Shareholder Multinationalism and Firm Performance
An empirical study on the effects of shareholder multinationalism on the return on equity of Fortune Global 500 firms.
Mark Barth 11152176 Madrid, 23 June 2017
MSc. Business Administration - International Management University of Amsterdam Business School
Final Version Master Thesis - International Management Supervisor: Dr. Niccolò Pisani
STATEMENT OF ORIGINALITY
This document is written by Student Mark Barth, 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.
ABSTRACT
The purpose of this study is to analyze the relationship between shareholder multinationalism and firm performance. Building on existing theory of multinationality and performance, this study argues that this is a positive linear relationship, which is positively moderated by institutional and technological development in the firm’s home country. The hypotheses are tested on a comprehensive sample of the Fortune Global 500 companies in 2015. Although this study hypothesizes a positive relationship, the results show a negative linear relationship between shareholder multinationalism and performance. Accordingly, the institutional development of a country negatively moderates the relationship between shareholder multinationalism and firm performance, and the technological development of a country negatively moderates the relationship between shareholder multinationalism and firm performance. Thus, this study contributes to the understanding of public (shareholder) ownership of firms by showing the specific impact that internationalization of shareholders has on firm performance. Moreover, it emphasizes the importance of considering contingencies at country-level to understand the effect of a public firm’s internationalization strategy on performance.
Keywords: shareholder multinationalism, firm performance, institutional development, technological development
TABLE OF CONTENTS
1. INTRODUCTION 5
2. LITERATURE REVIEW 9
2.1. Internationalization Theories 9
2.1.1. Multinationality and Performance 9 2.1.2. Institutional Development and Performance 12
2.1.3. Technological Development and Performance 14
2.2. Ownership 15
2.2.1. Public Ownership and Performance 17
2.2.2. State Ownership and Performance 19
3. THEORETICAL FRAMEWORK 22
3.1. Degree of Multinationality of Shareholders and Performance 22
3.2. Level of Country Development 25
3.2.1. Institutional Development 25
3.2.2. Technological Development 28
4. METHODS 31
4.1. Sample and Data Collection 31
4.2. Measures 33 4.2.1. Dependent Variable 33 4.2.2. Independent Variable 34 4.2.3. Moderating Variables 35 4.2.4. Control Variables 36 4.3. Empirical Results 38 5. DISCUSSION 44 5.1. Academic Relevance 44 5.2. Managerial Implications 57
5.3. Limitations and Suggestions for Further Research 49
6. CONCLUSION 52
ACKNOWLEDGEMENTS 53
REFERENCES 54
APPENDIX 61
LIST OF FIGURES Figure 1. Conceptual Model 30
LIST OF TABLES Table 1. Operationalization of Variables 37
Table 2. Descriptive Statistics 39
1. INTRODUCTION
More than three decades ago, Porter (1986) and Bartlett & Ghoshal (1986) identified increasing multinationality of firms as a response to increasing global competition. Increasingly, firms were diversifying the geographical scope of their business activities in the pursuit of a competitive advantage (Porter, 1990). As a result of the increase in the amount of international flows of capital, foreign direct investment (FDI) and portfolio investments over the last three decades, the issue of the possible impact of foreign direct investment on the performance of corporations, and thus the global economy, has gained increased attention (Brune & Garrett, 2005; Gurbuz & Aybarz, 2010). In addition, most OECD countries have experienced an increase in publicly listed companies during the last decade (Celik & Isaksson, 2014). Besides increasingly internationalizing firms, shareholders increasingly became more globalized due to growing international economic activity and liberalization of foreign economic policy (Garret, 2000). Nowadays, global finance is typified by a more international, integrated and intensive mode of accumulation; a new business imperative of the maximization of shareholder value; and a remarkable capacity to become an intermediary in every aspect of life (Clarke, 2014). In context, U.S. corporations currently own and operate more than $23,340.80 billion of assets abroad and have been investing $6,978.30 billion (2015) in direct foreign investments at market value. Accordingly, U.S. corporations own and operate $9,606.2 billion (2015) in international portfolio investment (Appendix 1).
Multiple scholars discuss the effect of multinationality on performance, where firm-level internationalization is emphasized. In addition, research on the relationship between multinationality and firm performance discusses multiple drivers of multinationality, such as efficiency and productivity (Buckley & Casson, 1976; Hennart, 2007; Rugman, 1983),
knowledge (Grant, 1987), location (Dunning, 1998), diversification (Delios & Beamish, 1999; Geringer et al., 2000; Hitt et al., 1989; Lu & Beamish, 2004; Rugman, 1986) and speed (Chang & Rhee, 2011). Additionally, it is found that institutional development of the home country helps internationalizing firms (Lane & Faresi, 2008; Makino et al., 2004) and firm performance (Naaborg, 2007). Moreover, it is found that the technological macroeconomic environment of a firm stimulates innovation (Schumpeter, 1934; Sabrahmanya, 2014; UN, 2015), increases firm performance in skill-intensive industries (Demirbag & Glaister, 2010; Dunning, 1988; Antonelli, 2007) and need localized knowledge (Antonelli, 2007; Hurry et al., 1992). Even though the degree of internationalization of the firm and firm performance is widely discussed, above-mentioned scholars have not discussed the (shareholder) public ownership role in multinationality and firm performance. Accordingly, literature on specific ownership types and performance clarifies that public ownership influences firm performance (Cuervo-Cazzuro, 2014; Haubrich, 1994; Pagano & Roell, 1998; Reneboog et al., 2007) and creates value for shareholders (Errunza & Senbet, 1984; Dalquist & Robertsson, 2001). In addition, literature on state ownership clarifies that state ownership has a mere negative influence on internationalization (Cuervo-Cazurra, 2014), and firm performance (Ben-Nasr & Cosset, 2014; Bichler & Schmidkonz, 2012). More specifically, performance of the firm depends on institutions and technology (Antonelli, 2007; Baum & Oliver, 1991). Scholars treat the firm as a “black box”, however, with little attention paid to the international movement of capital and ownership (Demsetz, 1997; Morck et al., 2000). By opening the “black box” and reducing the scope to (multinational) shareholder ownership of a firm, the effect on performance of a firm can be studied and later used for strategic purposes.
