The ownership choice of SWFs and SOEs in cross-border acquisitions

The ownership choice of SWFs and SOEs

in cross-border acquisitions

Lisanne Droppers Student number: 10199152

Date: January 27th 2017

MSc Business Administration: International Management Master Thesis

University of Amsterdam Supervisor: Vittoria Scalera

1 Statement of originality

This document is written by Student Lisanne Droppers 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.

2 Abstract

State Owned Enterprises (SOEs) and Sovereign Wealth Funds (SWFs) have become big players in the global business environment when looking at their investments. Both are government-owned, but SOEs are commercially operating firms, while SWFs are behaving more like model investors (Backer, 2010). The amount of SOEs and SWFs has been on the rise (Götz & Jankowska, 2016) as well as the values of their investments (Bortolotti, Fotak, Megginson & Miracky, 2009; Sturesson, McIntyre & Jones, 2015). Having government-owned entities invest abroad has some governments worried about their national security (Bortolotti et al., 2009; Kimmitt, 2008). This study investigates the difference in ownership choice by SWFs and SOEs. Additional hypotheses are developed and tested for the influence of trade agreements and cultural distance. The findings are based on the quantitative analysis of a dataset consisting of 1158 SWF and SOE cross-border acquisitions, performed between 2008 and 2013. These show that SOEs are more likely to choose full over partial acquisitions than SWFs, until the moderating effect of Hofstede’s (1994) cultural distance uncertainty avoidance dimension is taken into account. The higher the cultural distance uncertainty avoidance, the more likely SOEs are to go for partial acquisitions, while SWFs are more likely to choose full ownership. Trade agreements and Hofstede’s (1994) cultural distance power distance dimension turn out not to moderate the ownership choice of SWFs and SOEs.

3 Table of contents

1. INTRODUCTION ..………..… 5

2. THEORETICAL FOUNDATIONS ..………. 8

2.1 Ownership Choice ……… 8

2.1.1 Transaction Cost Theory ………... 8

2.2 Sovereign Wealth Funds ………. 10

2.3 State-Owned Enterprises ………. 14

2.4 Trade Agreements ……….... 16

2.5 Cultural Distance ………. 18

2.5.1 Measuring cultural distance ……….. 20

3. HYPOTHESES DEVELOPMENT……….………... 22 4. METHODOLOGY……….. 30 4.1 Sample ………. 30 4.2 Data Collection ……… 31 4.3 Variables ……….. 33 4.3.1 Dependent Variable ……….. 33

4.3.2 Independent Variable (SWF/SOE) ………... 33

4.3.3 Moderator Variables ………. 33

4.3.5 Control Variables ……….. 35

4.4 Analytical Models ……… 37

4.5 Strengths and Limitations ……… 38

5. RESULTS ……...………..……… 39

6. DISCUSSION AND CONCLUSION .……… 48

6.1 Contributions to the literature ……….. 51

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6.3 Limitations and future research ………... 53

REFERENCES ……… 56

List of figures Figure 1: Conceptual model ……….. 29

Figure 2: Moderating effect of cultural distance uncertainty avoidance on the relationship between SWF/SOE and ownership choice ……… 45

List of tables Table 1: Number of cross-border acquisitions in the sample by year and split between SWF and SOE ………. 32

Table 2: Missing values ………. 39

Table 3: Descriptive statistics: means, standard deviations and correlations ……… 41

5 1. Introduction

Since January 2016, Sovereign Wealth Funds (SWFs) have overtaken private pension funds to become the second-largest group of investors in private equity. Despite their small number, they since then take up 17% of all capital committed to private equity. Hazem Ben-Gacem, head of corporate investment Europe at the private equity firm Investcorp, stated that SWFs will continue to be some of the largest investors. He sees a shift in their allocation from fixed income into private equity (Pritchard, 2016). Another big government-owned player on the global market is the State-Owned Enterprise (SOE). About 10% of the biggest global firms are SOEs and they have become a subject of policymaking concern, since they might act differently than non-SOEs. The triple role of the government as a regulator, regulation enforcer and owner of assets companies, and the fear of the influence of SOEs that some foreign governments have, might lead to distinct treatments for SOEs compared to private-owned firms (Büge, 2013).

SOEs and SWFs have thus both become big players on the global market. Even though the 2008 financial crisis brought heavy losses and negative publicity, the number of SWFs has been on the rise since then (Götz & Jankowska, 2016). Despite the slight decline in prices of commodities, the Foreign Direct Investment (FDI) performed by SWFs increased that year (Source: WIR). This is interesting, as a decline in commodity prices usually means a decline in SWF’s FDI as well. These numbers deserve some attention in particular because the privatization of the global economy in the 1980s and 1990s caused a decline in the number of SOEs and SWFs and their significance (Estrin, Hanousek, Kocenda & Svejnar, 2009). SOEs have accounted for around 11 percent of all global FDI flows in 2011, while they make up less than 1% of the population of firms that engage in FDI (The Economist, 2012). The revenues from SOE investments, have grown even more than the number of SOEs has grown between 2005 and 2014 (Sturesson, McIntyre & Jones, 2015). Büge (2013) mentioned that the

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size and amount of SOEs is concerning for foreign policy makers. Since SOEs are related to the government, they might act differently than regular Multinational Enterprises (MNEs) (Rudy, Miller & Wang, 2016). The growth that SWFs have gone through has foreign

governments worry about their national security as well (Kimmitt, 2008). When they acquire a high stake in a foreign company, foreign governments might be afraid that the government behind the SWF will meddle in the acquired company’s decision making (Kimmit, 2008). The co-existence of SWFs with other stakeholders might cause for friction as well (Aguilera, Capapé & Santiso, 2016). In this study, the focus therefore lies on ownership choice in cross-border acquisitions by SWFs and SOEs. A distinction is made between partial and full

acquisitions. It is important to find out what the determinants of SOE and SWF ownership choice are, so conclusions can be drawn on their motivations and behavior.

