak institutional context a JV strategy may be pursued in order to gain access to a variety of resources. (Palenzuela, 1999). However, in a strong institutional framework the JV strategy can be less effective making acquisitions play a critical role in accessing resources that are both intangible and tangible (Meyer, 2009). By using a combination of indexes and archival data, this work provides the empirical backing for examining the testable hypothesis. This research will review international entry mode literature, identify rationales behind strategic decisions of entry modes, and attempt to create a bridge between SOMNE literature and entry modes.

Keywords: Institutional Theory, Resource Dependency, Entry Modes, Acquisitions, Joint Ventures, Mergers, State Owned Enterprises

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2. Introduction

There is a variety of literature that states how institutional and resource pressures of the host country may affect outward expanding multinationals. What isn’t clear is how levels of institutional and resource based pressure from the home country may affect multinationals seeking to internationalize. Low institutional strength from the home country may provide firms the incentive to expand into international boundaries as they have less of a barrier to do so (Brouthers, 2000). Likewise with resource dependency, firms may choose to extend their international grasp if the availability and conditions of both natural and human resources are not as readily available as in other countries (Choudhury & Khanna, 2014). This research aims to address the institutional and resource pressure issue from the other side of the paradigm, the home country. Based on the literature a question develops: Do home-based institutional and resource pressures indeed affect firms aiming to internationalize in the same way their host country pressure counterparts can?

Many case specific studies of state owned firms lack empirical analysis (child & Rodriques, 2005; Deng, 2008, Rui & yip, 2008). Studies have zoned in on issues that influence entry mode decision such as principal-principal conflicts or the effect of isomorphism on SOE decisions (Davis & Desai, 2009). In contrast, there has been little to none extensive empirical analysis performed on the effect of institutional and resource based pressure on entry modes by state owned enterprises. The integration of assets and efficient use of resources is difficult and the possession of strategic assets does not necessarily result in a long lasting competitive advantage (Deng, 2008). There has been an increase in outward FDI by SOEs leading the question of what factors can play influential factors towards their development across trans national borders (Dikova, 2007). To what extent does home country government policy and their control schemes of assets affect the outward FDI from SOEs? It is possible that home government policies may misdirect SOEs that must make accurate judgements of costs in international expansion (Rugman & Li, 2007). Does a stronger home institutional framework translate to a positive influence on SOE entry mode performance or vice-versa? Additionally, what role does the dependency for resource play in SOE international expansion?

Globalization drives firms to expand outside their home country, thus shifting the boundaries of the firm and creating new avenues of entry mode research to pursue (Chakrabarty, 2014). Specifically, international entry mode research has become especially

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important because of the significant impact it can have on entry mode performance (K.D. Brouthers, 2002; Brouthers & Werner, 2003). International entry mode research is still relatively new and focuses on the exploration of the type of model firms use to enter foreign markets. It is important to note that once entry modes are established it is difficult to shift to another entry mode choice without implying long term ramifications for the firm (Petersen & Benito, 2002). Additionally, recent research has highlighted the fact that entry mode decisions and strategies are moderated by the characteristics of the particular context in which the firms are set to operate within (Hoskisson et al., 2000; Meyer and Peng, 2005; Tsui, 2004).

The institution or ‘rules of the game’ can significantly shape firm strategies regarding for market entry (Peng, 2003). Institutions at the highest level have the ability to affect transaction costs (North, 1990) though the transaction cost research that is demonstrated by Williamson, 1985 has provided significant research that suggests that opportunism and bounded rationality can play critical roles as well. The need for resources also play a critical role in determining entry mode strategies and can affect firms in different institutional contexts (Barney, 1991). The implications for both institutional and resource pressures on outward expanding multinationals is developing, but the main purpose of this research is meant to consider the home of the state owned enterprise, or the alternative to the work of Meyer and Peng, (2014), who focused their study on how state owned enterprises adapt foreign entries to institutional pressures abroad.

The internationalization of state owned multinational enterprises has become more prevalent and as a result the international presence and power of SOMNEs are becoming increasingly evident (Marcel, 2006). The academic literature on SOMNE development has also incrementally developed over time since its rise in popularity during the 1970’s (Vernon, 1979). State and private owned businesses from both emerging and developed economies have internationalize their business reach in an effort to maximize both profit and efficiency gains (Cuervo-Cazurra, 2014). SOE’s are beginning to enter and solidify footholds within technological, nuclear, automotive, telecommunications, and resource-based sectors of the world (Pfeffer & Salncik, 1978).

The establishment of market presence for state owned businesses is especially critical in industries related to the extraction of natural resources (Kowalski, Büge, Sztajerowska, & Egeland, 2013). This is due to the scarcity and high levels of competition for natural resources. When SOMNEs aim to acquire resources abroad they must compete with privately owned enterprises and deal with the institutional pressures on their strategies for entering the

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market(s) (Arens & Brouthers, 2001). Barriers to entry, the pressure for legitimacy, and the time constraint for development within the host country allow for a great diversity in entry mode strategies of SOMNEs (Cui et al. 2011). Higher institutional pressures on state owned firms results in an easier transition for SOMNES to internalize advantages and assimilate within host country conditions (Meyer 2014). While institutions provide constraints for outward investing state owned business, resource availability and distribution among international expansions maintain a critical role as well. Resource dependence theory suggests that firms with the most resources maintain the most power and can depend less on other institutions (Pfeffer et al. 1978; Wry et. al 2013). While a larger amount of investment capital allows for greater flexibility in investment, SOMNEs must still strategically acquire capital necessary for industry production and export (Salancik, 1978). Though dependency can be low with firms that posses more resources to invest, RD theory does not address how SOMNEs with varying levels of resources choose to acquire the necessary capital to enter a market. Examining the difference between strategic choices of state owned MNEs will serve as an extension on SOMNE literature.

