State- versus private-owned firms and their foreign entry mode strategies : a subsidiary-level investigation of the Fortune Global 500 companies

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State- versus private-owned firms and their foreign entry

mode strategies: A subsidiary-level investigation of the

Fortune Global 500 companies.

By: Marina Broeva Student number: 5883016

Date: June 22nd 2016

MSc Business Studies: International Management Final Version Master Thesis

Supervisor: Dr. Niccolò Pisani Second supervisor: Dr. Ilir Haxhi

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STATEMENT OF ORIGINALITY

This document is written by Student Marina Broeva 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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ABSTRACT

Extensive research has been conducted on the entry mode decisions of private owned-multinational enterprises (POMNEs). Within this field however, hardly any attention has been paid to the internationalization patterns and motives of the globalizing state-owned-multinational enterprises (SOMNEs). As SOMNEs often take into account objectives of their home country government they can differ in their decision making process when internationalizing. The presented research takes a closer look at the relationship between SOMNEs entry mode considerations and their level of equity commitment in foreign affiliates. Furthermore, the moderating effects of global versus regional strategy and industry R&D intensity are also explored. The analysis is based on the worlds largest multinationals, as ranked by the 2015 Global Fortune 500 list. The findings suggest that state ownership negatively influences the level of firms’ equity commitment in focal affiliates compared to POMNEs. However, when adding the moderator ‘industry R&D intensity’, a significant positive direct effect of state ownership on equity stake is found.

Keywords: Entry modes, Equity commitment, ownership type, state ownership, SOE, SOMNE, PPOMNE, OFDI, internationalization, globalization, R&D intensity

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LIST OF FIGURES AND TABLES

Figure 1. Conceptual Framework……….27

Table 2. Distribution of corporation’s home country and type of ownership……...………..29

Table 3. Descriptive statistics: means, standard deviations and correlations …………...…..36

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INTRODUCTION

The globalization of state-owned enterprises (SOEs) has gained importance in international business (IB) (Cuervo-Cazurra, Inkpen Musacchio, & Ramaswamy, 2014). SOEs from both advanced and emerging economies have grown in presence, power and have extended their reach in global markets (Bass & Chakrabarty, 2014; Büge, Egeland, Kowalski, & Sztajerowska, 2013). There are considerable differences between SOEs and private-owned enterprises (POEs) with respect to main objectives, capital structures, resource access and corporate strategies (Dewenter & Malatesta, 2001; Meyer, Ding, Li, & Zhang, 2014). However, as opposed to a large body of research on POEs, very little is known about SOEs impacts and aspirations in the global arena. Only a limited number of previous studies has examined state ownership and internationalization decisions (Cui & Jiang, 2012; Ramasamy, Yeung & Laforet, 2012; Li, Sun, & Liu, 2006). The increasing global presence of SOEs and their changing nature into State-Owned multinationals (SOMNEs) however, inevitably raises new questions about the relationship between firm’s ownership and firm’s internationalisation strategies (Meyer et al., 2014; Wang, Hong, Kafouros, & Wright, 2012).

Therefore, various IB scholars have called for more future studies to focus on patterns of state investments abroad (Cuervo-Cazurra et al., 2014; Bruton, Peng, Ahlstrom, Stan, & Xu, 2015; Cahen, 2015). Furthermore, this issue has been brought to the attention by a special issue of the Journal of International Business Studies (JIBS) that was published in August 2014, titled ‘Governments as owners: globalizing state-owned enterprises’. The JIBS editors accentuate the expanding global reach of SOMNEs and the considerable lack of attention it has received in the literature (Cuervo-Cazurra et al., 2014). This lack of attention can be explained by the fact that internationalization of SOMNEs on a large scale is a rather new phenomenon. In order to contribute to closing this gap, in this study the strategic considerations of SOMNEs in the context of Outward Foreign Direct Investment (OFDI) will be analysed. More specifically, this study focusses on factors that affect the firm’s foreign market entry mode choice, hence the equity stake they invest in overseas affiliates (Hennart, 2009; Pan, Teng, Supapol, Lu, Huang, & Wang, 2014).

The choice to focus this study on foreign market entry decisions of SOMNEs is because this is one of the most important strategic decisions firms have to make when expanding abroad (Ganesh, Kumar, & Subramaniam, 1997; Lu, 2002; Pedersen, Petersen, & Benito, 2002). Entry modes, respectively Contracts, Joint Ventures and Wholly Owned Subsidiaries, can be arranged along a continuum of increasing resource commitment, amount of control and level of risk (Brouthers & Hennart, 2007; Osland, Taylor & Zou, 2001; Pan &

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Tse, 2000). Moreover, entry modes can be classified as equity versus non-equity modes (Anderson & Gatignon, 1986). Since the focus of this study will lie on SOMNEs that perform OFDI, only equity entry modes will be discussed in depth. One important aspect of equity entry mode decisions for example, is that once an entry mode is established, it is very difficult to reverse the commitment, this restriction of the firms’ flexibility to react to changes in a competing environment can negatively influence its performance in the long run (Nakos & Brouthers, 2002). Most research conducted on firm’s foreign entry mode choice trajectory is predominantly based on traditional MNEs, whereas SOMNEs are relatively poorly understood and neglected as an area of study. This is remarkable considering SOMNEs specific characteristics that are likely to affect the firm’s choice of foreign market entry mode. According to Cuervo-Cazurra et al., (2014) this lack of knowledge about the crucial decision how SOEs enter foreign markets is problematic, since it is almost impossible to transfer insights obtained in relation to traditional MNEs, to the context of SOMNEs, given the characteristics differences.

In order to reach a better understanding of SOMNEs choice of entry mode strategies, in this study existing theories of the firm, based on private owned MNEs (POMNEs) are extended by taking into account some of the peculiarities of SOMNEs that have not yet been considered in depth by traditional theoretical arguments, applied to the context of entry mode decisions. More specifically arguments from the agency theory, transaction cost theory (TCE), the Resource-Based-View (RBV), and the Neo-institutional theory are extended to the context of state-ownership. Subsequently, modified predictions of SOMNEs entry mode choices resulted in the development of three workable hypotheses for this study. The hypotheses are tested on a dataset of 37804 overseas wholly- or partially-owned subsidiaries of the Fortune Global 500 companies as listed in 2015. It appears that SOMNEs and POMNEs face different institutional pressures abroad, and hence adapt their international business strategies in different ways. The comprehensive approach of this study contributes to a better theoretical understanding of SOMNEs in the global economy (Cuervo-Cazurra et al., 2014), and to the literature on foreign entry mode strategies (Brouthers, 2002; Hennart, 2009) by explaining how SOMNEs differ in their foreign market entry strategies, due to their distinct features and interactions with host-countries and by addressing the issue of establishment and equity mode decisions (Kogut & Singh, 1988; Meyer, Estrin, Bhaumik, & Peng, 2009).