Based on the analyzed literature, the following research question is formulated: “What is the relationship between shareholder multinationalism and firm performance?” Accordingly,
shareholder multinationalism can be defined as a shareholder having investments in more than two countries, while firm performance is defined as return on equity (ROE). This thesis focuses on the 500 largest multinational corporations (MNCs) in the world as provided by the Fortune Global 500 list of 2015. Consequently, it provides a better understanding of the role of the multinational shareholder and their association with firm performance around the globe. In all, this study hypothesizes that shareholder multinationalism is positively related to firm performance. Accordingly, this study hypothesizes that the degree of institutional development in the home country of the firm positively moderates the relationship as hypothesized in H1. In addition, this study hypothesizes that the degree of technological development of the home country positively moderates the relationship hypothesized in H1.
The hypotheses are tested on a comprehensive sample of Fortune Global 500 firms of 2015. In relation to the first hypothesis, the findings show a negative and significant linear relationship between shareholder multinationalism and firm performance. The findings on the second hypothesis show a negative association concerning the institutional development of a country on the negative relationship between shareholder multinationalism and firm performance. In relation to the third hypothesis, empirical support is found for the assertion that technological development of a country negatively moderates the negative relationship between shareholder multinationalism and firm performance. Hence, this research has several theoretical and managerial implications. First, by illustrating that the specific impact of shareholder multinationalism on firm performance is negative, it extends literature on home country resources and home bias. Second, by showing that institutional and technological environment is contingent on shareholder multinationalism and firm performance, this thesis emphasizes the importance of considering country-specific developments in internationalization strategy.
The remainder of this research is organized as follows. In the next section, literature related to globalization and firm performance, ownership, technological and institutional development is discussed. In addition, the hypotheses are developed. Then, the methodology for testing the hypotheses is presented. This includes a description of the Fortune Global 500 dataset, the selection criteria and provides a descriptive analysis on the sample. In the final section, the empirical results are discussed and concluded.
2. LITERATURE REVIEW
This section considers different theories on globalization, the separation of ownership and control and the responsibilities and motives of shareholders. In addition, literature on the internationalization of shareholders and firm performance is discussed, as well as literature on the effect of institutional environment and technological development. Then, literature on public and state ownership is discussed. Accordingly, a research gap is identified, which leads to the research question of this study.
2.1. Internationalization Theories
The increasingly growing role of internationalization of the firms is driven by the global effect of globalization. Globalization offers a range of benefits for firms that internationalize their operations. The effect of globalization leads to free trade, infusion of foreign technology and merging politics (Brune & Garrett, 2005). Globalization can be measured using international economic flows, such as: gross domestic product (GDP), international trade flows, foreign direct investment (FDI) flows and international portfolio investment flows, and using foreign economic policy such as changing barriers to trade and capital account policies (Garrett, 2000). Conversely, globalization may lead to an increase in trade barriers, exploitation of tax havens and social injustice (Prakash, 2002).
2.1.1. Multinationality and Performance
Multiple scholars have discussed how internationalization leads to an increase or decrease in performance. Internationalization, or international expansion, entails an organization that takes cross-border economic activities. It considers the desire for value creating opportunities by both
private and public businesses at locations outside the country of origin (Peng, 2012). The resource-based view of the firm stresses the centrality of firms’ resource endowments and posits that companies achieve sustained competitive advantage based on their unique sets of idiosyncratic resources and capabilities (Barney, 1991). According to Johanson & Vahle (1977), performance of the firm is a result of the level of international involvement, which explains the internationalization of the firm as a gradual process towards more distant countries. Moreover, foreign investment motives relates to the location variable proposed by Dunning (1998), which looks at the location attractiveness of different countries that match the value adding services of the firm. Consequently, multinationals normally improve their efficiency and productivity, which seems to lead to an increase in their performance. Internalization theory, as developed by Buckley & Casson (1976), Rugman (1983), and Hennart (2007) is a firm-level theory explaining why the firm will exert proprietary control (ownership) over an intangible, knowledge-based, firm-specific advantage (FSA). In internalization theory, all FSAs are efficiency-based. The knowledge advantage arises from a transaction cost economics explanation, whereby knowledge leads to a competitive advantage of the firm (Grant, 1987). Knowledge is compatible with the resource-based view (Barney, 1991).
According to Rugman (1986), international firm diversification leads to an increase in firm performance. The principles of international diversification indicate that the advantages of risk reduction occur whenever there are offsetting covariances. Hitt et al. (1989) suggests that global market diversification of the firm leads to higher performance. The corporate profit performance impact of related and unrelated diversification varies upon the extent of a firm’s international market diversification. In addition, Delios & Beamish (1999) argue that a higher geographic scope leads to higher performance. Contradicting the theory on firm diversification, Geringer et al. (2000) argue that high levels of international diversification lead to a reduction in
performance in short and medium term during periods of rapid economic change, especially for generating profit through economies of scope. Accordingly, Lu & Beamish (2004) argue that the relationship between geographic diversification and firm performance at different phases of internationalization is non-linear. At high and low levels of internationalization, the extent of geographic diversification was negatively associated with firm performance, while at moderate levels of internationalization, greater geographic diversification was associated with higher levels of firm performance. Chang & Rhee (2011) discuss the internationalization speed and performance and found an inverted U-shaped relationship between speed of internationalization and long-term performance. Consequently, internal resources and capabilities give important sources for competitive advantage and can make rapid FDI expansion more feasible in the long run.
Contradicting these classic theories, Hennart (2007) discusses that transaction cost/internationalization theory implies no direct and general relationship between international diversification and performance of a firm. He argues that exploiting scale economies, access to markets and learning in foreign markets might be attained in the home market as well. In addition, market liquidity and presence in international markets seems to characterize national firms better than international firms. This can be explained by theory on home bias by Chan et al. (2009), who find strong evidence that at the country-level, increasing the bias of domestic investors toward home equity lowers the market valuation of home equity. At the firm level, firm value increases as the compositions of local equities held by domestic and foreign investors tend toward the firms' global market capitalization weights, but decreases as their weights deviate from global weights. This impedes shareholders are more likely to invest in firms that are listed in the country of the shareholder, and not abroad.