A factor that could influence the ownership choice of SOEs and SWFs is trade agreements. Previous studies have paid attention to the influence of these trade agreements on FDI strategies of firms and have confirmed that trade agreements affect these strategies (Eigengreen & Irwin, 1998; Büthe & Milner, 2008; Banalieva, Gregg & Sarathy, 2010; Perera, 2014). Less is known about the influence of trade agreements on the investment strategies of SWFs and SOEs, specifically their ownership choices. Trade agreements

between countries are suggested to influence the investment behavior of both SWFs (Murtinu & Scalera, 2016) and SOEs (Shi, Hoskisson & Zhang, 2016). The concept of isomorphism has been used by Perera (2014) to explain the relation between trade agreements and firms’ behavior, as it influences the legitimacy of a firm. Contractor, Lahiri, Elango and Kundu (2014) explain the relationship between trade agreements and ownership choice when

acquiring equity by both the concept of isomorphism and the institutio nal environment. They add that cultural distance affects this relationship too. Other studies have proven that cultural distance can affect FDI decisions (Megginson, You and Han, 2013; Ionascu, Meyer & Estrin,

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2004), and even ownership choice specifically (Contractor et al., 2014). Cultural distance will therefore be incorporated in this study as a possible moderator.

In this study, the difference between SWFs and SOEs’ ownership choice in cross-border acquisitions is investigated. The moderating effects of trade agreements and cultural distance on this relationship will be taken into account. The defined research question for this study is therefore:

RQ: How do Bilateral Trade Agreements and Cultural Distance influence the ownership choice in FDI of SWFs and SOEs, and is there a difference between the two?

This research question will be answered by the quantitative analysis of a dataset containing data on 1158 cross-border acquisitions performed by SWFs and SOEs between 2008 and 2013. The analysis will be controlled for corruption perception in the host and home country, common language, geographic distance, GDP per capita, country, industry and year

The main contributions of this study lie in extending the existing literature on SOEs and SWFs behavior in cross-border investments and it will therefore have an explanatory nature. The clarification of the differences in their ownership choice and the moderating influence of trade agreements and cultural distance will help these entities in their strategy development. Additionally, knowing more about the ownership choice of SWFs and SOEs and the factors influencing that decision could help foreign governments in their policy making when wanting to control the foreign SWF and SOE investments in their country.

The rest of the thesis will be organized as follows. Section 2 will discuss literature on ownership choice, SWFs, SOEs, trade agreements and cultural distance. Section 3 develops the theoretical framework and hypotheses. Section 4 describes the data and methodology.

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Section 5 shows the results and section 6 gives a conclusion and discusses this study’s results, limitations, managerial and policy implications and gives directions for future research.

2. Theoretical foundations

2.1 Ownership Choice

In this study, the focus lies on the decision of Ownership Choice in acquisitions as the dependent variable. Contractor et al. (2014) point out that the difference between partial or full acquisitions has not received much attention in previous research. It has been missing in most previous studies (Chen, 2008) and the partial acquisition itself has even been named an overlooked entry mode (Jakobsen & Meyer, 2007). Contractor et al. (2014) emphasize that Ownership Choice in acquisitions in their study is about the acquisitions of already existing companies, even when the acquisition is partial. They define an acquisition as partial up until when 99% of the equity is bought and full acquisition means 100% of the equity is bought. There are different motives for the choice between a full or partial acquisition. According to Chen’s (2008) study concerning MNEs, firms choose to acquire full equity to avoid the management problems that belong to co-ownership. On the other hand, partial ownership can minimize capital commitments and investment risk.

2.1.1 Transaction Cost Theory

Zhao, Luo and Suh (2004) state that important aspects of ownership decisions are: the amount of resource commitment necessary in the foreign market, investment risk involved and organizational control over foreign operations. These stand at the start of the most critical decisions in international expansion. Acquiring a foreign company, either fully or partially, does not come without trouble. Firms that are available for sale might be lemons and in bad shape, and firms that are in a good condition probably have a higher price than they are worth. This brings extra costs and the need for thorough screening before the acquisition, to prevent

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making a bad decision with all its consequences (Chen, 2008). Indeed, according to

Contractor et al. (2014), incorrect ownership choice can lead to a mismatch between resource commitment and risk, inefficient integration of the target firm and less than desired rent appropriation.

The underlying theory is the Transaction Cost Theory (Zhao et al., 2004). Rugman and Verbeke (2005) explain the Transaction Cost Theory as addressing three main issues. When considering internationalization, management should first decide the boundaries of the firm and make a decision on where and how to internationalize: the geographical scope and entry mode choice. Then, the choice of interface with the external environment: do you manage relationships with host-country customers and suppliers the same as in the home country or do you adapt to the local environment? Third, managers must decide how to design the internal network, the management of the network of subsidiaries. These decisions should diminish the influence of contractual hazards coming forth from bounded rationality (scarcity of the mind) and bounded reliability (scarcity of resources). Contractual hazards stem from the presence of nation-state borders, barriers of time and space, economic differences and institutional

differences. These might lead to incomplete and farsighted contracts (Rugman & Verbeke, 2005).

The choice between full or partial ownership belongs to the first Transaction Cost Theory issue that Rugman and Verbeke (2005) describe, specifically: the how to enter part of the issue. According to Zhao et al. (2004) this decision is influenced by the core attributes of a transaction, which are internal and external uncertainty (bounded rationality) and asset specificity (bounded reliability), which includes the risk on free-riding of other firms on knowledge and other intangible assets (Zhao et al., 2004). External uncertainty entails the inability of a firm to predict the future, internal uncertainty means the inability to assess a

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partner firm’s performance. A proxy for external uncertainty would be cultural distance, as firms might not be able to react to environmental changes because of unfamiliarity with that environment. Internal uncertainty can be measured by using experience in the host-country, assuming that more experience leads to more knowledge (Ruiz-Moreno, Mas-Ruiz, & Nicolau-Gonzálbez, 2007). Firms lacking experience in a host-country will be resistant to (aggressive) full acquisitions because of higher risk, and therefore probably choose partial ownership (Zhao et al., 2004). Asset specificity concerns a firm’s resources that reflect its ability to differentiate its strategy and products. For example intangible assets like knowledge and information. Though, these could be subject to maladaptation and opportunism when choosing to acquire businesses abroad (Hennart, 1988). Adding the free-riding danger of outsiders on a firm’s knowledge, firms will choose full acquisitions over partial ones when wanting to protect those assets (Chang & Rosenzweig, 2001). In this study, we focus on the external uncertainty and asset specificity, as explained later on.