This research departs from the existing literature that focuses solely on the entry mode strategy from privately owned multinationals and will examine how institutional and resource based pressures will affect the performance of SOMNEs in (1) joint ventures, (2) acquisition, and (3) merger deals. In addition, the choice of an entry strategy is determined by the anticipated revenue, which is in turn heavily influenced by a firm’s environment (Chen & Yu, 2002). Revenue will be used as a performance indicator in combination with resource and institutional indexes to develop an analysis with the mentioned entry mode decisions. This study aims to answer the following research question:

To what degree to home resource dependencies and institutional pressures affect Entry Mode performances by SOMNEs?

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3. Literature Review

The first part of the review will address literature pertaining to state owned enterprises and the rationale behind the establishment of SOMNEs. The analysis of literature on different entry modes will review the decisions and reasoning behind multinationals when deciding to enter a new market. The literature of institutional pressures will then be examined in order demonstrate cultural and political conflicts multinationals face when entering foreign competition (Dimaggio, 1988). Literature regarding resource dependency and resource requirement will then be assessed in order to demonstrate varying levels of investment by multinationals in fluctuating levels of resource requirements (Choudhury & Khanna, 2014). The evaluations of both institutional pressure and resource dependencies will aim to shed light on how SOMNEs perceive outward expansion, detailing both the motives and drivers of entry mode decisions. Subsequently, the review will integrate analysis between resource and institutional pressures, tying them to potential decisions for entry modes for state owned multinationals.

SOEs may choose to enter a market by joining resources in the form of tacit knowledge, capital investments, or acquire resources on the basis of their availability (Agarwal & Ramaswami 1992). It is possible that SOEs may choose certain entry modes based on the strength or weakness of home resource establishment with regard to technological availability, which is typical of advanced economies (Anderson & Gatignon 1986). In contrast, emerging market countries that are not as advanced could provide the necessary environmental resources in the form of natural resources despite not maintain a strong institutional framework (Bhaumik & Gelb 2005). These characteristics must be investigated to understand the extent to which these factors influence SOE entry mode performance. Does a stronger home resource dependent country lead to negative or positive influences by performances by SOEs or vice-versa? Revenue will be used as a performance indicator for all three types of entry modes (JV, Merger, Acquisition) and will be pinned to both resource and institutional indexes respectively.

There are many factors that influence the performance of outward expanding SOEs. An example of this would be the type of industry (Elango & Sambharya, 2004), the timing of technological development (Arora & Fosfuri, 2000), or the economic state of the global market in general (Dimaggio, 1988). Constraints will have to take into account global market failure, therefore, this research will examine the time period after the 2008 financial crisis, which will include performance data for JVs, mergers, and acquisition from 2009-2015. This

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research aims to investigate and find the empirical evidence for the effects of home-country resource dependency and institutional pressure on entry mode performance for SOEs. Revenue will be used as the indicator of performance.

3.1 Conceptual Model H o m e In stitu tio n al P ressu re H o m e R eso u rc e D epend enc y Host Country Entry Modes: JV, Mergers, Acquisitions State-owned Multinational Enterprise State-owned Multinational Enterprise State-owned Multinational Enterprise State-owned Multinational Enterprise State-owned Multinational Enterprise State-owned Multinational Enterprise H o m e In stitu tio n al P ressur e H o m e R eso u rc e D epend enc y USA Chin a

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3.2 Theory of the State Owned Multinational Enterprise

There are two orthodox justifications for the existence of SOEs; The first is maintained around the solution to the existence of market imperfections and the second includes the political ideology and strategy of governments that encompass private ownership of assets (Cuervo-Cazurra 2014).

When considering market imperfections, economic theory dictates that state ownership is established as a solution to market failure (Delios & Beamish 1999). When markets are unable to utilize resources in an efficient manner, governments must intervene in order to address these inefficiencies using forms of taxation, regulation, and direct ownership (Lawson, 1994). Governments will choose their form of intervention based on the typology of market failures. Market failures can be attributed to the depletion of resources, the development of negative externalities, information asymmetries, and natural monopolies (Laffont & Tirole, 1993). In the case of natural monopolies it may be the case that it is more efficient for a society to have just one provider of goods than to have large amounts of competition in order to avoid the perils of overpricing and undersupply (Gomes-Casseres, 1989). This leads to the creation of SOMNEs as some governments actually choose to be the supplier of a good for society (Brouthers, 2001). Once governments begin to stabilize domestic market failure, what steps may they take in order to expand operations? Establishment of SOMNEs in response to market failures will reach a turning point where products begin to provide efficient results and address societal needs (Arrow, 1962), the development of technological progression and operational excellency will still exist (Barney, 1991). The option for SOMNEs to internationalize into other markets for competitive advantages can exist as a viable option for growth. What needs to be clarified is by what method SOMNEs enter a market, what resources pressures they may face, and how can host country institutional pressure effect SOMNE development abroad.

Historically SOEs have been viewed as organizations that were created solely based on the foundations of state capital and managed by political leaders to serve the good of the country (Ramaswamy, 2001). SOEs typically confine their operations to their home countries and internationalize exports in the form of raw materials or energy products to provide foreign development to the home government (Vernon, 1979). Privatization processes that resulted as both capitalist and mixed economies embraced pro-market reformed called for the reform of the traditional SOMNE. SOEs became either state owned or fully private, shifting managerial behavior (Ramaswamy, 2001) and the development of privatized practices

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opened up opportunities for SOEs to diversify their standing in the international market (Barkema, 1997). In the midst of the globalizing economy, would it be possible for SOEs to create a sustainable business from the export of raw materials or energy products? It is blurred as to how the pressure to globalize could be affected by resource dependencies by other countries. Would political pressures from host countries present problems as other countries aiming to expand into their markets could be perceived as a threat?

SOEs can be viewed as enterprises that produce and sell services rather than government entities that offer social services such as health care, education, or security (Aharoni, 1986). As such, SOEs maintain different levels of ownership that manage firm control. Ownership in SOEs can be split into three types: The first is full government ownership of all shares of the firm; minority ownership by the government of the firm; and majority ownership by the government of the shares available (Cuervo-Cazurra, 2014). The degree of ownership by the home government may affect how SOEs internationalize into foreign markets, it however remains unclear how resource and institution pressure affect varying levels of ownership, and potentially varying entry mode decisions.