2.1.2. Institutional Development and Performance
Institutional development of a country plays an important role determining firm performance. North (1991) defines institutions as humanly devised constraints that structure political, economic and social interactions that create order and reduce uncertainty of exchange. Whitley (1992) focuses on firm level institutions, and discusses the degree and mode of authoritative coordination of economic activities, and in the organization of, and inter-connections between, owners, managers, experts, and other employees. He argues that the nature of the firm, market relations and patterns help institutionalizing a firm. In addition, he defines four key institutional features that structure business systems: the state, a financial system, development of skills and control, and trust and authority relations. Hymer (1976), a traditional scholar in the field of internationalization, argues that foreign firms are likely to face competitive disadvantages relative to national firms due information on the country’s economy, language, laws and politics. This leads to the hypothesis that foreign firms suffer more from a bad institutional environment in the host country than domestic firms. Foreigners and nationals may receive very different treatment from governments, consumers and suppliers.
Accordingly, Lane & Faresi (2008) explain that the future path for international financial integration depends on the deepening of domestic financial systems, overall economic development, as well as the pace of trade integration. However, financial globalization does not always work to encourage economic development because it might lead to devastating financial crises, if the country does not manage the process properly. According to Makino, et al (2004), the institutional environment in a specific country matters. They argue that it is the responsibility of the firm to adapt to external institutional pressures to conform to local demand, as the effect of institutions varies across countries. Sources of institutional barriers can be taxation, market
regulations, trade barriers, ownership restrictions and regulations. Accordingly, Meyer et al. (2009) discuss the role of the institution based-view in strategy and explain that a country’s stronger institutional framework lowers the cost of doing business. This effect is larger when there is a need of foreign firms that need intangible resources. Consequently, the firm has to understand local conditions, and the legal and institutional environment that may help their ability to extract economic returns from innovative ideas (Bruton et al., 2009). In addition, firms’ internationalization is higher when they are provided with procedures based on knowledge that the home country has gathered through, for example, research done by government agencies or diplomatic channels (Lu et al., 2014). Moreover, a study by Naaborg (2007) provides evidence on an increase in the quality of institutions enhances foreign banks’ efficiency. Governmental policy aimed at improving the institutional context would benefit firm efficiency especially in those countries where the banking industry is dominated by foreign banks. Corruption, effectiveness of the judiciary system and the quality of supervision are examples that determine the level of institutional policy. Unfortunately, this study by Naaborg (2007) is limited to the scope of the banking industry, and does not tell us about other industries.
On the contrary, Mian (2006) states that in a working environment with different corporate culture, legal environment, or regulative environment, information asymmetries arise, which makes it more difficult for management to design policies in the host country. Consequently, Mishkin (2007) adds there is no clear-cut relationship between financial globalization and economic growth as a result of bad policies of institutional regulation. He argues that bad policies are the reason that financial development does not occur, and are more dangerous when financial crises occur. Therefore, international advice should be consulted and higher institutional development is more important during financial crises.
2.1.3. Technological Development and Performance
Multinationality of firms is often driven by technological development of the country. Technological development at macro level varies among countries. According to a published paper by the United Nations in 2015, any effective global partnership supporting inclusive development needs a rebalance of priorities and concerns globally to achieve a paradigm shift, where the relevance issues such as technology and innovation, is very important. Consequently, technology and innovation serves as a crucial driver of rising prosperity and improved national competitiveness (UN, 2015). Moreover, most of the world’s innovations are limited to developed countries like the USA, Japan and Europe, while developing countries are still behind in the field of innovation and management of technology. Innovation and technology environment in developing countries are by nature, problematic, characterized by poor business models, political instability and governance conditions, low education level and lack of world-class research universities, an underdeveloped physical infrastructure, and lack of solid technology based on trained human resources (Sabrahmanya, 2014).
Nevertheless, the importance of technological opportunity against market demand emphasizes the fact that entrepreneurs are led by technological opportunities (Schumpeter, 1934). Accordingly, technological development of industries leads to macroeconomic technological development (Gordon & Kimball, 1986). Dunning (1988) argues that the gradual per income levels and the economic structure of the advanced industrialized economies, together with harmonization of government policies, stimulates intra-industry trade. Building on the internationalization theory of Dunning, firms in technologically intensive industries are more likely to invest in developed markets than they would in emerging markets. Specifically, firms from technologically intensive industries are more likely to be engaged in research and
development (R&D) activities. The availability of knowledge infrastructures, and the availability of R&D resources in more developed countries with a higher level of technological industrial development, help firms engaging in R&D (Demirbag & Glaister, 2010). Therefore, firms in technological intensive industries may opt for developed markets than emerging markets to profit from these already available benefits. Once countries are increasingly developing, a gradual shift may occur to innovation at the frontiers of knowledge (Szirmai, 2014).
Subsequently, technological development of a country has impact on firm performance. A macroeconomic environment characterized by fast rates of growth is the most conductive to stimulating the innovative capability of firms in skill-intensive industries, especially in skill intensive industries such as mechanical engineering, as technological change comes from high levels of tacit knowledge (Antonelli, 2007). Hurry et al. (1992) found that Japanese venture capital investments often serve as a learning mechanism to carry the firm to a new technology, and the success of this learning transition may take precedence over the success of the firm, or to produce immediate financial returns to the shareholder. Consequently, R&D activities cannot be the sole factor in the generation of new technological knowledge and should not be separated from the current flow of activities within the firm. Therefore, the generation of localized technological knowledge can be views as the product of a systematic bottom-up process of induction from actual experience (Antonelli, 2007).
2.2. Ownership
One of the most striking differences between countries’ corporate governance systems is the difference in the ownership and control of firms that exist across countries. Systems of corporate governance can be distinguished according to the degree of ownership and control and
the identity of controlling shareholders. Two main types define corporate ownership: public ownership and private ownership. In public ownership, the shares of a firm, corporation or enterprise are owned by the state or are publicly traded on at least one stock exchange or over-the-counter (OTC) market. The shareholder is an individual, group, or organization that owns one or more shares in a firm, and in whose name the share certificate is issued. Shareholders can be mutual funds, pension funds, hedge funds, venture capitalists and private equity firms (Berk et al., 2012). According to the shareholder model the objective of the firm is to maximize shareholder wealth through allocative, productive, dynamic efficiency and maximization of profits. The criteria by which performance is judged in this model can simply be taken as the market, or shareholder, value of the firm. Therefore, managers and directors have an implicit obligation to ensure that firms are run in the interests of shareholders (Maher & Andersson, 1999).