2.2 Sovereign Wealth Funds

SWFs are defined as investment funds owned by sovereign governments or entities (Knill, Lee & Mauck, 2012) and are mainly funded by foreign exchange reserves. Since about two decades ago they started to become more visible and more aggressive in their global

investment patterns (Backer, 2010). SWFs primarily have 3 objectives: being a source of capital for future generations, stabilizing the economy by reducing the volatility of

government revenues and SWFs can serve as holding companies, in which the government places its strategic investments (Bernstein, Lerner & Schoar, 2013). Generally, SWFs fall into two categories according to the source of their assets: commodity or non-commodity.

Commodity SWFs are funded by commodity exports that are either taxed or owned by the government. Due to the rise in commodity prices, many funds are now fulfilling the objective

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of being a source of capital for future generations. Non-commodity SWFs are usually established for the purpose of investing the excess foreign exchange reserves, which have increased through exchange-rate interventions (Kimmitt, 2008).

Collectively, SWFs invest higher amounts of money into stocks than any other single entity in the world, except for the United States Government (Bortolotti, Fotak, Megginson &

Miracky, 2009). Not only do they invest more money than other entities, they also make larger and riskier investments, for example in telecommunication and banking sectors. Furthermore, SWFs almost always invest by purchasing stocks directly from public firms through friendly transactions. SWFs often purchase such large amounts of stocks that they become blockholders of those firms, blockholders are entities holding at least 5% of a firm’s outstanding shares (Heflin & Shaw, 2000), which potentially gives them the opportunity to actively play a role in their target’s corporate governance (Bortolotti et al., 2009), an issue marked as highly concerning by Kimmitt (2008). The American judiciary Louis Ligget expressed this fear by saying: “Through size, corporations, once merely an efficient tool employed by individuals in the conduct of private business, have become an institution, an institution which has brought such concentration of economic power that so-called private corporations are sometimes able to dominate the state.” (Reed, 2009).

Though, unlike before, SWFs seem to have taken on a more economic than political nature when looking at their investments. Being able to freely invest in other countries through the vehicle of a SWF enables governments to expand their market power (Backer, 2010). Indeed, where SWFs previously mainly invested in national treasury securities and bonds, they now invest in private equity. Where capital used to be recycled without any economic or political disruption, SWFs now deciding to invest in private equity does have economic and political consequences (Gilson & Milhaupt, 2007). Megginson, You and Han (2013) looked into the

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investment motives of SWFs. They compared the investment facilitation hypothesis, which posits that SWFs have purely commercial objectives and facilitate cross-border corporate investment, with the political influence hypothesis, which posits that SWFs invest abroad because they have political objectives. Their study confirms the investment facilitation hypothesis, and thus that SWFs invest abroad for purely economic objectives. Aguilera et al. (2016) also find that SWFs with a financial motive seem to invest abroad, while SWFs with financial and strategic goals prefer to invest in the home country. Additionally, they argue that SWFs adopt a unique kind of state governance, where they are the owners of private equity who cannot exercise sovereign regulatory or supervisory powers in the equity that they own. Important to keep in mind is that Johan, Knill and Mauck (2013) show that even though SWFs have purely economic objectives, being owned by the government still leads to different investment patterns for SWFs compared to those of similar institutional investors. Examples are that they do not seek investor protection in countries that provide strong protection by investing in private equity there. Furthermore, political relations between the home- and host country influence the probability that SWFs will invest in private equity over public equity (Johan et al., 2013).

Underlying the difference between SWFs and other investing entities as described above is the opaque nature of SWFs (Johan et al., 2013). This opaqueness stems from the close connection of the state’s economic activities and their political objectives (Backer, 2010). It could be a reason for host-country actors to fear the investments of these state-owned funds, because of the threat to national security in the host country (Kimmitt, 2008). This fear arises from the ‘liability of sovereignness’ or the liability of being government-related (Aguilera et al., 2016). Even though scholars have proven that SWFs’ investment choices are mostly driven by economic motivations over political objectives, this fear still exists because of the opaqueness of SWFs (Megginson et al., 2013),.

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Johan et al. (2013) find that SWFs often decide to invest in private equity over public equity when engaging in FDI. On one hand this has its benefits for the SWFs. Equity investments diminish trade surpluses and reduce the cost of capital, add liquidity where it might be greatly needed and are more stable compared to investments in debt. On the other hand, having SWFs invest in private equity has its downsides. Kimmitt (2008) labels this as a critical issue in SWF investment. Having SWFs connected to the government that are investing in private equity could lead to those SWFs taking active control of private firms. This could endanger the national security in the target country, as the interests of a foreign government may differ from those of an ordinary shareholder. Say, using their influence on portfolio’s companies to secure technology, gaining access to natural resources or improve the competitive position for domestic companies (Gilson & Milhaupt, 2007). Kimmitt (2008) gives the example of a Chinese SWF attempting to acquire a U.S. oil company, which the U.S. blocked because they feared that the acquisition would endanger the national security. Looking at the relationship of the U.S. with not only China, but also Russia and the OPEC countries, having these countries acquire companies on the U.S. market could give them the possibility to exert financial

leverage to achieve political goals (Cohen, 2009). The challenge for governments is to control these acquisitions without limiting the benefits of an open economy. Non-national-security related issues are the potential of perceived or unfair competitive advantages compared to the private sector and the fact that the U.S. economy for example is built on the belief that private firms are more efficient in the allocation of capital than governments (Kimmitt, 2008).

Aguilera et al. (2016) differentiate between financial and strategic investment motives. SWFs with a financial motive operate similar to other institutional investors, investing in global, diversified portfolios to maximize their long-term returns and at an acceptable risk level. Their main challenge is coexisting with other non-governmental shareholders who might have other interests in the firm, illustrating the classic principal-agent problem. SWFs with a

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strategic motive invest to add sovereign value and mostly engage in national investments. They are interested in learning and acquiring new capabilities, which are achieved through alliances and joint ventures with leading international companies. Though, SWFs with an objective other than just financial often seem to engage in full acquisitions of private companies, to maximize control and minimize the need for disclosure, confirming the findings of Johan et al. (2013), who found that SWFs primarily engage in the acquisition of private equity. SWFs often also seek to develop a long-term relationship with the target country according to Aguilera et al. (2016). They note that it is important to keep in mind that many of these investments result in a win-win situation for both home- and target country. They conclude that there still is little known about the challenges these governmental investment vehicles face and the strategic capabilities they possess. Additionally, they

uncover that SWFs have introduced a new way of understanding the relationship between the private sector and the state. Shareholder activism is used by SWFs to overcome the liability of sovereignness they face (because of being government-related), primarily by showing their financial goals to signal transparency. This means that they actively exercise their voting rights and demand effective corporate governance in the firms that they have invested in, showing they have economic objectives over political ones. It should be made clear that a SWF is not some kind of SOE, even though their functionality is sometimes seen as similar (Reed, 2009).