3.3 Entry Mode Decisions

Establishing an outward FDI investment can be classified into specific categories: acquisitions, greenfields, and joint ventures (Kogut and Singh, 1988). JVs and Acquisitions provide firms with the access to potential resources already held by established firms. JVs most frequently draw resources from partners, while acquisitions integrate resources by total ownership (Bhaumik & Gelb, 2005). It is important to note that ownership and entry mode can be viewed as sequential decisions. For instance, firms may first decide between JV and full ownership. If full ownership is preferred then a decisions between acquisition or greenfield may be considered (Estrin and Meyer, 2004). Institutional pressures affect ownership and entry mode simultaneously; therefore it is possible to analyze these entry modes in a simultaneous manner (Meyer, 2004).

Acquiring a firm exposes it to major managerial risks (Buckley and Casson, 1998) yet a JV creates many different problems for coordination between firms (Kogut, 1988). This opens up a possibility where if the markets for goods in a country are efficient and not scarce, instead companies may purchase the resources and open up a green field operation. This may prove to be difficult in emerging markets where infrastructure isn’t fully developed or the institutional environment governing the transaction places too much pressure on the entrant (North, 1990; Peng 2006).

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Vernon’s (1979) research on SOMNEs provides a pivotal point for discussion as it lays out the different dimensions to consider when reviewing literature for SOEs aiming to internationalize. The field of international entry mode research is relatively new (Brouthers, 2007). Vernon analyzes the historical implications behind the strategic decisions of SOMNEs in foreign markets. Governments will decide to create a state owned enterprise as a means to create and develop an industry that the private sector seems reluctant to expand upon (Vernon, 1979). This means that state owned enterprise can expand as a result of the home government wanting to preempt the competition to ensure national dominance of host country resources. State owned firms must strategically maneuver themselves around barriers to entry in the forms of taxes, quotas, and institutional barriers. This creates a trend where SOMNEs can sometimes create partnerships with other MNEs in order to overcome institutional pressures. The extent to which the institutional pressures affect resource investment and the expansion of SOMNEs remains unclear.

A critical point of analysis is whether or not firms will enter foreign markets through contracts, through use of distributors, resource suppliers, and licenses/franchises, or by extending firms abroad, through use of sales and manufacturing subsidiaries (Brouthers & Hennart 2007). Entry modes can be classified in two categories, contracts (non-equity) and equity (Hennart, 2000) modes and equity modes can be distinguished by the degree of ownership or control, with a continuum from shared (joint ventures, JV) to full (wholly owned subsidiaries, WOS) ownership and control. Transaction cost theory explains why firms choose to emphasize external transactions, or limit internal transactions. This decision will dictate which course of entry firms will choose (Hennart 2000). The major difference between WOSs and JVs being that JVs consist of joint internalization and WOSs of sole internalization (Hennart 1989). It can be determined that different levels of ownership may correlate with different levels of internalization/externalization, if firms would rather have market sources provide for them (Hennart 1989). This study does not address how institutional pressures or resource orientation may affect the specific mode of entry from governing funded bodies such as state owned investors. Connections must develop between resource and institutional based views in order to understand entry mode decisions for SOMNEs.

Institutional pressures, or the rules of the game, certainly have a strong effect on firm strategies concerning foreign market entry (Peng, 2003). Pressures help influence firms to decide on three types of entry mode decisions: greenfield, JV, acquisitions. A firm’s entry mode can be perceived as a sequence of decisions, the first deciding partial JV vs. full

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ownership. If full ownership is preferred, the decision then culminates to acquisition vs. greenfield (Meyer et al. 2009). The logic behind what may effect the decision of firms to prefer a certain entry modes must still be investigated.

Li’s (2000) work on outward FDI strategies for state owned enterprises provides an ideal starting point in the discussion of strategies of entry mode decisions. Different types of SOEs must consider different paths of entry based on their country specific advantages. Key components of the CSA are strategic resources, country motivations, and adaptive capabilities (Barney, 1991). Institutional forces will affect the way SOEs strategically apply these resources, and therefore shift the mindset of outward strategy (Dikova, 2007). Institutional change can be described as a driving component of firm strategy as outward investing firms must also take into account the evolution and coevolution of political economic systems (Pan 2014). SOE’s will face opportunities that are created from asymmetric institutional pressures which will dictate how home country’s will adopt differentiated resource based strategies regarding FDI (Li et al. 2000).

Khanna and Choudhury (2014) extend the literature on SOMNEs by building upon resource dependency theory and why state owned businesses may seek to internationalize to achieve resource independence from state actors. The extent to which global cash flows are examined can be used to determine a relationship of independence from other state actors from the home country (Khanna & Choudhurry, 2014). Vernon (1979) agrees that SOEs can create resource independence from home country governments by creating independent cash flow streams (Vernon 1979). This demonstrates an example of why SOMNEs might be motivated to extend business outside their home country boundaries. While it is concluded that SOMNEs view independence as a critical motivating factor, the scope of the study is limited to how SOMNE decide in entry modes when considering resource objectives and institutional pressures.

The research article by Bass & Charkrabarty (2014) develops a resource-based theory by examining the strategic intent of acquisitions of scarce resources by multinational firms. Results of this study suggest that owners of firms shape the intent of strategic resource acquisitions. SOE’s usually acquire and pay more for resource exploration than exploitation. The key contribution of this literature suggests that ownership influences resource acquisitions and that resource security is of major importance to multinational enterprise. SOE’s invest abroad to protect both their own and their home countries’ future (Arens & Brouthers, 2001). The resource-based view suggests that internalizing resources can help

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improve performance and reduce dependence on other firms. Multinationals with greater state ownership pay higher prices for acquiring resources for exploration and lower prices for resources exploitation (Bass and Charkrabarty, 2014). The literature does not explain how resource and institutional pressures affect the way entry modes are decided, specifically acquisitions. While the literature suggests a variety of motives behind the use of certain acquisition strategies it does not examine the link between resource availability and institutional pressure when considering entry modes. Multinationals are more likely to acquire resources for exploration when the country is rich in resources and maintains a developed economy (Cuervo-Cazurra, 2014). SOE’s are more likely to acquire resources for exploration when they have previous experience in the target country. Location specific knowledge adds to efficient and informed decisions, SOMNE’s are more likely to acquire resources for exploration when target country is resource rich (Barney, 1991).