On the contrary, in private ownership, private owners of a firm own the shares of a firm, corporation or enterprise. Private companies may issue stock and have shareholders, but their shares do not trade on public exchanges and are not issued through an initial public offering (Berk et al., 2012). Companies choose to stay private for several reasons. The high costs of an initial public offering (IPO) and the obligation to publish financial statements and balance sheets are two main reasons. Another reason why companies stay private is to maintain family ownership. Staying private means the firm does not have responsibility to fulfill request from its shareholders (Renneboog et al., 2007). Moreover, Beatty et al. (2002) compare samples of publicly and privately held banks. They argue that public banks’ shareholders are more likely to diffuse information, whereas private banks’ more concentrated shareholders rely on simple earnings-based factors in evaluating firm performance. Even though private ownership has
several benefits over public ownership, private firms are not listed and do not publish information on their shareholders. As the scope of this research is shareholder ownership, private ownership is not discussed further.
2.2.1.Public Ownership and Performance
Public ownership, or shareholder ownership, generally allows for greater access to equity, enhanced stock-based management compensation packages, external monitoring of the business, and greater publicity for the firm. According to Graham et al. (2005), public firms could experience higher asset turnover if public firms have greater access to capital and invest the capital in positive net present value projects that generate more sales. On the other hand, public firms could experience lower asset turnover if they use the greater capital base to invest too much in projects. Past research suggests that public firms have the potential to overinvest because of the greater access to capital, as well as to underinvest to ensure that the firm’s earnings meet analyst expectations. Accordingly, Coles et al. (2013) find that private firms are less profitable than similar public firms, when profitability is measured as operating margin and profit margin. By examining the Forbes annual list of top 500 private and public firms, and profitability difference persist even when controlled for risk, managerial ownership, industry, role of the CEO and firm size. These advantages of public ownership have the potential to increase investment opportunities without issuing new debt, attract employee talent, and lead to an enhanced reputation (Renneboog et al., 2007). According to Cuervo-Cazzuro (2014), public ownership has the counter-advantage to private ownership of being an independently owned company. Owning and using independently developed resources, and not needing help and support from the government lowers the barriers for international trade.
However, the underlying problem of corporate governance in public ownership results from the principal-agent relationship arising from the separation of beneficial ownership and executive decision-making. The agency theory proposed by Jensen & Meckling (1976) argues that managers have a propensity to pursue their own interests at the expense of shareholders because of information asymmetry and differences between the interests of business owners and managers. This opportunistic behavior causes managers to make suboptimal decisions and waste resources and thus reduces the value of companies. These disclosures as well as the costs of complying with regulatory requirements may diminish the competitiveness and long-run profitability of public firms relative to private firms (Pagano & Roell, 1998). Loss of control, risk aversion and performance pay and the principal-agent problem are therefore important for profit, strategy and influence in a firm (Haubrich, 1994). Additionally, Grossman & Hart (1980) show that each individual shareholder is reluctant to concern because she wants to free ride on the value improvement. However, shareholders who pursue the maximization of corporate value tend to increase control to reduce such conflicts of interest (Maher & Andersson, 1999).
Zooming in on the role of the shareholder in the firm, Errunza & Senbet (1984) find that multinationality creates value for shareholders by increasingly lowering barriers to international capital flows faced by individual investors. Consequently, this relative cost-efficiency on the supply side is a result from the positive valuation effect of the firm associated with the degree of international involvement. Dahlquist & Robertsson (2001) show how foreign investors have preference for large firms, paying low dividends and firms with large cash positions on their balance sheets. Consequently, the finance sector has progressively increased its share of GDP, and even for non-financial corporations the pursuit of interest, dividends and capital gains outweigh any interest in productive investment. As non-financial corporations have become
increasingly drawn into a financial paradigm they have less capital available for productive activity. These financial pressures are translated into the operations of corporations through the enveloping regime of maximizing shareholder value as the primary objective (Clarke, 2014).
2.2.2. State Ownership and Performance
Additionally, state owned enterprises (SOE) are a form of public ownership, but undertake commercial activities on behalf of the state. State owned enterprises have a distinct legal form and are established to operate in commercial activities while having public policy objectives. Also known as government corporations, government business enterprises, government-linked companies or private enterprises, are firms where the firm is largely owned by the operating state of a certain country. While the varying forms of SOEs may provide governments with flexibility, these multiple forms may also serve to complicate ownership policy, make them less transparent and insulate firms from the legal framework applicable to other companies, including competition laws, bankruptcy provisions or securities laws.
SOEs continue to evolve as governments privatize companies but keep majority and minority stakes, while new forms of state ownership in the form of sovereign wealth funds (SWF), state-owned pension funds, and state owned banks have emerged (Cuervo-Cazurra et al., 2014). Hence, Cuervo-Cazurra et al. (2014) argue that five arguments influence firms’ preference to maintain a state-owned corporate governance. These arguments contain several disadvantages. First, the triple agency conflict argument in agency theory; it complicates the interaction among principles and agents due to an extra controlling agent. Second, disadvantage of ownership argument in the resource-based view; consequently, the disadvantage is that host-country governments may seem to discriminate against foreign governments. Third, the power-escape
argument in resource dependence theory; the dependency on government support reduces the opportunity to invest abroad. Last, the illegitimate ownership argument in neo-institutional theory; the host-country government may view the SOE as an instrument to exercise control in the host-country. On the contrary, the owner risk argument in transaction costs economics is an advantage of SOEs, which entails that private firms face lower risk due to backing of their home country governments. In addition, an advantage of the resource-based view is that government ownership can be a source of advantage when it provides the SOE with subsidies or diplomatic support.
According to Bichler & Schmidkonz (2012), state ownership has its influences on firm performance due to institutional pressures. Having a government as a shareholder of SOEs exerts various institutional pressures on firms that can influence the incentives and ability of firms to develop innovation. For example, the Chinese government formally introduced the policy of ‘indigenous innovation’ as part of China's national strategy in 2005. Such regulatory pressures might be higher for SOEs than for other firms because these firms have a greater need to conform to institutional prescriptions (Baum and Oliver, 1991). Hence, Ben-Nasr & Cosset (2014) examine the relation between government ownership and stock price informativeness around the world. Using a sample of privatized firms from 41 countries between 1980 and 2012, strong and robust evidence is found that state ownership is associated with lower firm-level stock price variation. Thus, the relation between state ownership and stock price informativeness depends on political institutions.