This thesis is structured in the following way. Firstly, the relevant literature and constructs that are of interest for the purpose of this study are reviewed. Firm ownership type is

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identified as an important deterministic attribute, and after discussing the important contextual factors, hypotheses are developed. Subsequently, in the methodology chapter, data collection, operationalized variables and the method of analysis used to test the hypotheses is described. In the next chapter the findings that emerged in the analysis are presented and discussed. Finally, the academic and managerial implications and the limitations and suggestions for future research are brought forward, and finished up with a conclusion.

LITERATURE REVIEW

This study will focus on OFDI performed by SOMNEs and their foreign market entry modes. In the literature review, insights are offered into key topics considering state-ownership. First, differences between traditional SOEs and POEs are discussed in their internationalization patterns and motives. Then, the entry mode literature applied to SOMNEs, and equity entry modes are discussed.

1. State-Owned-Enterprises

1.1 Differences between state-owned-enterprises and private-owned-enterprises

The main difference between SOEs and POEs regards the firms’ ownership. SOEs are legal entities that are owned and controlled by governments. SOEs can often be found in large industries such as infrastructure, strategic goods and services and natural resources; most of which are natural monopolies (Cuervo-Cazurra et al., 2014). POEs on the other hand are companies that are either owned by non-governmental organizations or a number of shareholders, and which are found in most industry sectors.

SOEs and POEs are believed to have different main objectives towards the evolvement of the firm. Where POEs mainly aim for profit maximization and growth, SOEs are generally believed to pass the firms potential profit, in the pursuit of social and political objectives such as the distribution of wealth (Dewenter & Malatesta, 2001). Moreover, SOEs residual cash flow claims are not readily transferable like the shares of POEs, hindering monitor managers’ incentives and therewith, eventually degrading firm performance. Taken together, one expects SOEs to be less efficient and therefore less profitable than POEs, implying that in competitive markets (with no significant externalities) private ownership is still the superior organizational form (Dewenter & Malatesta, 2001). Several studies indeed attributed lower performance and efficiency to government ownership presenting different possible reasons (Dewenter & Malatesta, 2001; Wei & Varela, 2003; Ng, Yuce, & Chen, 2009). Governments

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pressure of hiring politically connected people over those who are best qualified, could be one of the explanations of bad performance (Krueger, 1990). In the following subchapter the different nature of SOEs and POEs will be discussed in more detail

1.2 Changing nature of traditional SOEs

While major privatization and reform waves in the 1980’s and 1990’s have led to a quantitative reduction in the share of SOEs in the world economy, SOEs remain significant players in both domestic and global markets (Büge, Egeland, Kowalski, & Sztajerowska, 2013). Many publications emphasize on their significance and importance both in emerging as well as developed economies (Bass & Chakrabarty, 2014; Büge et al., 2013; Kwiatkowski & Augustynowicz, 2015; Shapiro & Globerman, 2009). More recently, researchers even pointed towards a “return of state-owned enterprises” (Clò & Fiorio, 2014) or a so-called “renaissance of state-owned enterprises” (He, Eden, & Hitt, 2015). By 2010, there were around 650 State-Owned Multinationals with over 8500 foreign affiliates, of which 44% came from developed economies (Cuervo- Cazurra et al., 2014). State ownership has indeed expanded in numbers and importance over the last decade(s), which in its turn has drawn new attention in the academic literature (He, Eden, & Hitt, 2015). Different theories have emerged on why and how SOEs evolved from “traditional government-granted monopolies operating mainly in national markets and sheltered from foreign competition, towards state-owned corporations with objectives of foreign investment or expansion into world markets for goods and services” (Büge et al., 2013, p.31).

Bruton et al., (2015) argue that the reason SOEs continue to thrive in today’s economy can partly be attributed to their evolvement into a type of hybrid organization in which the firm “incorporate[s] elements from different institutional logics” (Pache & Santos, 2013, p.972) and where levels of ownership and control by the state can vary (Inoue, Lazzarini, & Musacchio, 2013). He, Eden, & Hitt, (2015) ascribe the evolvement of SOEs into State-Owned Multinational Enterprises (SOMNEs) more specifically to the growing economic trend toward globalization. Considering the emphasis globalization has for country economic growth and development, governments have reduced their protective character towards SOEs (Tan & Tan, 2005), forcing them to engage in OFDI, seeking new markets and sources of income. This in turn, contributes to the accelerated evolution of SOE status toward a SOMNE. Changes in the international regulations have also pushed the growth of SOMNEs. The United Nations, World Bank and International Monetary Fund have acknowledged state-ownership as an important factor in economic growth and regularly established new codes and regulations to guide the growth of SOMNEs (He, Eden, & Hitt, 2015). Particularly among

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emerging economies, new policies and strategies for certain firms and sectors have driven state-ownership (Hsueh, 2011; Büge et al., 2013).

With the changing nature of SOEs the common understanding and definitions have also changed over the years. The traditional view of the SOE has generally been framed around the dimensions of efficiency, productivity and bureaucracy, and therefore tended to describe SOEs as inefficient, poorly managed and bureaucratic entities. Simply defined as:

“any corporate entity recognised by national law as an enterprise, and in which the state exercises ownership” (OECD, 2015, p.15). A definition of modern SOMNEs, that

incorporates the economic objectives of the firm comes from Cuervo- Cazurra et al., (2014, p. 925), defining SOMNEs as: “legally independent firms with direct ownership by the state that

have value adding activities outside its home country. These value added activities can be production facilities or sales subsidiaries, or purchasing subsidiaries or design or R&D centres.” Using this definition of SOMNE, the focus will be on OFDI) which means that the

SOE must have a subsidiary abroad, rather than internationalization through export strategies (Cahen, 2015). Considering that the studied firms in this thesis are all MNEs, continuing state-owned firms will be called SOMNEs. Outward Foreign Direct Investment (OFDI) can be defined as: “a category of investment that reflects the objective of establishing a lasting

interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise. (…)” (OECD (2008, p. 234).

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1.3 SOMNEs internationalization motives

Regarding SOMNEs internationalization, current lack of integration between IB theories and public management literature has generated different views; focussing on either the SOMNE or the internationalization aspect of the phenomenon (Cahen, 2015). The first (few) scholars in IB that studied SOMNEs did so in the perspective of public management (Cahen, 2015). They have traditionally focussed on the forms and functions of SOMNEs rather than their international aspirations, and - given the fact that SOMNEs traditionally had a domestic focus - have assumed state-ownership to reduce the likelihood of firm’s internationalization (Aharoni, 1986; Vernon, 1979; Mazzolini, 1980; Cuervo-Cazurra et al., 2015). Subsequent literature on SOMNEs has focussed more on pro-market reforms as enhancing mechanisms of SOMNEs internationalization (Rodrik, 2006). Therewith, researchers started to assume a

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more active role of SOMNEs in international markets after the reforms. However, no theoretical development has come into existence from this perspective (Estrin et al., 2012).