3.4 Transaction Cost Theory & Entry Modes, Market Failure

Once a firm has established its desire to take operations abroad, what might guide their motivations? Transaction cost theory can be used to provide a rationale behind the choice of entry modes and has been widely used to examine the determinants of multinational performance (Chen & Hu 2002). TC theory gives explains why firms may choose to expand or source operations in an external environment, weighing the costs of resource exchange with the environment against the cost of internal processes. An example of this would be a firm that decides to minimize the bureaucratic costs by using external environments; This allows companies to perform activities more cheaply if external transaction costs can surpass costs of internal bureaucratic costs.

Additionally, transaction cost theory emphasizes the importance of assets possessed by companies (Williamson, 1975, Buckley & Casson 1976). Examples of assets can include the firm’s currently knowledge of the market, the firm’s actual product, marketing skills, product differentiation, and brand name. Firm’s can encounter a variety of conflicts regarding asset transferability, which are influenced by environmental pressures. For example, knowledge can be difficult to transfer because of buyer uncertainty (Hennart, 1988). The incorporation of patents can be used as a solution to address the lack of mobility in knowledge because patents dictate exactly what a specific product can do. In an environment where it is difficult for knowledge to be patented the costs for the transfer of knowledge will be much greater due to use of contracts, making hierarchical coordination via equity ownership a more practical mode of entry (Chen & Hu, 2002).

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The amount of available resources, commitment to investing resources, and construct of institutional control heavily determine entry mode decisions. Higher control entry modes are more useful in scenarios where there are unstructured, unclear, and highly customizable product adaptations (Anderson & Gatignon, 1986). It is clear that high complexity will lead to higher control entry mode as the difficulty to understand will increase with the unstructured characteristics of products. It has been established that high knowledge content, especially when considering tacit knowledge, places the investing multinationals in a position of greater risk (Buckley and Casson 1976). A high control entry mode such as wholly owned or acquired subsidiary is more useful in this scenario (Buckley & Casson, 1996).

Transaction cost theory also explains that market failure can arise due to bounded rationality and opportunism (Brouthers & Brouthers, 2000). Bounded rationality is the idea that explains that when firms or managers make decisions the information available is limited by the scope of the problem, the cognitive limitations of their thoughts, and the time frame in which they need to deliver their results (Anderson & Gatignon, 1986). Opportunism can be defined as the idea that explains that managers and firms can take advantage of opportunities and exploit circumstances in order to achieve personal gain and align environments or situations to their own personal objectives (Brouthers & Brouthers, 2000). Both opportunism and bounded rationality can influence market failure, which in turn drive up transaction costs (Brouthers & Brouthers, 2000). The high costs that are incurred by firms that aim to transfer assets will lead them to internalize markets (Chen & Yu 2002). This will lead firms to select a high control mode when they decide to transfer assets internationally. This is true in institutions where intellectual property is weaker, especially in emerging markets where the legal framework is still developing and difficult to enforce. By choosing a high control entry mode, it will be more effective for expanding multinationals to transfer their assets and products.

3.5 Institutional Context and Entry Mode Strategy

The firm must choose how they want to enter their market based on the strength of institutional, both regulative and cultural, practices. Institutions play a key role in market economy to support the transactions between firms and consumers without developing extraneous cost or risk (North, 1990; Peng, 2008). The institutional frameworks, includes the legal enforcement, property rights, information systems, and regulation that monitor the markets. For this study, weak institutions can be defined as frameworks that fail to regulate markets and deter criminal business action. Strong institutions demonstrate a support for

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voluntary exchange underpinning an effective market mechanism (Peng, 2008). Institutional differences can vary vastly from country to country, especially if the home country has many businesses operating in different institutional contexts. For example, legal restrictions may limit equity that foreign investors are allowed to control (Delios and Beamish, 1999).

In addition to the existence of legal frameworks, information institutions, or cultural pressure, may contribute to the difficulty of assimilation by outward expanding firms. MNEs must devise approaches to overcome these constraints (Peng, 2008). Culture is the shared values and beliefs of a country and cultural distance is the difference in these specific beliefs between the host and home countries (Chen, 2002). A large cultural distance can potentially lead to higher transaction costs overall, shifting the strategy of firms to maintain a conservative approach. However, transaction cost analysis explains that outward expanding firms may select a form of control that is both high and low (JV and Acquisition) as a potential response to unfamiliar and large cultural differences (Buckley & Casson, 1996). The unfamiliarity may lead potential firms to share control with local firms in order to reduce uncertainty and minimize risk. This means that foreign investors can more evenly distribute risk, therefore avoiding expensive mistakes in a new institutional setting.

Additionally, institutions have the ability to reduce information asymmetries by providing information to other businesses (Casson, 1997). Strength of institutional frameworks influences foreign entrant to invest because it lowers the cost of doing business. Less resources needed to be invested in order to overcome market inefficiencies such as bribery or deceit (Choudhury & Khanna, 2014). What is not clear is how SOEs might be affected when confronted with the same amount of institutional pressure. SOEs can be perceived as another type of competitor due to the existence of government funding. This may shift attitudes concerning the legitimacy of a company, creating inefficiencies along the way.

State owned enterprises are subject to institutional pressures that are dictated by legitimacy, ideological conflicts, perceived threat to national security, and unfair competitive advantages that exist due to support by the home country government (Meyer, 2014). Legitimacy is a key characteristic that drives strategy of a SOE within a host country, causing state owned foreign entrants to tailor their strategy in order to reduce inter country conflicts. Using data from control decisions within Chinese owned firms, this article (Cui & Jiang, 2011) tests the differences between pressures on SOE’s where legitimacy pressures are weaker or stronger. The aim is to provide an extension to institutional theory (IBV) to give a

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better explanation on how entrants may proactively integrate within a host country organizational field.