To sum up, in the field of public ownership the aspect of multinational shareholders is relatively unexplored, especially compared to the influencing role of institutional and technological development in the home country on firm performance. Prior theories show mixed empirical results on multinationalization of the firm. Even though the degree of
internationalization of the firm and firm performance is widely discussed, scholars focus on the firm as a “black box” (Demsetz, 1997; Morck et al., 2000). Opening the “black box”, literature on public ownership and performance clarifies that public ownership positively influences firm performance (Cuervo-Cazzuro, 2014; Renneboog et al., 2007) and value for shareholders (Clarke, 2014; Dalquist & Robertsseon, 2001; Errunza & Senbet, 1984). On the contrary, public ownership could also cause problems (Demsetz & Villalong, 2001; Grossman & Hart, 1980; Haubrich, 1994; Pagano & Roell, 1998). However, in these papers public ownership (shareholder ownership) is taken for granted, while shareholders could be either domestic or international.
In all, the disconnection between internationalization and ownership, and both its effects on performance, form an “international public ownership proxy”. Consequently, researching the role of international shareholders could extent current literature and benefits a firm’s management via (international) shareholder contribution on culture, knowledge, networks, capital and technology. Therefore, this study aims to clarify the specific role of the international shareholder of a firm and its effect on firm performance. To research this “international public ownership proxy” of the firm, this study uses data from Fortune Global 500 companies and addresses the gap of whether a higher or lower degree of shareholder multinationalism is associated with the performance of Fortune Global 500 firms. Based on the analyzed literature, the following research question is formulated: “What is the relationship between shareholder multinationalism and firm performance?”
3. THEORETICAL FRAMEWORK
This section will propose a model where the effect of multinationalism of shareholders on firm performance is considered. Since the literature is incomplete in this field of study, hypotheses are derived to explore new insights in the phenomena. First, the degree of shareholders multinationalism is discussed, followed by the degree of public ownership of the Fortune Global 500 firms. Second, the effects of the home country’s institutional and technological development are hypothesized. Last, a conceptual model shall clarify how the discussed hypotheses interact and relate to each other. The paragraphs are structured by discussing country, industry, firm and shareholder perspectives on the phenomena.
3.1 Degree of Multinationality of Shareholders and Firm Performance
The starting perspective of the firm is the resource-based view. The resource-based view of the firm stresses the centrality of firms' resource endowments and posits that companies achieve sustained competitive advantage based on their unique sets of idiosyncratic resources and capabilities (Barney, 1991). Even though firms are changing from a shareholder model to a stakeholder model on a firm’s economic profit, shareholders still have an unique claim on profits (Barney, 2015). Hence, shareholders have a big impact on the corporate governance of publicly owned firms. Errunza & Senbet (1984) find that multinationality creates value for shareholders by increasingly lowering barriers to international capital flows faced by individual investors. Doukas & Travlos (1988) find that shareholders of U.S. firms expanding internationally for the first time experience insignificant positive abnormal returns, while shareholders of MNCs operating already in the target firm's country experience insignificant negative abnormal returns. Being a multinational shareholder therefore leads to an increase in performance for the shareholder, but does not say whether the performance of the firm increases. This indicates that
influence, from the perspective of the shareholder, could either increase or decrease firm performance. Therefore, the role of shareholder ownership should be further investigated.
Demsetz & Villalong (2001) find no relation between various ownership structure characteristics and firm performance. In addition, they find that the profit-maximizing interests of shareholders influence the ownership structure. This profit-maximizing interest of shareholders could potentially lead to the principal agent problem, as firm managers exercise more freedom in the use of firm resources as they would in case of a single shareholder or if the ownership would have been more concentrated. However, Morck et al. (2000) argue that an increase in public ownership provides insiders incentives to monitor the company, and that “too much” ownership would result in entrenchment effects, that cause a decline in firm value. Accordingly, Huang & Shiu (2005) find that domestic and foreign shareholder ownership jointly have a significantly positive firm valuation effects in Taiwan. As described by multiple theorists, public ownership has advantages and disadvantages. Since these advantages and disadvantages do not address international shareholders specifically, but only “shareholder ownership”, it is an important phenomenon to research the impact of “international shareholder ownership”, or shareholder multinationalism, on firm performance.
Building on theory from Grant (1987), who states that increased knowledge of the firm increases firm’s internationalization, more international shareholders bring in additional knowledge. The engagement of all stakeholders, or in this case international shareholders, in a common productive effort increases business activity more than the speculation of the agency theorists predict. The arrival of the new knowledge-based economy added a powerful boost to the early conceptions of the essentially social basis of industry and firm performance (Clarke, 2014). Therefore, international knowledge from shareholders will lead to increased firm performance. Shareholders also have influence on network building activities of the firm since shareholders
may become active in the company after their investment since they own a share of the company. Enabling them to monitor the progress of the company and to add value, giving strategic and other advice (Wright & Robbie, 1998). Having international shareholders is important for firms pursuing an internationalization strategy, as the shareholders may help in defining strategy (Jääskeläinen, 2009). If one multinational shareholder has strong ties in her/his country, for example with lawyers or accountants, and if it has thorough knowledge of the functioning of the market and legal environment, then the shareholder may help the firm build a strong economic network (Wright & Robbie, 1998). If the shareholder is highly respected in a target region of the internationalizing firm, the legitimacy of the firm is enhanced, facilitating access to customers, suppliers and employees. Adopting more international shareholders is therefore key to access local market knowledge and business networks (Hurry et al., 1992). That said, the increasing speed of globalization forces international firms to change their ownership structures to attract more international shareholders in order to attract new capital, knowledge, and networks, thus gain performance. Accordingly, the rapid internationalization of large multinationals and privatization of markets resulted in the internationalization of shareholder capital (Hanic & Vujovic, 2011).