2.3 State-Owned Enterprises

Next to the SWF, the other government-related entity discussed in this study is the SOE. An SOE can be defined as an enterprise that is owned for a 100 percent by the government or partially government owned, which are sometimes referred to as Mixed-Owned Enterprises (MOEs). MOEs are part government-owned and part private-owned (Rudy et al., 2016). In the past, SOEs have mostly operated in their home country. Nowadays, they engage more and

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more in cross-border activities. This has private enterprises compete with SOEs not only in their domestic market, but also internationally (Kowalski, Büge & Sztajerowska & Engeland, 2013). Just like MNEs, SOEs are commercially oriented firms (Backer, 2010). Underlying the difference between MNEs and SOEs are the political motives of SOEs that influence their behavior, which, among other things, is due to their long-term objectives and the political relationships behind the government that owns the SOE (Rudy et al., 2016). This is why the opposition they face in host-countries (when engaging in FDI) might differ from the

opposition non-government owned firms face, being one of the big challenges that SOEs have to deal with when internationalizing (Shi et al., 2016). This opposition could be the result of the aforementioned liability of sovereignness too, which SWFs encounter when engaging in FDI (Aguilera et al., 2016).

Kowalski et al. (2013) state that one of the motives for SOEs to go abroad is to acquire know-how and proprietary technologies abroad in order to transfer them back to the home country. Rudy et al. (2016) also find that SOEs primarily engage in FDI that leads to Firm specific Advantage (FSA) flows back to the home country. An FSA can be defined as a unique capability proprietary to the organization (Rugman & Oh, 2008). These advantages can be both location-bound FSAs, which are specific to a location, meaning that a firm will not be able to transfer the FSAs back to the home country, and non-location bound FSAs, which can be transferred to other locations (Rugman & Verbeke, 1992). To encourage SOEs to expand into international markets and help them outcompete other players in foreign markets, governments can provide a number of advantages and privileges. Among them are subsidies, concessionary financing and state-backed guarantees or information advantages. These can lead to a competitive advantage for SOEs over non-government owned entities and can be perceived as unfair by those entities (Kowalski et al., 2013). Nevertheless, the state cannot operate the SOE itself and needs to delegate the power and control to managers. This could

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lead to conflicting goals of the government and the operating managers, causing for agency problems like the moral hazard and the managerial slacks and discretion (Lin, Cai & Li, 1998). Other motives for SOEs to internationalize are to pursue economies of scale or profit from tax benefits (Kowalski et al., 2013), which are more likely to be pursued by the managers themselves. Nevertheless, political relations have proved to influence SOEs’ internationalization decisions. Because of the interstate cooperation or conflicts that political leaders are engaged in, regional institutions are becoming increasingly important in

international politics (Shi et al., 2016). Choices of entry mode might also be under the influence of state control at the macro level (Liang, Ren & Sun, 2015). It means that

government-economic policy takes into account international issues like regional free trade agreements (Backer, 2010). Trade agreements may be agreed upon to ensure the balance of trade flows when countries develop bilateral trade agreements (Rudy et al., 2016).

2.4 Trade Agreements

Worth (1998) briefly describes the history of trade agreements. It all started with a

multilateral trade agreement, an agreement between at least three countries, called the General Agreement on Tariffs and Trade (GATT), now known as the World Trade Organization (WTO) (Büthe & Milner, 2008). Later on, countries started to develop separate regional agreements, such as the European Union (EU) and the North American Free Trade Agreement (NAFTA) that we know nowadays. Büthe and Milner (2008) distinguish multilateral trade agreements, like the WTO, and preferential trade agreements, which assure better investment circumstances to those who signed the agreement versus those who did not. Then there are bilateral trade agreements, made between two countries. An example is the Canada-US FTA, which caused a rapid increase in manufacturers’ trading between the two countries

(Eichengreen & Irwin, 1988). According to Medvedev (2012), the liberation of trade as a consequence of Trade Agreements leads to a significant increase in FDI inflow for

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participants. The Canada-US FTA for example leads to an FDI increase of 11% when the Canadian tariffs are reduced by 1% (Breinlich, 2008). This study will focus on bilateral trade agreements.

Earlier studies have already shown a clear connection between trade agreements and foreign market entry strategies (Banalieva et al., 2010). Even though trade agreements are focused on trade specifically, they do have an effect on FDI patterns and volumes too (Worth, 1998). Argawal (1994) states that trade is usually correlated with FDI investments. Benito, Grøgaard and Narula (2003) add that being a member of a regional trade agreement (the European Union in their study’s case) influences not just the initial entry decision, but also the scope of the investment. MacDermott (2007) compared investment levels from countries that are a member of a trade agreement with countries that are not. Results showed that FDI flows into member countries were higher. Even though the relationship between trade agreements and FDI flows has been proven, there are multiple factors that might influence this relationship. Banalieva et al. (2010) for example found that membership of a trade agreement generally propels the global expansion of firms in their study into emerging market MNEs. This relationship is increased by regional trade agreement experience and diversity, but decreased by the potential market size. Interestingly, the relationship found in their study does not exist for MNEs based in developed regions. Argawal (1994) studied FDI flows into Eastern European countries that are a member of the Europe agreements. The positive relationship between trade agreements and FDI was confirmed, but mentioned is that relative cost of labor and realistic exchange rates as well as the demand created by economic growth could impact this relationship. This impact is also addressed by Raff (2004), who found that free trade agreements lead to an increase in FDI, but only when the production costs are not too large and not too small. Concluded is that trade agreements will not always lead to more FDI, but never to FDI destruction.