FDI ownership explains the connection between government ownership and legislative connections (Pan, 2014). This is based on existing literature on transaction cost theory, which predicts that firms prefer higher ownership for subsidiaries that are located in favorable institutional environments. The proposition is clear, governments can act as mediators between firms and the firm’s legislative connections. The purpose of this study was to test whether the level of subsidiary ownership was affected by the heterogeneity of foreign institutional environments. Pan (2014) provides strong evidence between strategic positioning and legislative connections/power for SOMNEs. A critical point of analysis for Pan (2014) is demonstrated through use of multivariable regression analysis to tie in the correlation between subsidiary ownership and foreign institutional environments. Analysis showed that stronger foreign institutions had a great likelihood to determine the level of ownership. It is possible that ownership and, therefore, stronger foreign institutions determine which type of entry mode strategy is selected for the firm.

3.6 Resource Dependency Context and Entry Mode Strategy

Firms must consider resources, their positioning to accessibility, and their potential to acquire them. When entry is performed in the form of acquisition or joint venture, two parties are required to combine resources together to enter the market. Though resources can already be embedded within the firm, resource needs and entry modes depend directly on the situation of the entrant. For example, in emerging economies it is necessary for firms to demand context specific resources to achieve competitive advantages (Delios and Beamish, 1999). It is possible that in weak institutions firms may need to rely on the ability to create and develop networks, increasing their ability to enforce contracts (Meyer, 2008). This may cut down costs and litigation can be avoided. An important distinction in the literature is the identification of both tangible and intangible assets (Hennart and Park 1993). Networks and relationships can exist as tangible or intangible resources that are required for the success of new entrants. Do these tangible and intangible resources affect the SOMEs posture themselves within a market?

Acquisitions are more likely in countries that maintain a high levels of developed infrastructure (Song & Yang, 1978). Local stakeholders are more motivated to exert pressure on SOEs acquiring a local company because of perceived discrepancy between principles of free market economy and notion of state ownership (Xiaohu, 2010). Future research and gaps

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to be filled for this field include using a multivariate approach to investigate the impact of institutional changes over time. There is room to explore whether or not SO MNE’s may choose to invest into countries where development is low to reduce costs. Conversely research on whether or not privately owned MNE’s choose to invest primarily in advanced economies such as Europe and North America may be prevalent as well (Cuervo-Cazurra, 2014). Future research may also fill in the gap of how the stakeholder engagement and human resource practices relate to institutional pressures on different types of MNE and SO MNE’s.

3.7 Institutional & Resource Pressures on Entry Mode Strategy

Can institutional and resource pressures synergize in order to create or reinforce tangible or intangible benefits? An issue occurs when institutions and resources maintain simultaneous cooperation with each other. If institutions are weak and do not foster an efficient market, foreign entrants would not be able to obtain resources locally (Meyer, 2009). This leads to a scenario where acquisition would be too costly to pursue due to an improper valuation of the worth of resources, providing even more difficult in integration (Dimaggio, 1988). Foreign entrants would need to find another way to obtain resources. This would lead firms to want to do a joint venture or partnership in order to obtain necessary resources, but this will lead to share of control (Meyer, 2001). It could be possible that in the situation of high institutional pressures that firms in host countries may have more incentive to partner up with state owned enterprises to pursue intangible benefits (Marcel, 2006). In the converse scenario, where institutional pressures are high and resources are easy to obtain, it makes more sense for MNEs to go for a greenfield type scenario. Under strong institutions the market for corporate control is relatively efficient, which allows firms to engage in various forms of acquisitions (Buckley and Casson, 1998).

SOMNEs aim to improve both efficiency and competitiveness through the development of innovative activity. To combat competitive pressures, SOMNEs can invest into innovative technologies that reduce costs and transition production to host country environments. Innovation can impact an SOE’s decision to invest into locations via entry modes through either acquisitions or joint ventures (Girma and Crepon 1998). Innovation allows firms to develop new processes to improve market performance. Resource availability plays a constraint on how much SOMNEs can invest in R&D practices, limiting growth of innovation (Song, 2011). Institutional pressures also can limit the cash flow into a country, which similarly adds as a deterrent for innovation. Innovative processes may drive motivation

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for SOMNEs to choose one equity mode over another during the entry phase (Xiaohua, 2010). While innovation may determine the choice decision of entrance in some markets, the gap still exists as to how resource availability plays into varying levels of equity based ownership. Additionally unlike institutional pressures, innovation will only determine what assets are best pursued in that specific interval time of entry.

3.8 Potential Market Size on Entry Mode Decisions

The size of the host country market influences the strategy of entry mode decisions (Buckley & Casson, 1996). As stated before, this allows the choice of strategy to be dictated by revenues and costs, which is a direct result of the firm’s environment. Market size, which is an influence of the firm’s environment, maintains a directly proportional relationship to the benefits gained from increasing internalization. This creates a scenario where fixed costs of investment can potentially be spread across a wider array of markets, guiding the benefits that are associated with investments to a higher level of benefit (Chen & Hu, 2002). This situation allows mergers to be preferred over other entry modes because a small market will inevitably lead to higher unit costs. Large markets do not only signify lower costs, which in turn justifies the high risk of investments, but also predicts empirically that a high level of controls will be implemented (Agarwal & Ramaswami, 1992). Additionally, difference in levels of development also can lead to region disparity and thus instability (Gao 1996). In this sense multinationals choosing entry modes must adjust their strategy to not only each country but also according to regional standards.