Emphasizing the role of knowledge, prior research also suggests that investment specialization of the firm may facilitate the acquisition of specific information from international shareholders, and thus may enable the shareholder to become more effectively involved in key decision-making in strategy and processes. Simultaneously, the international shareholder may gain knowledge from the firm where he/she invests in. Equally important, the networking benefits from international shareholders increase institutional, market, technology and strategic knowledge of the firm, increasing performance. Therefore, this thesis proposes that firms, having
more international shareholders, experience above normal returns through increased international capital, knowledge, networks and a faster pace of internationalization. The benefits of not needing to attract additional debt and being an independent owned company strengthen this proposition. Thus, having a higher degree of shareholders’ multinationalism in a firm increases the performance of a firm. Hence:
H1: The relationship between shareholders’ multinationalism and firm performance is positive.
3.2. Level of Country Development
3.2.1. Institutional Development
Prior studies on institutional development and performance show that performance of a firm is dependent on the institutional, or political, legal and regulatory environment of a country. The institutions could be different in every country. Accordingly, institutions vary among countries (Makino et al., 2004). According to scholars, institutional development in countries lowers the cost of doing business (Meyer et al., 2009), increases firm performance (Bruton et al., 2009), and allow firm to internationalize quicker (Lu et al., 2014). Hence, institutions positively benefit firms on three important factors. On the other hand, institutional development can also have negative impact on firm performance. Different institutional frameworks create information asymmetries, which make it difficult to extract economic returns (Main, 2006). Therefore, the quality of the institution in a country is important (Naaborg, 2007). Thus, the institutional development of a country is important for the firm, if considered correctly.
economic growth can be greatly improved if countries develop policies that promote successful financial development and financial globalization. Accordingly, the reform of corporate law might serve to strengthen the recognition and pursuit of the wider purposes of corporations, longer-term investment horizons and increase network-building initiatives from international shareholders (Clarke, 2014). Consequently, increased firm performance results from providing protection against political risk, aiding the firms in dealing with the host country’s institutions, providing fiscal incentives, and enacting trade agreements (Luo et al., 2010). So for firms it is important that it chooses a country with good developed policies, invests in its own corporate lawyers and look for protection. Accordingly, it can be concluded that a higher developed institutional framework of a country positively associates with firm performance.
However, few scholars have researched the impact of institutional development on shareholders. This thesis argues that a contingency perspective that emphasizes the association of institutional development on shareholder multinationalism and firm performance is positive. Therefore, the specific motives of international shareholders should be researched as well. Hill & Thomas (2015) state that European regulations helped shareholders to internationalize as a result of abolished share blocking and introduced minimum standards for shareholder involvement. Thus increased involvement in regulations increase shareholder’s internationalization. Aggerwal et al. (2005) discuss portfolio preferences of foreign investors at both country and firm level. At country level, US funds invest more in open emerging markets with stronger accounting standards, shareholder rights, and legal environments. At the firms level, foreign investors invest more in firms that adopt discretionary policies. This study concludes that countries with a higher level of institutional control attract more international investors, but firms themselves need to develop strict policies in order to attract more capital. The limitation of this study is that it only
focuses on American based shareholders, so it might not be applicable for shareholders in other countries. Correspondingly, Giannetti & Koskinen (2010) study the effects of investor protection on stock returns and portfolio allocation decisions. However, they argue that investors feel more protected when investing in domestic companies, as a result of home bias. Thus, investors, or shareholders, tend to invest more in firms that operate in the same country as them. So, shareholders invest in firms that operate in international countries, when they feel involved and when firms adopt strict regulative policies. However, investors also feel more accompanied with firms in their home country as a result of home bias. So, for firms to attract more international shareholders, they should decrease the home bias of the shareholder.
Even though multiple scholars argue that a better-developed institutional framework in a country positively influences firm performance, they as well, see the firm as a “black box”. Opening the “black box”, and zooming in on the public owners of the firm, concludes that a better-developed institutional development in a country has several benefits for the firm as international shareholders internationalize quicker, and invest more, in firms that have their operations in countries with a high level of institutional development, as they feel more protected. In addition, strict firm policy and regulation are important for shareholders as well. Therefore, this thesis includes the contingency of technological development, as it is important to research its relation to the degree of shareholder multinationalism and firm performance, and may positively benefit the relationship. Together, these arguments lead to the conclusion that countries with a higher level of institutional development, higher levels of shareholder protection and higher levels of firm regulation enhance the effect on the relationship between shareholder multinationalism and firm performance. Thus, an institutionally developed country will strengthen the effect proposed in the relationship hypothesized in H1. Hence:
H2: The degree of institutional development in the home country of the firm positively moderates the positive relationship between shareholders’ multinationalism and firm performance as hypothesized in H1.
3.2.2. Technological Development
Technological development in a country is a key driver for macro economic prosperity. Accordingly, technology and innovation serves as a crucial driver of rising prosperity and improved national competitiveness (UN, 2015). Simultaneously, a macroeconomic environment characterized by fast rates of growth is the most conductive to stimulating the innovative capability of firms in skill-intensive industries (Antonelli, 2007). Therefore, the level of technological development of a country stems from country, industry and firm incentives. However, there are still large differences between countries concerning technological development. Most of the world’s innovations are limited to developed countries (Sabrahmanya, 2014). This emphasizes that technological development could only benefit shareholder multinationalism and firm performance in developed (western) countries.
Industries are also an important driver for macroeconomic technological development. Despite not being in the scope of this research, technological industries increase technological development in countries (Demirbag & Glaister, 2010; Szirmai, 2014). Subsequently, better technological developed industries lead to macroeconomic technological development (Gordon & Kimball, 1986). Also, Thornhill (2006) argues that industries with greater aggregate levels of research and development (R&D) intensity are home to higher rates of firm-level innovation. So, technological development of industries is important for the technological development in a country technological development of the firm. Thus, technological development has inter-linked
consequences between the firm, industry and country.