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Perera (2014) further explored the relationship between trade agreements and FDI through a meta-analysis of 50 articles published on this topic. Based on this meta-analysis, Perera (2014) developed a conceptual model where trade agreements influence the regulatory environment, influencing the institutional conditions and transitions, which affect the entry strategy of firms: the where, when and how to enter. Underlying this relationship between trade agreements, the institutional condition and entry strategy is the presumption that firms are always in pursuit of legitimacy. When a firm has a legitimate status, this means it is socially acceptable and credible in a certain market, meaning the acceptance of an

organization by its external environment (Chan, Makino & Isobe, 2006). This legitimacy can be gained by isomorphism. Isomorphism eventually causes for firms to become more similar, due to coercive, normative and mimetic pressures (DiMaggio & Powell, 1983). Indeed, Deephouse (1996) also found that strategic behavior deviating from the norm is related to a negative evaluation of the organization by regulators and the general public. Coercive pressures stem from legal mandates or the dependency on certain firms, mimetic pressures push firms to copy other successful firms and normative pressures are those from other firms or activist groups (DiMaggio & Powell, 1983). This subdivision is similar to Scott’s (1995) regulative, normative and cognitive institutional pillars (Perera, 2014). Scott (1995) describes institutions as ‘regulative, cognitive and normative structures and activities that provide stability and meaning to social behavior’ (p. 33). The regulatory pillar stands for the rules that govern economic activity, the cognitive pillar for the implicit assumptions that surround economic activities and the normative pillar for societal values and belief. Trade agreements change the rules that govern economic activity, and therefore the limits of the institutional conditions that firms work within, extending the possibilities to gain social acceptance and credibility (Perera, 2014).

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2.5 Cultural Distance

As explained above, institutions have an influence on a firm’s entry strategy. Perera (2014) adds that culture too is an important concept influencing the formal institutional environment. Cultural distance refers to the differences in attitudes toward authority, trust, individuality, and importance of work and family (Berry et al. 2010). It can affect FDI decisions

(Megginson et al., 2013; Ionascu, Meyer & Estrin, 2004), and even ownership choice specifically (Contractor et al., 2014). According to Contractor et al. (2014), high cultural distance increases the uncertainties and risks because of unfamiliarity with social routines and implicit assumptions. This makes it more difficult to transfer firm routines, procedures and management practices. Furthermore, the challenges to successfully establish, monitor and sustain relationships with local managers and stakeholders are much larger in a high culturally distant host-country opposed to one with low cultural distance. Megginson et al. (2013) indeed found that SWFs invest more in countries with similar cultures. Reed (2009) explained the choice for investments in countries with a similar culture by SWFs as opportunism. They invest in countries with similar customs and beliefs, but in different industries to diversify their investment portfolio, concluding that investing in countries with similar cultures does not mean that SWFs do not have profit-maximizing objectives as sometimes is critically argued. Contrasting, Chhaochharia and Laeven (2008) find that the location choice of SWFs for FDI is only partly driven by cultural differences, and in particular differences in religion. This is not the case for all SWFs. An example is the Norwegian SWF, which seems to prefer countries that are physically nearby over countries with a similar culture. Furthermore, they seem to have a preference for countries with high industrial diversification and a low risk of expropriation.

2.5.1 Measuring cultural distance

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Individualism - Collectivism, Masculinity - Femininity, Uncertainty Avoidance and Long-term – Short-Long-term orientation. Power distance is the degree to which less powerful members of a society accept and expect that power is distributed unequally. In a highly individual society, individuals are expected to take care of only themselves and their immediate families, an ‘I society’, while in a collectivist society everyone is looked after with an unquestioning loyalty, a ‘we society’. In a masculine society there is more of a preference for achievement, heroism, assertiveness and material rewards for success compared to a feminist society, which stands for cooperation, modesty, caring for the weak and quality of life. It is also described as a ‘tough versus tender’ culture. The uncertainty avoidance dimension measures the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity, and evolves around the question: ‘can a society deal with the fact that the future will never be known?’. Then long-term versus short-term orientation, which is actually the difference between societies in how they deal with the challenges of the past and future. Long-term orientation means that traditions and norms are respected, while short-term orientation leads to thrift and efforts in modern education as a way to prepare for the future.

These cultural distance dimensions could explain certain differences in countries that are culturally distant. For example routines and customs related to innovation and inventiveness for example could vary significantly for a higher or lower degree of

individualism-collectivism. This also goes for the degree of entrepreneurship. Furthermore, the uncertainty-avoidance and power-distance dimensions cause for differences in decision- making practices and of course in power and control structures (Morosini, Shane & Singh, 1988).

Studies into the effects of cultural distance on the ownership choice in FDI have showed different results when using these cultural dimensions. Padmanabhan and Cho (1996) for example found that larger cultural distance encourages full ownership, while Brouthers and

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Brouthers’ (2001) results showed that larger cultural distance encourages joint ownership. An entirely different result came from the study of Erramilli (1996), his results showed that cultural distance has no significant effect on the ownership choice at all. Berry, Guillén and Zhou (2010) argue these contradictory results are due to an incorrect use of Hofstede’s (1994) cultural dimensions. Additional dimensions of distance should be taken into account when using his dimensions, and not only culture, like economic distance and physical distance.

Regarding the measurement of cultural distance, Kim and Gray (2009) looked into the best way of measuring cultural distance. They find that the Kogut and Singh’s (1988) distance construct, a measurement that combines all of Hofstede’s (1984) dimensions into an aggregate index, was robust for Hofstede’s original framework, as well as the Schwarz and GLOBE Frameworks that have been developed as an alternative for Hofstede’s cultural dimensions. They therefore argue in favor of a combined use of the all dimensions.