Recent studies have provided specific explanations for SOMNEs internationalization motives (Cuervo-Cazurra et al., 2014; Choudhury & Khanna, 2014; Duanmu, 2014; Liang, Ren, & Sun, 2014). In many cases SOMNEs can behave like POMNEs in their OFDI and the patterns and motives can be explained by extending traditional IB theories, but state-ownership makes SOMNEs a unique and particular type of multinational firm (Cuervo-Cazurra et al., 2014). Unlike traditional POMNEs, that measure the success of OFDI based on profitability metrics such as return on investment, in SOMNEs the presence of various -possibly conflicting - demands from politicians, managers and citizens, can complicate interpretation of such success and therewith the actions that are taken to realize this (Cuervo-Cazurra et al., 2014). I will explain the main differences in internationalization motives between SOMNEs and POMNEs according to the decision making sequence managers undertake when considering internationalization; decision to internationalize, host country selection and entry mode selection.

At the core of the internationalization decision lies a trade-off between the costs and potential benefits of accessing international markets. When assuming that a firm’s main motive in seeking new markets, resources, strategic assets or efficiency, is to increase profitability (Dunning, 2001), this is a logical and generally accepted concept. It tends to break down however when applied to SOMNEs, as it doesn’t account for non-value adding or even value destroying motives. SOMNEs might pursue a broader set of internationalization objectives involving both economic and political ones. The latter contradicting the profitability logic, is often assumed to be at least -if not more- relevant than economic objectives for SOMNEs (Amighini, Rabellotti, & Sanfilippo, 2013; Cuervo-Cazurra et al., 2014).

The second step entails the choice in what country the firm should invest. Traditional POMNEs are generally attracted to big markets and host countries with resources and capabilities that enhance the firms’ ability to grow or gain new sources of competitive advantage, to achieve higher profitability (Cuervo-Cazurra et al., 2014). They are also averse to economic and political risks. SOMNEs on the other hand, are largely indifferent to the economic and political conditions of host countries as they are often driven by a political logic rather than profitability as predicted by Dunning (Cahen, 2015). In many cases, rather than being guided by strategic benefits of a particular country, SOMNEs invest in countries to achieve foreign policy goals for their home governments’ or to expand their influence zone among international competitors (Amighini, Rabellotti, & Sanfilippo, 2013; Ramasamy,

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Yeung, & Laforet et al., 2012). Accordingly, SOMNEs can enter riskier countries or those, unattractive for POMNEs (Ramasamy et al., 2012; Cuervo-Cazurra et al., 2014).

Having established the location for OFDI, the focus shifts to choosing the appropriate entry mode. According to traditional models, POMNEs would select the entry mode that facilitates the access to resources needed to operate efficiently, and minimizes the risks and exposure in the host country (Johanson & Vahlne, 1997). A large body of literature has shown different insights into factors on which firms can choose their appropriate entry mode (Brouthers & Brouthers, 2001; Caves & Mehra, 1986; Hennart & Reddy, 1997; Kogut & Singh, 1988; Pan & Tse, 2000; Zejan, 1990). Yet again, most of the knowledge focusses on observable criteria with economic implications. Unlike POMNEs, SOMNEs may choose certain operation and entry modes solely with the goal of achieving their governments political objectives. Even if that would pose risks, require large commitments and enable the firms’ profitability, the entry mode choice may be based on political- rather than economic considerations (Cuervo-Cazurra et al., 2014). Because of larger budgets and resources, SOMNEs typically have a higher risk tolerance than POMNEs (Ramasamy et al., 2012). Moreover, governments are able to exert control over laws and regulations, enabling them to enforce contracts that will reduce risks for the OFDI of their SOMNEs. Taken all together, SOMNEs are both more likely and more willing to make a risky OFDI than their privately-owned counterparts (Cuervo-Cazurra et al., 2014), typically resulting in acquisitions and greenfield ventures (Ramasamy et al., 2012) in host countries with weaker institutional environments (Cahen, 2015).

In summary, the nature of ownership and control forces internationalizing SOMNEs to address distinct parameter sets compared to their private-owned counterparts, whose decisions are mostly driven by economic objectives of value creation. The need to include political goals in their decision-making, can constrain SOMNEs in the entire sequence of the internationalization process; from the decision to internationalize, to the choice of a location and type of entry mode into the host country.

1.4 Traditional theoretical frameworks adapted to SOMNEs

The main difference between SOMNEs and POMNEs concerns their ownership by the government. This distinction makes that some of the assumptions upon which traditional theories of the firm are built, -mostly developed from studies on POMNEs-, don't hold anymore (Cuervo-Cazurra et al., 2014). Using insights from recent studies on SOMNEs, the extension of traditional MNE internationalization literature can contribute to a better understanding of SOMNEs internationalization processes. In the following section I review

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some of the key theories of the firm; agency theory, Transaction Cost Economy (TCE), Resource-Based-View and Neo-Institutional theory, and illustrate how the conventional arguments can be extended to the context of SOMNEs.

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1.4.1 Agency Theory

The traditional agency theory is based on the relationship management between two parties, where the principals (shareholders) give the agents (managers) the task to operate in their name. They give up a part of their delegating authority to the managers, expecting their (managers) actions to be aligned with their goals of share value maximization. To make sure the agent complies with his desires, the principal can provide both incentives and establish control mechanisms. When undertaking these activities, the principal incurs agency costs in form of ‘bonding and monitoring costs’, which can vary depending on the relationship between the managers and shareholders (Holstrom (1979; Jensen and Meckling (1976).

Unlike private firms, with single agency relationships between shareholders as principals and managers as agents (Fama & Jensen, 1983), SOMNEs face triple agency relationships (Cuervo-Cazurra et al., 2014). This complex relationship is as follows: firstly, there are the citizens of the SOMNEs home country, who act as the principals, that assign politicians, as agents to carry out the social and economic targets for which the SOMNE has been built. Secondly, there are politicians as principals, who assign the SOMNEs managers (the agents) to achieve their political objectives, which most likely differ from those of citizens and the managers, of which the latter rather pursue goals that are guided by their career preferences and personal progression (Aharoni & Lachman, 1982). Lastly, there are the managers of the SOMNE as principals, and the managers of the SOMNEs host country subsidiary as agents (Roth & O’donnell, 1996). Next to their own desires for career progress and independent decision making, SOMNEs managers have to integrate these conflicting objectives. To account for these interaction objectives of principals and agents, the traditional agency models need to be extended (Cuervo-Cazurra et al., 2014).