3.9 Operational Revenue as a Performance Indicator

Operational revenue is chosen as a performance indicator because it is used to gauge the general health of a company’s core business or businesses (Arens 2001). It is income that is collected from sources related to a company’s day-to-day business operations. Companies that earn the majority of their income from operating revenue are considered more stable than those do not. Additionally, the health of accompany can be examined via operational revenue analysis. Attention to sources of operating revenue may vary, it is common to see weaker companies gain significant portions of their operating revenue by selling underperforming stores or assets (Bermans, 1999). This makes statements look better than they really are. Operating revenue can be generally calculated by multiplying price by quantity of sales.

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Research Question:

To what degree to home resource dependencies and institutional pressures affect Entry Mode performances by SOMNEs?

Based on the literature, the following hypothesis are made regarding entry mode and institutional/resource pressures. It is expected that firms from strong institutional settings in the home country perform better in JVs, mergers, and acquisitions as they maintain the knowledge and experience to deal with tough legal processes and bureaucracies. This is then transferred over to the host country, where these firms can apply their experiences to streamline business operation processes to optimize performance (operational revenue). It is expected that firms from strong resource dependency settings also perform better in JV, mergers, and acquisitions. Firms that must follow more strict guidelines in acquiring and accessing resources in the home country will be able to apply their experience and know-how to obtaining resources in host countries, whether the host country provides minimal or maximum resource accessibility. This translate into higher performance. The following Hypotheses are developed.

3.10 Hypotheses Join Ventures:

H1) SOMNE JV performance is positively affected by countries with stronger home country institutional pressure.

H2) SOMNE JV performance is positively affected by countries with strong home resource dependency levels.

Mergers:

H1) SOMNE merger performance is positively affected by countries with stronger home institutional pressure.

H2) SOMNE merger performance is positively affected by countries with strong home resource dependency levels.

Acquisitions:

H1) SOMNE Acquisition performance is positively affected by countries with stronger home institutional pressure.

H2) SOMNE Acquisition performance is positively affected by countries with strong home resource dependency levels.

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4. Research Method

Data regarding state owned multinationals has been gathered from several secondary sources, specifically the Orbis, a database that is endorsed by the Bureau van Dijk and maintains comprehensive information on both public and private multinationals globally. Operational revenue serves as an indicator of performance; Data is gathered from Orbis in order to develop a data set for linear regression analysis. The investigation will be achieved through a data set analysis approach and will aim to both extend existing literature and build fundamental theory for SOMNEs. This study will use lines of deductive reasoning to reach a conclusion, aiming to discern a probable relationship between entry mode decisions, institutional pressure, and resource based orientation.

Analysis will consider and control for firm size among each joint venture, merger, or acquisition deal performed. The sample of SOMNEs used will consist of the criteria described previously in the SOMNE methodology section. Tables that include the model summary, ANOVA, Coefficient, and Coefficient with size control will be presented for each hypothesis. Analysis will follow after each set of tables.

4.1 Data Collection

This research utilizes quantitative analysis to investigate the effect of institutional and resources based pressures on entry mode performance (JVs, Mergers, Acquisitions) by state owned multinationals. The method for data collection can be distinguished into three parts.

1) Identifying samples of state owned multinationals performing JVs, Mergers, or Acquisitions from 2009 until 2016. Criteria is explained in section 4.2

2) Collecting total revenue data from the aforementioned state owned multinationals for joint ventures, mergers, and acquisitions

3) Pinning operational revenue data, or performance (DV), from each entry mode to institutional and resource dependency indexes (IVs) to determine correlation. This is described in 4.1.3 and 4.1.4.

4.2 Sample of State-Owned Multinationals

The availability of state owned multinational information has been scarce before the year 2000 and the availability of data still remains limited today. For example, public information regarding Chinese enterprises only became available when firms began to be listed on stock exchanges in 2000 (Chen & Young, 2009). This may be a reason why there is a limited quantity of comprehensive quantitative research on SOMNEs. Quantitative research papers

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on SOMNEs typically use Thomson Reuters database, which is now referred to as the Thomson One Database (Zhang & Ebbers, 2010).

This study will focus in SOMNE specifically in industrial markets and will ignore financial firms and banks. Examples of industries include SOMNE from natural resource sectors, automotive industries, IT industries, telecommunications, transportation, and trade. Additionally, this research will focus on the data and information gathered from three different databases and indexes: the Orbis, the economic freedom index by the National Heritage Foundation, and the 2013 version of the Resource Governance Index that is supported by surveys from the International Monetary Fund. Performance data (Operational Revenue) is gathered from the Orbis database. It is important to note that information about shareholders and ownership is also included as is used in the criteria, which is explained in the criteria section. This database is primarily used to gather information on SOMNE operational revenue, or performance.

4.3 Sample Criteria

The following will describe the data collection criteria for SOMNE sample size and time frame.The subsequent criteria are used to collect a sample from the Orbis Database:

State owned multinationals must acquire, merge, or perform a joint venture within a foreign location (international).

1) JV, Acquisitions, and Mergers from January 1, 2009 until December 31, 2015. 2) This research will select a sample from the top 100 performers in terms of operational revenue from joint ventures, acquisitions, and mergers.

3) Samples that are used for joint ventures are defined as firms that 4) Samples that are used for mergers are defined as firms that 5) Samples used for acquisitions are defined as firms that

6) Entry modes must be completed deals and not speculation; deals must be completed and

m not rumored.

7) Industrial, resource based firms are targeted.

8) Completed deals from any country into another by form of JV, Acquisition, or Merger. 4.4 Ownership Levels

Information regarding shareholder and ownership is collected and maintained in the Orbis database. Orbis is therefore used to determine level of government control, involvement, and ownership of SOMNEs. Orbis is used to collect the mentioned information of the selected

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sample by use of the The Bureau van Dijk independence indicator. This indicator maintains five separate categories: A, B, C, D, and U to label different level of shareholders. Categories A and B maintain less than a 50% ownership level while category C firms have total shareholder ownership that is over the 50% mark. Category D represents firms that have a direct state ownership of greater than 50% and category U represents an unknown level of independence/ownership. For this research, firms that maintain a level of 50% or greater by the government (group D) are considered state owned firms. The sample consists of 96 firms for joint ventures (N=96), 65 firms for Mergers (N=65), and 76 for acquisitions (N= 76). 4.5 Time Period

The sample collected will be have lower and upper bounds from January 1st, 2009 until December 31st 2015. Lack of data due to the availability of SOMNE public data make it difficult to gather information prior to 2000’s, the most comprehensive and full data for this study will therefore use information from 2009 until 2015. Data gaps could be attributed to lack of government participation in the release of data and the only recently increasingly popular trend to globalize as a state owned firm.