Nevertheless, many scholars advocate for a separate use of Hofstede’s cultural dimensions as an alternative and have used them separately in their research (Tse, Pan & Au, 1997; Shane, 1992; Luo, 2003; Contractor et al., 2014). Tse, Pan and Au (1997) confirmed the importance of Hofstede’s power distance measure in entry mode choice. Shane (1992) used the

dimensions separately in his research into licensing over FDI and Luo (2003) used the cultural dimensions separately as control variables. Contractor et al. (2014) use only the cultural dimension Uncertainty Avoidance in their research into acquisition ownership choice. This is in line with Ajzen and Fishbein’s (1980) argument that outcomes can be best predicted by certain attributes that specifically relate to the research question. The use of a cultural

dimension that fits your research question best, or applying them separately in your analysis is therefore better than combining all the dimensions into one aggregate index. Contractor et al. (2014) chose for the Uncertainty Avoidance dimension in their study because acquisitions in

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foreign settings are risky due to the uncertainty arising from unfamiliarity with the environment. They therefore see this dimension as most relevant to their study.

3. Hypotheses Development

In this study, the difference in Ownership Choice between SWFs and SOEs is examined. The moderating effects of Trade Agreements and Cultural Distance are taken into account. A difference in Ownership Choice is expected because of the differences in characteristics between SWFs and SOEs.

SOEs are perceived as both political and economic entities, just like SWFs. Though, an important difference between the two is that SOEs are commercially operating firms and SWFs are investment funds operating to meet national policy objectives regarding financial investments (Backer, 2010). According to Rose and Epstein (2009), SOEs therefore present more challenging issues than SWFs do, and Backer (2010) states that SOEs generally raise more concerns about their investments in the host country. An example is that a SOE can secure strategic concessions from a foreign company when entering a foreign market, through a joint venture (Rose & Epstein, 2009), while a SWF cannot. This represents a more

controlling interest of SOEs in FDI, unlike SWFs, who in the past have consistently just behaved as model investors and therefore do not seem to have such a controlling interest (Backer, 2010). Another difference is that the SWFs’ FDI levels are much smaller than you would expect for an entity with the enormous government funds that they have available. In contrast, SOEs account for 11% of all FDI flows, while their presence in the market is nowhere near that percentage (The Economist, 2012).

Reed (2009) states that there are no examples of SWFs and SOEs behaving the same way when engaging in FDI, and that perhaps this difference emanates from many SOEs having close ties with manipulative governments or the intermingling of government management

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with the SOE management. According to his research, this happens to a lesser extent with SWFs, as they are often managed by professional third parties. At the time of his research 40% of the SWFs’ assets were managed by third parties (Reed, 2009). The management problem is confirmed by Götz and Jankowska (2016) who find that SOEs indeed have a more complex ownership structure than SWFs do, and therefore are less well managed. They attribute this to SWFs having a more profit-oriented objective. Though, a challenge for SWFs is their opaque nature, where SOEs do not have transparency issues to that extent. The fact that SWFs engaging in FDI in private equity mostly have a financial objective is confirmed by Aguilera et al. (2016). They distinguish two types of SWFs that invest in private equity, of which the ones with a strategic objective mostly invest in their own country and the ones with financial objectives mostly invest abroad.

SOEs generally have a more strategic objective. They usually engage in FDI that leads to FSA flows back to the home country (Rudy et al., 2016). Of course, FSA flows are not only

towards the home country, but they could also spill over to the host country. According to Zhao et al. (2004), the ownership choice is partly determined by asset specificity. This includes the risk on free-riding of other firms on knowledge and other intangible assets. This risk is bigger for SOEs, since they have FSAs that could spill over which, in general, SWFs do not have. Furthermore, SOEs have proven to desire a more controlling interest when engaging in FDI (Backer, 2010). To maximize the control, and minimize the need for disclosure, SWFs with a strategic motive often choose to engage in full acquisitions over partial ones. Though, SWFs with a strategic objective have proven to mostly invest in their home country (Aguilera et al., 2016). Since SOEs have a more strategic objective, this might be applicable to them as well. Therefore, it is expected that SOEs are more likely to go for full acquisitions over partial ones, to protect their assets and to maximize control. SWFs on the other hand have no such controlling interest and smaller FDI levels than you would expect

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from funds with such large resources (Backer, 2010). SWFs are also more opaque than SOEs. This opaqueness leads to a higher fear of endangerment of the National Security in the target country (Kimmitt, 2008). Tax reforms, in for example the United States, encourage low risk investments for SWFs (Aguilera et al., 2016). Policy is thus often designed to demotivate SWFs to undertake large, risky acquisitions. Hypothesized is therefore that SWFs are more likely to choose partial acquisitions over full acquisitions compared to SOEs.

H1. When engaging in FDI, SOEs will more likely choose full acquisitions over partial acquisitions compared to SWFs, who will more likely choose partial acquisitions over full acquisitions.

In the theoretical framework is mentioned that trade agreements change the institutional environment for firms to invest in, mostly in a favorable way for firms (Perera, 2014).

Generally, a difference between the institutions in the acquirer and target country has an effect on the strategic positioning of the firm in the target country (Xie, Zhao, Xie & Arnold, 2011). Research showed that bilateral trade is significantly higher when a Trade Agreement is in place, to such an extent that it could even double the trade volumes (Baier & Bergstrand, 2007). An example is the Auto Pact of 1965 between Canada and the US, which very rapidly increased the trade of manufacturers between these two countries (Eichengreen & Irwin, 1988). Megginson et al. (2013) found that when there are higher volumes of bilateral trade between the home and host country, the value of SWF investments is higher. Suggested by Shi et al. (2016) is that bilateral trade agreements might lower the barriers for SOEs to invest abroad. They see trade agreements as regional institutions that are becoming important players in international politics. When there is a trade agreement in place, SOEs from countries that are taking part in such an agreement could face lower levels of opposition to their investments in the host country. According to Büthe and Milner (2008), international

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trade agreements and preferential trade agreements provide mechanisms to countries for making commitments to foreign investors about the treatment of their assets. Besides the economic effects, they could cause political and informational effects by reassuring investors that the political policies relevant to them are not going to be changed in ways that could reduce the value of the investment. This leads to an increase in FDI. Especially relevant is the finding that trade agreements lowering trade barriers are increasing the economic incentives for vertical FDI, but decreasing the incentives for horizontal FDI. In horizontal FDI, the subsidiaries of a firm produce finished products that are sold in their domestic market. Transportation costs, tariff- and nontariff barriers are incentives for horizontal FDI (Caves, 1996). When performing vertical FDI, subsidiaries of a firm are responsible for different parts of the production process, which is therefore geographically separated based on local

advantages. Incentives for this kind of FDI are therefore based on differences in factor endowments (Gereffi & Korzeniewicz, 1994). For vertical FDI, trade is thus necessary to get all the parts in one place for resembling the final product. Trade agreements reduce trade barriers, so this explains why trade agreements encourage vertical FDI. As SOEs are commercially operating firms and SWFs are more behaving as model investors (Backer, 2010), one may assume that SOEs are more interested in vertical FDI than SWFs would be. Investments alone do not include trading goods and services. We therefore expect that when there is a bilateral trade agreement in place, this will have a positively moderating influe nce on the ownership choice of SOEs, meaning that they will likely choose full ownership over partial ownership. The opposite is expected for SWFs, since trade agreements have a negative effect on horizontal investments (Büthe & Milner, 2008). This means that when there is a trade agreement in place, SWFs will more likely choose partial ownership over full ownership when investing abroad.