It is likely that because of this triple agency problem SOMNEs invest in foreign projects with lower business value than those selected by their private counterparts. There are several reasons for this. First, citizens and politicians have conflicting understandings of what a strategic industry for the internationalizing SOMNE means. Where citizens will most likely focus on their current welfare and consumption, politicians may focus on how to exercise influence over other countries or the insurance of long-term input supplies of natural resources. As managers of SOMNEs try to meet both objectives, it is likely that they select countries based on the group which has most influence at that point, resulting in subsidiaries

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with unpredictable behaviour (Cuervo-Cazurra et al., 2014). Second, politicians can instruct SOMNEs to perform tasks that are beneficial to the political relationship between the countries in question, but harmful to the SOMNE and its home country citizens. Third, SOMNEs managers of especially not publicly traded firms are poorly monitored and controlled, this can give them the freedom to pursue ‘empire building’ internationalization strategies, providing prestige, but economically damaging the firm (Cui & Jiang, 2012; Cuervo-Cazzura et al., 2014; Vernon, 1979). Therefore, it is expected that SOMNEs perform OFDI with lower business value than POMNEs.

1.4.2 Transaction Cost Economics

The Transaction Cost Economics (TCE) theory is the most commonly used theory within the internationalization theory (Brouthers & Hennart, 2007). According to this theory, firm behaviour is explained based on transaction costs between economic actors, where transactions are the fundamental unit of analysis (Williamson, 1985). A market transaction takes place when a good or service is provided though the market, rather than within the firm, and is coordinated by the price mechanism. Transaction costs, independent from the actors involved, emerge from market imperfections; where not all involved parties in the market have the complete information available: “In mechanical systems we look for frictions: do the

gears mesh, are the parts lubricated, is there needless slippage or other loss of energy? The economic counterpart of friction is transaction cost” (Williamson, 1981, p.552). In uncertain

situations, transaction costs are expected to be higher because uncertainty leads to information asymmetries; where crucial information of a transaction is known by one party and can’t be shared with others without making costs (Williamson, 1985). According to Williamson, transactional friction can be explained by two human factors: bounded rationality and opportunism. With bounded rationality suggesting that actors intend to be rational, but in reality are limitedly so because of uncertainties and opportunism as an attribute of economic actors in a contractual relation. This is expressed as a combination of self-interest seeking and dishonest behaviour such as: “the incomplete or distorted disclosure of information, and

calculated efforts to mislead, distort, disguise, obfuscate or otherwise confuse” (Williamson,

1985, p.47). In the end, identifying the transaction costs depends on the specificity of the involved assets, and the possibility of setting up contracts with imperfect and asymmetric information.

For SOMNEs however, these arguments don't hold. Although SOMNEs are equally likely to act opportunistically, they have a different risk tolerance. Larger budgets and resources, enable them to take more risks and at the same time maintain long-term investment

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strategies (Kaldor, 1980). Moreover, being able to control laws and regulations, enables them to enforce contracts and lower risks. Accordingly, SOMNEs are more likely and willing to take more risk in their investments; choosing high-risk profile industries and countries with weaker rule of law or high expropriation risks. Two distinctive features explain this behaviour. First, as SOMNEs are backed by their home governments in financial difficulties, they have lower budget constraints. Because of this government support and access to low-cost government capital, the barrier rate is lower for them compared to POMNEs, which is the reason why it’s more likely that they take on riskier foreign projects (Kornai, 1979; Vernon, 1979). Second, because SOMNEs have implicit backing of their governments, especially if from powerful governments, they face lower expropriation risks (Knutsen et al., 2011). Governments can use diplomacy and bilateral investment treaties in their favour. This especially counts when the SOMNEs home country is larger and more powerful than the host country. In sum, SOMNEs managers can enter countries that are considered too risky for POMNEs, and face lower chance of expropriation than POMNEs, because of the protection of their government.

1.4.3 Resource-Based-View

The Resource-Based-View of the firm (RBV), originates from the strategic management literature, but has gained increasing interest among IB scholars (Barney, 1991; Dunning, 2001; Peng, 2001; Wang, Hong, Kafouros, & Boateng, 2011). The RBV focuses on how companies can develop and use their resources and capabilities to achieve a competitive advantage over competitors and serve customers (Penrose, 1959). According to the RBV, competitive advantage derives from a firm’s heterogeneous resources (e.g. knowledge, assets, and capabilities) that; “(a) must be valuable, in the sense that it exploit opportunities and/or

neutralizes threats in a firm’s environment, (b) must be rare among a firm’s current and potential competition, (c) must be imperfectly imitable, and (d) there cannot be strategically equivalent substitutes for this resource that are valuable but neither rare or imperfectly imitable” (Barney, 1991, p. 105-106). According to Wang et al., (2011), in order to grow

internationally and be able to appropriate rents in overseas markets, firms must be able to explore and exploit valuable resources corresponding to Barney’s (1991) criteria. Providing them with a competitive advantage over host country competitors in satisfying the needs of host country customers (Tallman & Yip, 2001).

For SOMNEs, the state-ownership can be viewed as a resource, that can have a dual influence on its competitive advantage abroad (Cuervo- Cazurra et al., 2014). On the one hand, when governments provide SOMNEs with diplomatic support or subsidized credit to

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deal with foreign governments, its ownership can be an advantage, as it enables SOMNEs to make larger investments in host countries. On the other hand, state-ownership can be seen as a disadvantage, as host country governments or consumers can discriminate foreign government firms (Ciu & Jiang, 2012). Especially when SOMNEs bid for strategic assets, such as natural resources and infrastructure utilities, they can be perceived as a threat because of their links to their home government (Globerman & Shapiro, 2009). Therefore, it is likely that such bids from SOMNEs, compared to POEs, will more commonly be blocked.

1.4.4 Neo-Institutional theory

According to the neo-Institutional theory, firms respond to pressures of their environment and try to imitate practices that are seen as legitimate (Dimaggio & Powell (1991). There are two main conceptualizations of institutions, by North (1990) and Scott (1995). North (1990) distinguishes formal and informal institutions, the first concerning legal systems and the latter cultural aspects. Scott (1995) distinguishes 3 type of institutions: regulative institutions (rules, laws and regulations), normative institutions (socially shared standards and values), and cognitive institutions (peoples underlying norms, beliefs and values). Institutions can be seen as the rules of the game (Peng, 2002), and when expanding to foreign countries, firms must take into consideration two -possibly conflicting- legitimacy pressures; from the home country headquarters, and the host countries institutional environment (Kostova & Zaheer, 1999).

As state ownership can also be a source of illegitimacy in host countries, SOMNEs can face extra pressures. In this light, host country customers and governments can suspect SOMNEs of being a foreign governments instrument to exercise control. The perception of the SOMNEs illegitimacy depends on its level of state-ownership and its governments overall ideology and political strategies. Therefore, it is likely that SOMNEs will choose countries that perceive them as more legitimate, either because they have an economy with many domestic SOMNEs themselves, or their governments share similar ideological and political strategies (Cuervo- Cazurra et al., 2014). However, may a SOMNE need to invest in a country in which they are perceived less legitimate, they would need to engage in legitimacy building to facilitate their foreign operations. One way to do this, could be through the establishment of alliances with local firms; building mutually beneficial relationships. Another way to ensure support of the host countries citizens and politicians, could be with the investment in corporate social responsibility projects.