Consequently, increased firm performance is a result of enhanced technological development of a country. According to Thornhill (2006), innovative firms are likely to enjoy revenue growth, irrespective of the industry in which they operate. The research also shows that firms’ knowledge, industry dynamism and innovation interact in the way they relate with firm performance. Moreover, it was found that all studied types of innovation, including Internet-enabled and non-Internet-Internet-enabled product or process innovations, are positively associated with firm performance (Koelinger, 2008). Thus, innovative firms increase firm performance. However, R&D activities should not be separated from the current flow of activities within the firm. Moreover, the generation of localized technological knowledge can be viewed as the product of a systematic bottom-up process of induction from actual experience (Antonelli, 2007). This bottom-up process emphasizes the specific role of the international shareholder in a firm. International shareholder could add local technological knowledge from their home country in the firm, stimulating innovation, and thus performance. Accordingly, Hurry et al. (1992) found that Japanese venture capital investments often serve as a learning mechanism to carry the firm to a new technology. Thus, from the shareholder perspective, investing in international firms increases the technological knowledge of the shareholders.
In keeping with these arguments and findings, for firms that operate in country where levels of technological development are high, shareholder multinationalism implies higher firm performance in the commitment and development of a country’s technological industries, localized knowledge, and learning from shareholder’s technological knowledge. Such technological development improves firm performance as a result of innovation and industry dynamism. Thus, this thesis hypothesizes that, all else being equal, higher levels of technological
development of a firm’s home country positively moderate the linear, positive relationship between shareholder multinationalism and firm performance. Specifically, the expectations suggest that the increased technological knowledge of international shareholders, associated with the internationalization of the firm, increase the return on equity of a firm through increased innovate power. In accordance with these considerations, this research hypothesizes as follows:
H3: The degree of technological development of the home country positively moderates the positive relationship between shareholders’ multinationalism and firm performance hypothesized in H1.
The previously discussed hypotheses result in the conceptual model as shown in figure 1. The model shows how this thesis hypothesizes that shareholder multinationalism positively relates to firm performance, and how country level factors such as institutional and technological development positively relate to this relationship.
Figure 1. Conceptual Model
Country level factors
Institutional Development Economic Freedom Index
Country level factors
Technological Development Global Innovation Index Shareholder Multinationalism % International / Total % Shareholders Firm Performance Return on equity H2 +
H1 +
H3 +
4. METHODS
In this section, the emphasis is on studying a situation or a problem in order to explain the relationships between variables. First, the sample and data collection method is discussed, as well as specifications of the dataset. Second, the measures and variables are discussed. Last, the statistical analysis is explained and the results are discussed.
4.1. Sample and data collection
The research studies multinationality of shareholders and firm performance of Fortune Global 500 firms. More specifically, a cross-sectional research design is used to explain the degree of shareholder multinationality, and explain the effect on firm performance. Database research is used because of the fact that it is the best way to acquire the secondary data about the 500 largest companies in the world. The dataset consists of three sheets: The first sheet is comprised of general firm information (home country, year founded, industry, size, number of employees, ownership and listing), as well as financial information (shareholder funds, liabilities, gearing, profit/loss, ROA, ROE, expenses and geographical distribution of sales and assets). A column on economic freedom is added to indicate the institutional environment of a country. The second sheet contains information about 160119 subsidiaries of the firms (home-country, name, turnover, size and company’s direct/total stake in the subsidiary). The third sheet contains information on a total of 27712 shareholders of the firms (home-country, name, turnover, size, company’s direct/total stake in the subsidiary).
The sample is comprised of Fortune Global 500 companies as listed in 2015. The Fortune Global 500 is an annual ranking of the top 500 corporations worldwide and is compiled and published annually by Fortune magazine and contains data on firm size, revenue, profit, balance sheet and employees. Companies are ranked by total revenues for their respective fiscal years
ended on or before March 31, 2016. All companies on the list must publish financial data and report part or all of their figures to a government agency. Revenue figures include consolidated subsidiaries and report revenues from discontinued operations, but exclude excise taxes. Profits are shown after taxes, extraordinary credits or charges, cumulative effects of accounting changes, and no controlling interests, but before preferred dividends. Assets on the balance sheet shown are those at the firm’s fiscal year-end. The employees are represented by the fiscal year-end or yearly average number as published by the firm (Time Inc., 2017). However, the data is missing numerous important key indicators that are important for researching the relationship between shareholder multinationalism and firm performance. Therefore, additional data on the Fortune Global 500 companies is retrieved from the ORBIS database, annual reports, Internet websites, economic freedom database from the Fraser Institute and the Global Innovation Index.
The ORBIS database is provided by Bureau van Dijk (BvD) and harmonized worldwide as it includes more than 150 million companies in more than 90 countries. The data is collected from official business registers, annual reports, newswires, and webpages. The data features balance sheets and profit and loss accounts. This results in good coverage as one merges across different sources of data. In addition, it provides detailed industry classification (4-digit). Annual reports of all of the firms are consulted for missing data. The annual reports are retrieved from the firm’s website. If necessary, the data is supplemented with information available on two main Internet sources. These sources include the firm websites, ‘Bloomberg’ (Bloomberg.com) and ‘Morningstar’ (Morningstar.com). These websites are known for being reliable and factual sources for financial information. Consequently, additional data on the institutional environment of a country is retrieved from Fraser institute. The Fraser Institute provides data on the Economic Freedom of the World. This dataset is the world’s premier measurement of economic freedom, ranking countries based on five areas: size of government, legal structure and security of property
rights, access to sound money, freedom to trade internationally, and regulation of credit, labor and business (Gwartney et al., 2016). In addition, the Global Innovation Index (GII) will provide data on technological development of the home country. The GII helps to create an environment in which innovation factors are continually evaluated, and aims to capture the multi-dimensional facets of innovation and provide the tools that can assist in tailoring policies to promote long-term output growth, improved productivity, and job growth (Dutta et al., 2016).
The dataset that is employed covers the 500 firms with the highest turnover in the world, thus increasing the representativeness of the sample. The ORBIS database is used in several studies and is a suitable firm-level database because it is one of the most comprehensive and inter-temporal databases containing detailed information about public and private companies all over the world. Using data from ORBIS ensures a high level of representativeness of firm data, as the database is updated every 15 minutes (De Jong & Van Houten, 2014). In addition, the sample size of the dataset that is available increases the strength of the analysis. A large number of observations contribute to the generalizability of the study. Accordingly, it contains a global representation of firms, as the firms on the list are situated in 40 different countries. Most importantly, the use of this sample offers great insight in the level of internationalization of shareholders, firm performance and the level of country-level institutional / technological development.