4.6 Measurement of Variables

For this study there are two independent variables measuring the effect on one dependent variable for joint ventures, merges, and acquisitions. Institutional pressure and resource dependency values are the independent variables and are derived from indexes that are described below. Operational revenue is the dependent variable and will serve as the dependent variable, or measured effect.

4.6.1 Institutional Pressure Index

In order to determine the institutional pressure of a country, the economic freedom index by the Heritage Foundation is used to assign a numerical value for the host country. This index provides information of the institutional strengths of institutions worldwide, specifically focusing on the ability for individuals to pursue business activities. Economic freedom can be defined as the fundamental right of an individual to control his or her own labor and property. In the most economically free societies the government will allow labor, capital, and goods to move freely without the hindrance, which can influence both positively social and economic objectives.

This index is chosen because if maintains the theoretical concepts of market efficiency and freedom of institution. It maintains 50 independent variables, which are divided into 10 categories and then grouped into four broad categories of economic freedom.

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The four categories are: Rule of Law (property rights, freedom from corruption), Limited Government (fiscal freedom, government spending), Regulatory Efficiency (business freedom, labor freedom, monetary freedom), and Open Markets (trade freedom, investment freedom, financial freedom). The score for economic freedom is assigned a value from 0 to 100. The average value of the ten independent variables then develops the country’s overall score. Each variable is assigned equal weight. Additionally, the EFI is positively associated with FDI inflows (Bengoa and Sanchez-Robles, 2003) and economic growth (Easton and Walker, 1997). This index was preferred over others due to its strong influence from business freedom, trade freedom, property rights, investment freedom, and financial freedom. This overall component score will be tied to the performance of SOMNEs (operational revenue) in order to determine a relationship between entry mode performance and institutional pressure. 4.6.2 Resource Dependency Index

In order to determine the level of resource dependency in a given environment the Resource Governance Index is used to assign a numerical value. RGI evaluates the level of governance on natural resources (oil, gas, and mining) and focuses on the premise of governance on enabling a business environment. This includes the rule of law, democratic accountability, institutional arrangements, integrity safeguards, and quality control. This methodology overcomes the insufficiency of information that is exemplified by publication of information by incorporating questionnaires based on standards of resource revenue transparency by the International Monetary Fund. The questionnaires are devised into four components: institutional & legal setting, reporting practices, safeguards and quality control, and enabling environments. The RGI is not a survey of opinions but rather a hybrid index that combines primary data and external measures of governance in context. The 2013 version of this index is used as opposed to the 2010 version because the latter only focuses on reporting practices only and does not use an estimate for margin of error. Indicators of resource dependency are scored on a 0-100 scale, which are influenced primarily from both the survey data and governance measurement.

One of the primary reasons this index is used is because of the focus on two of its indicators. The first is the enabling environment component, which plays a significant role in impacting entry mode decision. This indicator reflects the extent to which broader environment will help or detract resource sharing or extracting from SOMNEs, possibly influencing performance positively or negatively. The second important indicator is institutional & legal setting, which demarcates institutional pressure in a resource-based

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context. This indicator maintains incorporations of whether laws or institutional practices can affect resource availability, allowing the opportunity to draw comparisons between resource based strength and SOMNE performance.

The source of the RGI data draws from five different government agencies, the ministry of finance, ministries of extractive sector, regulator agencies, central banks, and a variety of other domestic agencies. The overall score of the RGI is the average of all indicators, which provides the component score. These indicators will be tied to operational revenue of SOMNEs in order to determine a relationship between entry mode performance and resource dependency.

4.6.3 Performance

Operational revenue is used as an indicator to gauge the performance for each entry mode of SOMNEs (Merger, Acquisition, Joint Venture). Operational revenue can be defined as the revenue a company receives in in the course of executing operations and can be derived from sources such as sales, commissions, and investments. As stated before, revenue data is gathered from the Orbis database, which defines operating revenue as revenue minus operating expenses with the addition of non-operating income. Revenue of entry modes will be pinned against both institutional and resource strength indexes in order to determine the correlation between entry mode performance and environmental strength.

4.7 Comparison of Pressures

Though institutional and resource pressures share overlap via government control and influence, it is important to make a distinction between the two. The institutional pressure index maintains a more detailed representation of law (taxes, ownership levels, competition regulation, property regulation). The resource pressure index represents the availability and accessibility of natural resources and firm’s ability to access or utilize these resources. Both indexes share overlaps, but emphasize different forms of government regulation as portrayed by the structuring of the questionnaires.

4.8 Controls

Variation by population in the data needed to be controlled by examining the specific type of SOMNE parent, specifically examining the size of the firm in terms of number of employees and diversification. Foreign investors transferring assets that are potentially subject to market failure would be more likely to establish greenfield or acquisitions than JV (Gatignon and Anderson, 1988; Kogut and Zander, 1993; Brouthers and Hennart, 2007). Firms that focus on specific products lines where technological know-how of operations are strong may affect the

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decisions to just pursue a greenfield strategy, conversely diversified firms could prefer the JV or acquisition (Hennart and Larimo, 1998; Brouther and Brouthers, 200).

In order to control these skewed decisions it is important to implement a dummy variable that is assigned a value from 0 to 1. It is important to address the size of the firm and the potential impact on performance. The size of foreign entrants can influence international strategies (Barkema and Vermeulen, 1998; Luo and Peng, 1999). It is possible that this could influence the decision of a JV over a acquisition or vice-versa. This can be measured by examining the number of available employees in the year before, which is available through the Orbis database. Another dummy variable will be implemented where if the number of employees available is less than 100,000 the firm would receive a value of 0 and, if greater, the firm would receive a value of 1.