As the SOMNEs changing nature, differences in internationalization motivations and extensions of traditional theories of the firm are clarified, I will now cover in detail one of the

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final and major aspects in a firms’ internationalization process, namely; the firms market entry mode choice. Accordingly, I will discuss the implications state ownership can have on entry mode decisions.

2 Entry Modes

2.1 Research on foreign market entry modes

Since the beginning of IB research, scholars have considered the choice of a market entry mode to be one of the most critical decisions in the firm's’ internationalization process (Anderson & Gatignon, 1986; Hill, Hwang & Kim, (1990); Brouthers & Hennart, 2007). Next to the significant implications it has for the performance of the firm (Brouthers, 2002), the foreign market entry mode choice determines the level of resource commitment, risk, and control a firm undertakes and is exposed to in its foreign market activities (Anderson & Gatignon, 1986; Hill et al., 1990). Once an entry mode is established, further changes or corrections are difficult, and can imply consequences that negatively impact the firm's performance in the long run (Nakos & Brouthers, 2002). Sharma and Erramilli (2004, p. 2) define an entry mode as “a structural agreement that allows a firm to implement its product

market strategy in a host country either by carrying out only the marketing operations (i.e., via export modes), or both production and marketing operations there by itself or in partnership with others (contractual modes, joint ventures, wholly owned operations)”. Given

its relevance, numerous empirical studies have addressed this topic, including studies on: ‘the predictors of entry mode choices, predictors of international equity ownership levels, and consequences of entry mode decisions’ (Werner, 2002, p. 281) and literature overview articles, for example by Brouthers and Hennart, (2007) and Canabal and White, (2008). Making it the third most studied field in international management (Morschett, Schramm-Klein & Swoboda, 2010).

Two main views appear to exist in the IB literature on the meaning of entry modes. According to the first, entry modes, respectively Contracts, Joint Ventures’s and Wholly Owned Subsidiaries, can be arranged along a continuum of increasing resource commitment, amount of control and level of risk (Brouthers & Hennart, 2007; Osland, Taylor, & Zou, 2001). Based on this premise, various researchers have offered typologies of entry mode types (Anderson & Gatignon, 1986; Erramilli & Rao, 1990; Hill, Hwang, & Kim, 1990). Nevertheless, literature still falls short in helping managers in their evaluation of entry trade-offs, hence many firms still make uninformed choices (Anderson & Gatignon, 1986). The second perspective, formulated by Hennart (1988, 1989, 2000), classifies modes of entry into two categories, Equity and non-Equity. Contrary to the continuum approach of the first view,

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in this classification the entry mode choice depends on the method chosen to pay back input providers. The fundamental characteristic of the equity mode is that input suppliers are paid after (ex-post) profits of the venture are collected, in contrast to non-equity, where payments are specified before (ex-ante).

An important hierarchical model that both continues on the partition of equity vs. non-equity, but also elaborates on the increasing risk and control aspect is Pan & Tse (2000), hierarchical entry mode model. Following Ganesh, Kumar and Subramaniam’s (1997) distinction of a natural hierarchy between various modes of entry, in the hierarchical market entry mode model as proposed by Pan & Tse (2000), POMNE’s foreign market entry mode choices are explained as a hierarchical decision-making process. Because of the inherently risky nature of doing business in foreign markets, entry mode choices and expansion abroad are often perceived to be a slow and incremental process. As Johanson & Vahlne, (1997) suggest in their Uppsala model: firms should start with an entry mode such as export, that requires least resources, and therewith least risk, gain experience and resources in the foreign market, and only then moving towards more challenging entry modes that require more commitment and risk. To ease firms’ entry mode choice, Pan & Tse (2000) divide entry mode decisions into two stages, first deciding on: equity vs. non-equity investment, and later choosing a specific entry mode within the category. Further, they elaborate on the differences in investment requirements and control between the categories, and argue that equity modes (e.g., equity joint venture (EJV) and wholly owned subsidiaries; Greenfields, brownfields and acquisitions, require exercise of higher levels of control from headquarters, as these forms involve large equity commitments and thus pose greater risks (Pan & Tse, 2000). Opposed to the non-equity modes (e.g., export and contractual agreements) where lower levels of commitment and control are required due to the lower investment intensity (Canabal & white, 2008). Thus it can be stated that in the equity investment category the levels of commitment, risk and control are the highest.

High commitment, risk and control entry modes can pose the parent firm both advantages as disadvantages. Investments with large equity stakes for example offer the firm a high degree of control over its investment. The advantage of control is that the firm can freely manage its operations abroad and have a quick responsiveness to potential problems, reducing firms’ international risks (Taylor, Zou, & Osland, 2001). Moreover, higher equity stake in a foreign subsidiary allows the firm to freely decide its strategy and positioning in the foreign market without having to consider a local counterparts’ goals as would be the case in a Joint Venture commitment. In turn for control however, the parent firm must pay a price in the form large resource and financial commitment (Ghemawat & del Sol, 1998). Furthermore,

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high equity stake investments are often irreversible, meaning that once the firm committed resources to an investment, it can’t easily divest in case of failure (Rivoli & Salorio, 1996), restricting the firm’s flexibility to react to changes in a competing environment.

In this research the focus lies on the equity stakes SOMNEs have in their foreign affiliates, therefore the following I discuss in detail equity entry modes together with the related risks and advantages1

.

2.2 Equity Entry Modes

As implied by their definition, equity entry modes suggest an investment of capital and/or resources by a firm in order to set up a business overseas. This considerably large commitment, grants the internationalizing firm high control over the operation of its investment, while at the same time limiting its flexibility to reverse the commitment in case of losses (Rivoli & Salorio, 1996). The two main equity entry modes are Joint Venture (JV) and Wholly Owned Subsidiary WOS (e.g. Greenfields and Acquisitions). In WOS the firm controls 100% of the equity-stake, whereas in a JV the ownership is shared with a partner; for the sake of this study 50.01%-99% is a majority ownership by the parent firm. It is also possible for firms to have less than 50% stake in their focal affiliate, in this research this will be considered a minority ownership by the parent firm.