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H2. There is a positive interaction between trade agreements and ownership choice, such that when there is a trade agreement in place, SOEs will more likely go for full acquisitions over partial ones compared to SWFs.

As explained in the literature review, Transaction Cost Theory predicts that external uncertainty is one of the major factors affecting the ownership choice. A way of measuring external uncertainty is the cultural distance between the firm’s home and host country (Zhao et al., 2004). According to López-Duarte and García-Canal’s (2004) study, the less similar countries are, the more likely firms will choose for a partial acquisition over a full acquisition. Interesting is that they look at partial acquisitions as a combination of joint ventures and full acquisitions. Like full acquisitions, they acquire equity of an existing firm and like joint ventures, they have to share the control and profits of the foreign unit with other shareholders. The explanation for the result of their study is that when the dissimilarity between cultures goes up, this means the information asymmetry, integration problems and the perceived country risk go up as well. In that case, a local partnership is preferential to gain access to knowledge and assets. López Duarte and Vidal-Suárez (2010), who look into the different entry modes joint ventures and wholly owned subsidiaries of MNEs, the higher the cultural distance is, the higher the negotiation costs will be. They argue that on one side, a joint venture may be preferential in a culturally distant country (or with high political risk) because of the access to local knowledge and contacts. On the other, there is the problem of higher transaction costs when cooperating with a local partner and thus full ownership and a wholly owned subsidiary could be preferred. They find that joint ventures and therefore shared ownership entry modes are preferential over wholly owned subsidiaries when investing abroad and both cultural distance and political risk are high. Though, such a preference only exists when there are no language barriers. Thus, when speaking different languages,

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ownership entry mode. Similar to López Duarte and Vidal-Suárez’s (2010) study, López Duarte and García-Canal (2004) also found a conditional outcome. When a firm has more competitive advantages, the investing firm is more concerned about protecting the assets causing that advantage and will therefore prefer a full acquisition over a partial one.

Cultural distance in this study will be measured by Hofstede’s cultural dimensions, which have been explained in detail in the theoretical foundations. As Contractor et al. (2014) have pointed out and having taken a closer look at the individual dimensio ns, it seems that for ownership choice, the uncertainty avoidance and the power distance dimensions are most relevant. These dimensions previously have been used separately in various studies into firm’s FDI patterns (Tse et al., 1997; Pan, 2003; Tang, 2012; Contractor et al., 2014). The first cultural dimension, power distance, has been used as an isolated dimension by Tse et al. (1997). They found that firms from a country with high power distance want more control and will therefore acquire more equity than firms from a country with less power distance, which are more willing to share the power with an associate. Tang (2012) looked into the effects of the cultural dimensions on bilateral FDI levels. The more dissimilar the power distance levels in the home and host countries are, the more acculturative stress the investing firm will experience. This is explained by the leadership style that employees are accustomed to and the control or power the investing firm wants to have. Firms from countries with high power distance want to have more control and will thus prefer full acquisitions over partial ones (Tang, 2012). The acculturative stress that arises when the cultural distance power distance is high could lead to firms preferring full acquisitions over partial, to avoid a difference in leadership styles. This because different leadership styles could lead to higher transaction costs, which, according to López Duarte and Vidal-Suárez (2010), lead to firms choosing full acquisitions over partial ones. A positively moderating effect is thus expected of the cultural distance power distance dimension on the ownership choice of SWFs and SOEs. Since SOEs

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generally already have a more controlling interest in acquisitions (Backer, 2010) as opposed to SWFs, they are more likely to choose full acquisitions over partial ones. The positive effect of cultural distance power distance is therefore expected to be stronger for SOEs than for SWFs.

H3b. There is a positive interaction between cultural power distance avoidance and ownership choice, such that when there is a large cultural distance power distance, SOEs will more likely go for full acquisitions over partial ones compared to SWFs.

Pan (2003) investigated both the power distance and the uncertainty avoidance dimension. Firms from countries with a high power distance level engage more in FDI than firms from countries with a low power distance level. Contrastingly, firms from countries with a high uncertainty avoidance level engage less in FDI as opposed to firms from countries with a low level of uncertainty avoidance. Tse et al. (1997) paid attention to the uncertainty avoidance dimension too and confirm Pan’s (2003) finding on that dimension. The lower the country scores on uncertainty avoidance, the more risk firms from that country are willing to take and thus the more they engage in FDI and the more equity is acquired. Contractor et al. (2014) confirmed that a high uncertainty avoidance level is associated with a preference for a minority acquisition as opposed to a majority or full acquisition. The cultural distance uncertainty avoidance dimension reflects the question: ‘Can a society deal with the fact that the future will never be known?’ and that is in line with the external uncertainty that Zhao et al. (2004) describe in the Transaction Cost Theory as explained before. A firm might not be able to react to changes in the environment because of unfamiliarity with that environment when the difference between home and host country on cultural distance uncertainty avoidance is high. Access to the contacts and knowledge of a partner in such a different

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environment could diminish that uncertainty (López Duarte & Vidal-Suárez, 2010). Though, Tang (2012) found no significant effect for FDI flows into countries differing on the

uncertainty avoidance dimension. Do note that FDI flows are a different concept than ownership choice. Therefore, based on the aforementioned results of previous research and theory, a negatively moderating effect is expected for the cultural distance uncertainty

avoidance dimension. As hypothesized earlier in this study, SOEs will more likely choose full acquisitions as opposed to SWFs. Therefore, the expected negative influence of the cultural distance uncertainty avoidance dimension is hypothesized to be stronger for SWFs than SOEs.