4.2. Measures
4.2.1. Dependent variable
This study uses firm performance as the dependent variable, which is defined as return on equity (ROE). ROE measures a firm’s profitability by revealing how much profit a firm generates with the money shareholders have invested. This applies to this research as the relation between
shareholders and the performance of Fortune Global 500 firms is researched. Usage of ROE as a measure for firm performance is in line with previous studies on multinationality and performance. Other studies have also used return on assets (ROA) and sales (ROS) to measure firm performance (Peng, 2004). However, ROA and ROS are strongly correlated and have generated very similar findings in research (Chao & Kumar, 2010). Consequently, using either ROE, ROS or ROA would be sufficient for the reliability of the results as ROE, ROA and ROS are all accounting-based measures (Keats & Hitt, 1988). However, this reasoning contradicts the principal agency problem, which argues that shareholders want profit and managers value (Shleifer & Vishny, 1997). For above-mentioned reasons, this study analyzes the return on equity (ROE) as of performance measured of the firm, as ROE focuses on the specific role of shareholders’ equity in the firm.
4.2.2. Independent variable
The independent variable measures the degree of shareholder multinationalism. This study focuses on one main measure of shareholder multinationality that has typically been used in the international management literature: the ratio (%), or proportion, of international shareholders to total shareholders of the firm. The data is retrieved from the third sheet in the dataset (Shareholders), under the column shareholder information, “Shareholder’s country”. Hence, the firm has an internationalized shareholder portfolio when it has a higher average proportion international shareholder compared to other firms. For each firm, the ratio of international shareholders is calculated separately to ensure that the relative amount of shareholders is equally dispersed. In some cases no data was provided on the shareholders’ country (n.a. / -), which are therefore excluded from the analysis. In addition, when the ownership of the firm is state owned, the firm is excluded from the list, as state owned firms are owned by the state of the same country, excluding international investors from the firm.
4.2.3. Moderating variables
The moderating variables in this research affect the strength of the relationship between shareholder multinationalism and firm performance. It measures when the independent and dependent variable are related. In this study, positive moderation is defined as both the coefficient of the independent variable as well as the coefficient of the interaction term having the same sign. Accordingly, negative moderation is defined as the coefficient of the independent variable and the coefficient of the interaction term having the opposite sign. Consequently, this study researches the moderating role of home country technological development and home country institutional development. Both hypothesis 2 and 3 test the moderating effect of technological and institutional development of the home country.
Hypothesis 2, or institutional development of the home country, is measured using the Economic Freedom index from the Fraser Institute. The index compares 159 countries and territories. The data is checked on forty-two data points, that are used to construct a summary index and to measure the degree of economic freedom in five broad areas: one, size of government: expenditures, taxes, and enterprises; two, legal structure and security of property rights; three, access to sound money; four, freedom to trade internationally; and five, regulation of credit, labor, and business (Gwartney et al., 2016). Each country is ranked according a scale from 1 to 10, with 1 having a “low institutional development score” and 10 having a “high institutional development score”. Nicaragua has the lowest score (2), whereas Hong Kong has the highest score (9.15).
Hypothesis 3, or technological development of the home country, is measured using the specific rank per country from the global innovation index from Cornell University. For the dataset, each country will receive their respective rank to determine whether home-countries’ technological development will have a moderating effect on hypothesis 1. The index is comprised
from five input pillars and two output pillars that capture elements of the national economy that enable innovative activities: Institutions, human capital and research, infrastructure, market sophistication, and business sophistication. Two output pillars are: Knowledge and technology outputs and creative outputs (Dutta et al., 2016). It provides a key tool and a rich database of detailed metrics for economies, which in 2016 encompassed 128 economies, representing 92.8% of the world’s population and 97.9% of global GDP (Reynosso, 2017). Each country is ranked according a scale from 1 to 100, with 1 having a “low technological development score” and 100 having a “high technological development score”. Yemen has the lowest score (14.6), whereas Switzerland has the highest score (66.3).
4.2.4. Control Variables
Control variables are used to explain potential relationships investigated in this study as they strongly influence experimental results. The first variable that is controlled for is firm size, which is a common control variable and is linked to organizational outcomes. Larger firms are typically more capable of exploiting economies of scale, which in turn allows a higher return on assets and sales (Chao & Kumar, 2010). Firm size also has impact on perceived risk (Kirby & Kaiser, 2003), and risk is highly important for shareholder investment motives (Berk et al., 2012). Hence, the number of employees measures the size of the firm.
The second variable that is controlled for is firm age; since it is an important metric for determining short and long-term performance. Older firms may have lower levels of innovation, which lead to lower performance (Sabramanya, 2014). In addition, older firms are often less internationalized than newer firms, lowering performance (Heunks, 1998), and age was also done in previous internationalization studies (Fernandez & Nieto, 2006). Hence, the age of the firm is measured as number of years after incorporation.
The third variable that is controlled for is gearing. Gearing is a measure of financial leverage and shows the degree to which firms’ activities are funded by owners’ funds versus creditors’ funds. Gearing is an important metric for shareholders and firms. Performance is reflected by firm profitability that is affected by leverage. On the contrary, Modigliani & Miller (1958) assume that financing decisions do not matter in perfect capital markets. The level of debt in the firm's capital structure would have no impact on the firm's value, performance and shareholders' value. In addition, having more debt financing limits the agency problem (Jensen & Meckling, 1976). However, as we assume increased performance, and thus higher profitability usually provides more internal financing and hence a lower level of debt by the firm (Abor, 2005). Hence, the level of debt of the firm is measured as the percentage of debt used.
Table 1 summarizes the variables used in the empirical analysis, operationalization and their measurement.
Table 1. Operationalization of the variables in the models.
Variable Operationalization
Dependent: Firm Performance Return on Equity of the firm (%) Independent: Shareholder
Multinationalism
The percentage of international Shareholders divided by the percentage of total shareholders (%)
Moderating: Technological Development
A variable that uses the Global Innovation Index to rank the technological development in the home country of the firm (scale: 1 is low, 100 is high) Moderating: Institutional
Development
A variable that uses the Economic Freedom Index to rank the institutional development in the home country of the firm (scale: 1 is low, 10 is high)
Control: Firm Size Number of employees (#)
Control: Firm Age Number of years after incorporation till the end of fiscal year 2015 (#)