! A joint venture (JV), also known as a consortium, is a common equity-based entry mode in the international market (Brouthers & Hennart, 2007; Hitt, Dacin, Levitas, Arregle, & Borza, 2000). JVs are usually formed between two firms from different countries. In doing so, risks of internationalization to foreign markets are shared with a local partner (Johnson & Tellis, 2008). Therefore, the stake in the focal affiliate in a JV will most likely be shared by two parties; 50% stake meaning a JV. According to Brouthers & Hennart (2007), the six common objectives on which joint ventures are based are market entry, sharing risks and rewards, sharing technology, engaging in a joint product development, conforming existing government regulations, and overcoming informal institutional differences. An engagement in a JV can offer advantages, both from the institution-, as well as from the resource-based view perspectives. In terms of the latter, access to the combined financial resources, or joined efforts in R&D can be named as potential advantages (Brouthers & Hennart, 2007). Furthermore, potential learning advantages could arise from accessing the local partner’s superior knowledge of the market. For instance, knowledge about specific needs and tastes of

1_{The following paragraph was partially taken from a previously submitted group paper titled: “Degussa Stabilizers: Accessing the Chinese Market (Case Study) “(sole}

author of used part is me; Marina Broeva, 2016).

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local consumers makes exploitation of the available resources easier (Wilson, 2006). By engaging in a JV, the firm striving for an international expansion can also overcome ownership restrictions and cultural distance. Since a partnership makes a firm more or less an insider of a local market, firms can more easily access the host country firm’s political connections and access their established distribution channels that may depend on close relationships (Wilson, 2006). Next to the above-mentioned benefits of the JV, there are also disadvantages associated with this entry mode. One of the risks of a JV is a conflict between the collaborating firms. Potential issues could be a performance and control ambiguity, or asymmetric new investments between both partners (Pan & Tse, 2000). Another major concern of JVs is the mistrust in terms of proprietary knowledge. This entails the risk of potential knowledge spillovers, lack of parent firm support, cultural clashes, and in the worst case, how and when to terminate a JV relationship (Brouthers & Hennart, 2007). These disadvantages could arise from the collaborating firms conflicting pressures to cooperate versus compete with each other. For example, while aiming for maximum advantages for the JV, both individual firms also want to maximize their own competitive position in the market (Brouthers & Hennart, 2007). In addition, when sharing and developing resources, each firm simultaneously develops and tries its best to protect its own proprietary resources. This can eventually evolve in a learning race between the collaborating partners (Hitt et al., 2000). Finally, a conflicting pressure is expressed in the JVs control through negotiations and coordination processes, while in fact each firm would like to have full control. Therefore, the key issues that need to be taken into account when considering a JV are the division and execution of ownership and control, the exact duration of the agreement, the transfer of technology, the pricing, resources, capabilities of the local firm, and local government motives (Hitt et al., 2000).

! Wholly Owned Subsidiary (WOS); Greenfields and Acquisitions. The Greenfield and Acquisition entry mode, require the biggest input of equity from the parent firm. Therefore, it is likely that firms that have high stakes in their focal affiliates (majority- to full-ownership), have conducted either a greenfield or acquisition entry mode. Below in short are described the corresponding ownership, control and risks with these entry modes. Results of the analysis however will not be discussed in such manner, but in the following way: if a firm has over 50% stake in its focal affiliate (51-99% = majority- to full-ownership), it can be assumed it has performed a WOS entry mode, which can be either greenfield or acquisition.

When conducting a greenfield, companies don’t partner up with local players, except for market based transactions, instead, they try to create the capabilities and get access to the required resources themselves (Meyer et al., 2009). Greenfield investment can be defined as

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“the investments that create new production facilities in host countries” (Qiu & Wang, 2011,

p.836). On the one hand, a greenfield can pay off extremely well, on the other it bears a significant amount of risk (Pan & Tse, 2000). An advantage of the greenfield entry mode is the high degree of control a firm keeps over its operations (Pan & Tse, 2000), the control shows in the stake the parent firm has in its foreign affiliate. Another advantage is not having information asymmetries; hold-up costs, which clearly reduce the risk compared to other entry modes (Brouthers & Hennart, 2007). Yet another advantage of a greenfield operation is the low threat of knowledge spillovers, since one does not have to work with partners (Pan & Tse, 2000). The only type of knowledge spillover could be the risk of having your employees leave for a competitor. Opposed to the advantages, greenfields also have limitations that need to be taken into account. First of all, the level of capital and commitment required (Pan & Tse, 2000), increasing the importance to understand the cultural- and formal-institutional distances between the firm and the host country (Erramilli, 1991). Host-countries legal structures form an aspect that could influence greenfield investments (Meyer, et al., 2009). In China, for instance, governments enforce entrants to collaborate with local players in order to enforce some kind of knowledge spillovers to the domestic firms and improve the domestic environment from the presence of the entering multinational.

! Acquisition as a foreign market entry mode is characterized by the purchase of one business enterprise by another, establishing the acquiring firm as the parent/owner (Woodcock, Beamish, & Makino, 1994). Acquisitions are regarded as a relatively quick executable equity entry mode, whereby the acquiring firm can expand quickly, gain market share, and learn from the new market in a relative short period. Therefore, MNEs tend to apply acquisitions when aiming for a bigger market share or market power (Meyer et al., 2009). Compared to greenfields the risk of market entry through acquisitions is lower due to the easier estimations of risk and return. In addition, acquisitions provide firms with relatively easy access to the host enterprises assets, like its employees or production facilities (Mittal, 2014; Pan & Tse, 2000). Besides, the acquiring firm also gets the opportunity to access new customers, distributors, local knowledge, qualified labour force, existing goodwill, and possibly the brand name or reputation of the acquired firm (Chang & Rosenzweig, 2001). Acquisition in a sense also reduces competition in the foreign market considering the fact that the entering firm is taking over a rival (Meyer et al., 2009). However, there are also disadvantages and problems firms can face in entering a foreign market through acquisitions. First of all, the acquired firm must realize that the acquisition includes all of the liabilities of the acquired firm, including financial and managerial. This can result in significant increases of a firm’s level of debt (Mittal, 2014). A thorough assessment should be made of the to-be

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acquired firm since the MNEs name and reputation are at stake. Secondly, the integration of two different firms can cause problems due to differences in organizational cultures and control systems (Luo, 2001; Pan & Tse, 2000). A mismatch can lead to high costs in communication, coordination, and integration between the acquiring and acquired firm (Mittal, 2014). Furthermore, cultural differences on the national level also need to be taken into account when acquiring a firm from a different country. The differences could become a great financial burden when a mismatch exists, but cultural differences can also create opportunities for new market exploitations in the entering firm’s favour (Mittal, 2014). For example, the firm could adjust or even create new products to meet local needs. Finally, the acquisition of a foreign firm can be a complex task that requires knowledge of local institutions, regulations, and involvement of specialists like lawyers or bankers from both countries (Hitt et al., 2000).

!

2.3 Research gap

Although “The globalization of state-owned multinational companies and the wide variety of

approaches taken by the state as a cross-border investor have become an important phenomenon in international business (IB)” (Cuervo-Cazurra et al., 2014, p. 925), it has

received scant attention in the literature. Most research conducted thus far, has focussed on internationalization strategies and globalization patterns of POMNEs in general (Cuervo- Cazurra et al., 2014). Therefore, replying to the Journal of International Business Studies’ (JIBS) call for more research on SOMNEs internationalization, this thesis tries to contribute by filling this research gap with the investigation of the relationship between state ownership and firms’ equity stakes in their foreign subsidiaries when performing OFDI.