4.9 Analysis

In order to provide a estimation for model parameters between an independent and dependent variable, researchers use a regression analysis with ordinary least squares, or OLS. (Mcwilliams & Siegel, 1997; Mackinlay, 1997). Regular assumptions for a linear regression dictate that observations are independent, with the inclusion of causal relationships and linearity. The purpose of the regression is to predict a dependent ‘Y’ variable (operational revenue) from an independent repressor ‘X’ (Institutional pressures, Resource pressures). The objective of this research is to give a deeper understanding on the effect of institutional and resource pressure on performance of entry modes and to determine if the relationship/effect is significant. The variation in performance, or operational revenue, will provide an indication of the strength of success of a SOMNE under either a certain level of resource or institutional pressure, and will therefore, give an indication of how resource based or institutional pressure affect performance. In order to test the previously stated hypothesis, regression analysis will be performed. Supposing that a linear relation exists, SPSS statistical data will be utilized to explain the linear function.

4.9.1 Analysis with SPSS

The final sample this research maintains 96 deals for mergers, acquisitions, and joint ventures each. One hundred percent of the deals that are executed are by state-owned enterprises. The SPSS application will be used to create and execute the analysis. Data collected from the Orbis database is entered into excel format and then imported into the SPSS data input mode. In order to examine the influence of the differing variables, dummy variables are used to control the data using the methodology described in the control section.

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The first variable entered into the data set for each entry mode are the institutional and resource dependency indicators. The second variable is the operational revenue for each SOMNE in each different entry mode. The first dummy variable controls for the size of the firm by measurement of employee numbers. A value of 0 will be given if the total employee number is below 100,000 and a value of 1 will be given if the employee number exceeds 100,000. The second dummy variable controls for the diversification of the firm. A value of 0 will be assigned if the SOMNE examined maintains market share in less than 1 industries and a value of 1 will be assigned of the SOMNE maintains market share in greater than 1 industries.

5. Results

Tables are included at the end for statistical reference

5.1 Join Ventures

H1) SOMNE Joint Venture performance is positively influenced by countries with higher home-institutional strength

In this analysis, the impact of institutional pressure on SOMNE joint venture deals is investigated. Only deals labeled with joint ventures are selected to participate in the analysis. A dummy variable is used to clarify firm size above 100,000, which is coded as 1, and below 100,000, which is coded, as 0 is included. A linear regression is performed with operational revenue as the dependent variable and economic freedom, or institutional pressure, as the independent variable. The R square located in table 1 represents the proportion of variance in the dependent variable, which is determined by the independent variable. This analysis shows that 6.6% of the variance in operational revenue can be predicted by the independent variable, economic freedom. Examining through another perspective, variance on the ANOVA table (Table 2) explains which portion of the total variance is expressed by the regression. The independent variable explains the regression and the residual indicates what is not explained. This allows a representation if the independent variable can indeed reliably predict the DV. In this case the P value is less than .05, which indicates that the variable can give a reliable prediction.

The b-coefficient for variable EconomicFreedomIndex is -1.95, yet the R variable is .0257. This signifies a positive relationship between institutional pressure and operational revenue. The significance of EFI is sig = 0.012 and is less than 0.05. This indicates that the value lies within the 95% confidence interval and demonstrates that the B value is significantly greater than zero. This means that the effect of institutional pressure on joint

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venture deals have a significantly more negative influence on operational revenue by outward expanding SOMNEs. This result is in disagreement with hypothesis 1, which dictates that strong institutional pressure has a positive impact on JV operational performance. The null hypothesis can be rejected due to the fact that the p value is significantly different from zero. This part of the research suggests that institutional pressure will affect SOMNE JV performance negatively. Additionally, Table 4 below with the addition of firm size controls maintains a sig value of .127 and b value of 29.755. There is no significance of firm population size on operational revenue for this part of the research.

H2) SOMNE JV performance is positively impacted by firms in countries that maintain high home resource dependency levels.

In this analysis, the impact of resource dependency pressure, via the RGI, on SOMNE joint venture performance is investigated. Only deals labeled with joint ventures are selected to participate in the analysis. The dummy variable is used to clarify firm size above 100,000, which is coded as 1, and below 100,000, which is coded, as 0 is included. A linear regression is performed with operational revenue as the dependent variable and the Resource Governance Index, or resource pressure, as the independent variable. This analysis shows that 12.4% of the variance in operational revenue can be predicted by the independent variable, RGIndex. Examining through another perspective, variance on the ANOVA table (Table 2) explains which portion of the total variance is expressed by the regression. In this case the P value is less than 0.05, which indicates that the variable can give a dependable prediction.

The value of the b coefficient for RGIndex is -1.716, yet the R value is .357. This signifies a positive relationship between resource dependency and operational revenue. The significance of RGIndex is .003, which is smaller than 0.05. This means that the value lies within the 95% confidence interval and demonstrates that the B value is significantly different from zero. It can be inferred from this analysis that the home resource dependency effect on JV SOMNE operational revenue has a significant negative influence, proportionally, to increasing operational revenue. This positively affects performances of the SOMNE attempting to perform JV deals. The result agrees with hypothesis 2 for JV deals and the null hypothesis can be rejected because the p-value is significantly different than zero. SOMNEs that aim to expand through joint ventures are negatively impacted by strong home resource dependencies. Furthermore when firms are controlled for size, the significant

Examining the boundaries of the firm an institutional-resource based approach to transnational M&A performance : an empirical analysis

Examining the Boundaries of the Firm

An Institutional-Resource Based Approach to Transnational M&A

Performance

Statement of Originality

Acknowledgements

Table of Contents

Examining the Boundaries of the Firm:

An Institutional-Resource Based Approach to Transnational M&A

Performance

1. Abstract

2. Introduction

3. Literature Review

4. Research Method

5. Results