To shed light on this relationship from different perspectives, two moderating variables are included in this research. First of all, the globalization versus regionalization debate, a topic that has been subjected to intense study in the IB literature over the last years (Ghemawat, 2003; Rugman & Verbeke, 2007). Most often it has been analysed in relation to the internationalization strategies of traditional POMNEs, and only limited attention has been paid to its relationship with foreign market entry modes choice; especially in the case of SOMNEs. In order to clarify this, the influence of a parent firms’ strategy (global versus regional) will be tested on the relationship between state-ownership and stake in foreign affiliate. The second moderator concerns industry sector differences. Here a distinction is made between high and low R&D intensive industries. Researchers have found that in R&D intensive industries, firms tend to have a preference for full ownership entry modes (meaning larger equity stakes in foreign affiliates) (Hennart, 1991). In this respect too however, limited

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research has been done on how this compares when a firm is owned by the state. Therefore, this moderator will also be included in the research of this thesis.

Considering the before mentioned research gap, the aim of this thesis will be to work towards answering the following research question:

“Are SOMNEs versus POMNEs more likely to establish a majority or minority owned foreign affiliate when conducting OFDI? And how do firms’ regional vs. global strategies, as well as their belonging to a high vs. low R&D intensive industry influence this relationship?”

THEORETICAL FRAMEWORK AND HYPOTHESES

In the following section I build a theoretical framework, based on SOMNEs entry modes, firms’ global versus regional strategies and high vs. low R&D intensity across industries. 2.1 State Ownership and Entry modes

SOMNEs have different risk tolerance compared to POEs, because of larger budgets, resources and backing from their governments (Kaldor, 1980). Therefore, it is likely that they will take on riskier projects and invest more equity in foreign subsidiaries compared to POMNEs, that usually gradually expand into a foreign market, reducing risk, while learning about that foreign markets system (Johanson & Vahlne, 1997). Moreover, as SOMNEs enjoy diplomatic government support that allows them to make larger investments, higher equity proportion can be expected (Cuervo- Cazurra et al., 2014). State ownership can also be seen as a disadvantage, as it can be perceived as a threat by host country governments and customers (Ciu & Jiang, 2012). To compensate for the disadvantage by their state ownership that creates hostility, SOMNEs will tend to increase investment spillovers, therefore implementing high equity stake investments in their foreign subsidiaries (Cuervo- Cazurra et al., 2014). To overcome illegitimacy, SOMNEs can establish strategic alliances/Joint Ventures with local firms to build a trusting relationship with the foreign government. In the category of largest equity investment entry modes: Wholly Owned Subsidiaries, mergers and acquisitions seem to be SOMNEs’ quickest and most effective way for gaining international competitive advantage (Kling & Weitzel, 2011). When companies set up a WOS, they have a high commitment and therefore often tend to be the majority (more than 50% stake) or full-owners (100% stake) in their foreign affiliates. To avoid controversy associated with a foreign state-owned firm taking over a domestic company, SOMNEs will most likely carry out high commitment investments instead of full acquisitions (Meyer et al., 2013). As large equity

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investments are focussed on the generation of productive and operational facilities in the host country, they most likely promote significant knowledge transfer and innovation spillovers in case long term asset allocation takes place (Klimek, 2011). Moreover, large equity commitment signals positive generation of employment and therewith local development and economic growth, instead of existing facility transfer to the foreign government (Cuervo- Cazurra et al., 2014).

Given the aforementioned studies and arguments on SOMNEs foreign entry modes, I expect that SOMNEs will more often have higher (versus lower) equity stakes in their foreign affiliates (higher commitment equity entry modes) than POMNEs. Concluding, I argue that!

the mechanisms that drive SOMNEs to higher versus lower equity stakes in their foreign affiliates are: SOMNEs large budgets, resources and (diplomatic) backing from their governments, and their tendency to avoid hostility and reduce illegitimacy in a foreign country. Accordingly, I hypothesize as follows:

Hypothesis 1: SOMNEs are more likely than POEs to establish a higher (versus

lower)-owned foreign affiliate when making OFDI.

2.2 Global versus regional strategies in the context of SOMNEs

Since the beginning of 2000, there has been an ongoing debate on whether multinational firms are truly ‘global’ (Rugman & Verbeke, 2007). Garret (2000) defines growing globalization as:

“the international integration of/in goods, services and capital” (p.942). However, if markets

would be either completely integrated or completely isolated, firms’ international business strategies would not differ from single-country strategies (Ghemawat, 2003). This means that current business environments are unique; they are not fully integrated because the cross-border context and because resources and key activities are still often found to be location bound, and not isolated, as barriers to market integration are not strong enough to isolate countries from one another. Garret’s idea of globalization has been criticized by different authors analysing data on the degree of economic integration (Ghemawat, 2003; Rugman & Verbeke, 2004). Ghemawat’s (2003) semi-globalization for example, emphasizes on market imperfections and implies "that we observe neither extreme geographical fragmentation of the world in national markets nor complete integration" (Rugman & Verbeke, 2004, p.6). Building on Ghemawat’s idea, Rugman and Verbeke (2004) show that instead of a globalization strategy, most international firms seem to apply a regional strategy. Most of the multinationals being ‘home region oriented’, focusing on responsiveness to customers with

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similar needs, standards, cultures and level of economic development (Berry, 2006) and getting over 50% of their sales from their home region.

However, as previously discussed in the literature review, SOMNEs and POMNEs greatly differ, both in their firm structure as in their investment strategies, risk-taking behaviour, subsidiary governance and the relation between the parent and the subsidiary (Luo & Tung, 2007). Therefore, it is very likely that SOMNEs also differ from what Ghemawat (2003) and Rugman & Verbeke (2004) argue on global firms. In fact, SOMNEs mainly invest in foreign countries to achieve foreign policy goals for their home governments’ or to expand their influence zone among international competitors (Amighini, Rabellotti, & Sanfilippo, 2013; Ramaswamy, Yeung, & Laforet et al., 2012). This implies that the more SOMNEs spread their affiliates globally rather than regionally, the broader the scope of their influence zone could be. Moreover, with the budget and resource backing of their governments, SOMNEs can enter riskier countries or those countries unattractive to POMNEs (Ramaswamy et al., 2012; Cuervo-Cazurra et al., 2014), perhaps because of distance. In the assessment of the distance between two countries, Ghemawat’s (2001) “CAGE” model can be used. It is a theoretical framework that covers the Cultural, Administrative, Geographical and Economic dimensions of distance. POMNEs tend to be more risk averse and therefore less likely to invest high levels of equity in highly distant countries (Cuervo-Cazurra et al., 2014). Sanchez-Peinado, Pla-Barber and Hébert, (2007) study, confirms the hypothesis that when firms pursue global strategies, they are more likely to choose a full-control entry mode (e.g. WOS with majority stake in foreign affiliates).

Combining this logic with the prediction that SOMNEs compared to POMNEs more often have higher (versus lower) equity stake in their foreign affiliates, it is likely that the moderating effect will reinforce the positive relationship predicted in hypothesis 1. So when firms are global and state-owned, the likelihood of them having a higher (versus lower) equity commitment is even higher. To examine this assumption, the following hypothesis will be tested.

Hypothesis 2: A global (versus regional) strategic focus positively moderates the relationship

hypothesized in H1.

2.3 R&D intensity across industry sectors

According to Graham (1978), firms within a same industry show similar internationalization patterns, and these patterns differ across different industries. By including the globalization versus regionalization moderator to this study, I first checked for contingencies at the regional

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level. Since industry characteristics influence the environment in which firms operate and this in turn has differing implications for firms’ internationalization patterns and motives, it is arguable to also include a moderator to test for contingencies at the industry level. Hu & Chen (1993) conducted a research to identify factors that influence the ownership share of foreign partners in Joint Ventures in China, and their analysis suggested that together with social-culture distance and economic risks, some industry-specific factors such as R&D intensity can be potential determinants of foreign equity ownership. Moreover, Zhao & Zhu, (1998) have designated the coefficient of R&D intensity to be a significant (positive) determinant of ownership preference, more R&D meaning larger equity stake in foreign affiliate. Therefore, in this study the industries will be distinguished according to their ‘R&D intensity’. In several studies R&D investment is also linked to innovation (Franko,1989). To sustain a competitive advantage, firms have to continuously keep improving and updating their offerings, this can be done with R&D (Hitt et al., 1994), this makes the assumption likely that the more R&D intensive, the more innovative an industry is.

In the study of Hennart, (1991) it is also confirmed that firms operating in high R&D intensive industries should be associated with a preference for full ownership. However, similar to the previously mentioned studies, the results are based on data of POMNEs. Considering the context of the present study it is interesting to analyse whether this also counts for SOMNEs, because SOMNEs often have different motives, ways and resources to internationalize. They often focus on strategic assets, with the goal of acquiring knowledge for their home country and therewith increasing their overall competitive advantage (Child & Rodrigues, 2005, Cuervo-Cazurra et al., 2014; Luo & Tung, 2007; Yiu et al., 2007). SOMNEs desire to gain these strategic assets and protect themselves from host country hostility and knowledge spillovers, often transcends the tradeoffs relative to the associated risks of certain OFDI choices. This makes them more willing to adopt aggressive high risk targets (Ramaswamy, Yeung & Laforet, 2012), and makes it even more likely that they will invest larger equity stakes in R&D intensive/innovative industries from which they can gain much knowledge.

Given the aforementioned I expect that the more R&D intensive an industry, the stronger the incentive for a SOMNE to go with a high equity stake, in order to maximize knowledge gain and protect the firm from potential knowledge-spillovers and hostility. Accordingly:

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The three before mentioned hypotheses are summarized in the following conceptual model:

Figure 1. Conceptual model

METHODOLOGY

3.1 Sample and data collection

In this chapter I will discuss the methodology of this study. Outlining the research design and method through which the hypotheses will be tested.

In this study a cross-sectional research design is used to examine the effect of state-ownership on the entry mode choice of their foreign affiliates (higher vs lower equity stake). In addition, this study examines the moderating effects of firms’ globalization versus regionalization strategy, and high vs low R&D intensity in the firms’ industry, on the relationship between state-ownership and foreign affiliate equity stake. Moreover, three control variables are included to the analysis; firm size, age, and performance. The sample for this study is based on the Fortune Global 500 firms as listed in 2015. In this annual ranking, the Fortune magazine publishes the top 500 firms worldwide based on their revenues. All these firms produce and/or distribute products and/or services across national borders (Rugman & Verbeke, 2004), and represent the firms that recorded the biggest revenues in 2014. This means that the data for this research is based on the fiscal year 2014. Although the majority of the world’s largest firms are traditional multinationals, the Fortune 500 dataset also contains 104 state-owned firms, that will most likely show different entry mode strategies. Moreover, the firms are geographically spread and come from different industries,

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which makes this a good sample to analyse the relationship between state-ownership and foreign market entry mode strategies.

The Fortune Global 500 firms are situated in 39 different countries. Ordered in size, originating from the United States (128 = 25.6%), followed by China (96 = 19.2%), Japan (54 = 10.8%) and France (31 = 6.2%). As for state-owned enterprises, the majority can be found in: China (67), followed by France (4) and Republic of Korea (4). The distribution of firms within the ten leading home countries is illustrated in table 1. The table distinguishes between state and private ownership, and therefor excludes the 17 firms that had missing data on this variable.

Table 1: Distribution of corporation's home country and type of ownership

FG500 POE’s SOMNE’s

Country Frequency % Frequency % Frequency % U.S. 128 25,6 126 32,2 1 1,0 China 96 19,2 19 5,0 67 64,4 Japan 54 10,8 53 14,0 1 1,0 France 31 6,2 26 6,9 4 3,8 Germany 28 5,6 26 6,9 1 1,0 Great Britain 28 5,6 26 6,9 2 1,9 Republic of Korea 17 3,4 13 3,4 4 3,8 Netherlands 13 2,6 12 3,2 1 1,0 Switzerland 12 2,4 12 3,2 0 0,0 Canada 11 2,2 11 2,9 0 0,0 Others 65 13,0 55 14,5 23 22,1 Total 500* 100,0 379 100,0 104 100,0

*Total missing data on state- versus private-ownership =17 firms, (500 – 17 = N 483)

The Bureau van Dijk’s Orbis database and the firms’ annual reports of 2014 were used as a primary data source to gather information on the Fortune Global 500 firms. Orbis has proven to be an appropriate method to gather firm-level data, as it is one of the most comprehensive and inter-temporal databases that contains detailed information on both private and public firms, all over the world (De Jong & Van Houten, 2014). For firm specific data, the firms’ annual reports were used. From these primary sources the following data is gathered: general data; on country of origin, founding year, major sector and industry, amount of employees and firm ownership (state or private). Financial data was gathered on ROA and turnover and assets per region. In addition, information was gathered on the firm’s affiliates; especially information on the parent company’s stake in the firm, is an important variable for this research. This information offers the possibility to analyse whether there are differences between state and private-owned firms and the variation of the stake in their foreign affiliates. From the dataset of 500 companies, firms with no information on crucial variables were

State- versus private-owned firms and their foreign entry mode strategies : a subsidiary-level investigation of the Fortune Global 500 companies