H3b. There is a negative interaction between cultural distance uncertainty avoidance and ownership choice, such that when there is a large cultural distance uncertainty avoidance, SWFs will more likely go for partial acquisitions over full ones compared to SOEs.

The previously discussed hypotheses result in the conceptual model as shown in figure 1.

Figure 1: Conceptual model

SWF/SOE H1 Ownership Choice Cultural Distance Power Distance H3a Trade Agreements H2 (+) (-) (+) Cultural Distance Uncertainty Avoidance H3b (+)

30 4. Methodology

This study has a quantitative approach, which means that a dataset will be assessed

statistically to answer the proposed research question. The main contributions of this study lie in extending the existing literature on SOEs and SWFs behavior in cross-border investments and will therefore have an explanatory nature. Studied is the difference in ownership choice between SOEs and SWFs in FDI decisions when acquiring abroad, and the influence of bilateral trade agreements and cultural distance.

The dataset used by Murtinu and Scalera (2016) with data on SWFs will be adjusted for this study. Their dataset was used originally to assess whether the use of investment vehicles by SWFs is used as a signal of passive investment to access foreign markets. In their dataset you will find data on SWFs that acquired firms abroad, the parent and target company, how much was acquired, when and where. Their data on SWFs will be extended with data on SOEs, bilateral trade agreements, cultural distance and the control variables. This study will use a deductive approach, as we develop hypotheses derived from the theory available about FDI from SOEs and SWFs, to be able to confirm the difference in investment behavior between these entities. In this methodology section the sample is discussed first, then the data

collection, data assessment, validity and reliability and ended with the methodological model.

4.1 Sample

The sample is limited to acquisitions made in the time period from 2008 until 2013. A dataset on SWFs (Murtinu & Scalera, 2016) has to be extended with data on SOE acquisitions. The original SWF dataset contained data on SWF investments between 1 January 1997 to 31 December 2013. They have taken the 2007/2008 financial crisis into account as a dummy variable. After the crisis, SWFs have become one of the major funding sources for corporations, meaning that the value of private equity they acquired had raised to over 4

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trillion dollars (Bernstein et al., 2013). Not only SWFs, but SOEs too have experienced growth in their private equity investments after the financial crisis. This crisis crippled many private-owned companies, leading to SOEs being well positioned to acquire their assets because of their long-term perspective and ability to take on risky investments (due to being backed up by the government) (Rudy et al., 2016). The fact that both SWFs and SOEs were investing a lot in private equity after the financial crisis (Götz & Jankowska, 2016 makes 2008 an interesting stating point in time for the sample. As the data on SWFs goes until 31 December 2013, this is the end point for the data collected. Thus, the time span is 1 January 2008 until 31 December 2013. The data contains 1179 observations. The research question is answered by comparing the collected data on SWFs and SOEs.

4.2 Data Collection

The data collected for the dataset consists of secondary data, which means adjustments of the data might be necessary. To expand Murtinu and Scalera’s (2016) dataset on SWFs, data on cross-border acquisitions made between 2008 and 2013 was downloaded from Bureau van Dijk’s Zephyr. The selection criteria were: deal number, acquirer name, acquirer country, target name, target country, deal type, deal status, deal value, target BvD ID number, acquirer BvD ID number, announced date, completed date, acquirer global ultimate owner name, acquirer global ultimate owner BvD ID number, acquirer global ultimate owner country code, acquire global ultimate owner country code, target major sector, acquirer major sector, initial stake in percentages, acquired stake in percentages and final stake in percentages. This data had to be cleared, in order to remove all the non-SOE investments. This has been done by looking at the Global Ultimate Owner of the acquiring company, and if that owner was related to the government. Words that have been used to do this are: ‘state’, ‘government’, ‘region’, ‘province’ and country names. Furthermore, government websites contain information about the SOEs they own, for example the Chinese ‘Cherry’, which have been taken into account.

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After this selection, the observations that were actually SWFs have been removed from the data as well. Just like Murtina and Scalera (2016), the observations were removed that contained a blank space for completed date and have incomplete information about the name of the target company and geographical location and where the names of the acquirer

company or of the target company are "existing shareholders", "investors", "management", "private investors", "shareholders", "strategic investors", "consortium", "directors", "unnamed e-commerce group", "investment funds", "chemical joint venture", "undisclosed joint

venture"; and made by government-to-government joint ventures, e.g. Qatar and Abu Dhabi Investment Company (QADIC). Data on Trade Agreements was collected from the WTO website, looking at preferential trade agreements and regional trade agreements between acquirer and target countries. Data on Cultural Distance has been collected by looking them up for the countries included in the Zephyr dataset on Hofstede’s website. Data on the cultural dimensions of Power Distance and Uncertainty Avoidance are used as will be explained later on in this section. Table 1 provides a summary of the sample by year and split into

acquisitions made by SWFs and SOEs. The acquisitions in the sample involved 95 target countries, of which the United Kingdom accounted for the most acquisitions.

Table 1. Number of cross-border acquisitions in the sample by year and split between SWF and SOE

2008 2009 2010 2011 2012 2013 Total

SWF 62 54 50 41 70 60 337

SOE 158 114 125 114 132 178 821

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4.3 Variables

This section will pay attention to the way that the variables will be measured. First, the dependent variable Ownership Choice is discussed, then the independent variable SWF/SOE is elaborated upon, the way moderator the variables Trade Agreement and Cultural Distance are measurement is explained as well as the control variables that will be taken into account.

4.3.1 Dependent Variable

The dependent variable is ownership choice, that is, if the acquired equity stake is a partial or full acquisition. This is a dichotomous variable and is measured by looking at the percentage that has been acquired, like has been done in previous studies (Chen, 2008; Ruiz-Moreno et al., 2007). In this study, acquisitions are looked at as equity acquired of an already existing company. The acquisition is defined as partial when less than 100% is acquired (i.e. 0-99.99%) and full when 100% is acquired. The variable is measured by looking at the final stake acquired in percentages, as collected from Zephyr. Partial acquisitions get the value 0 and full acquisitions the value 1.

4.3.2 Independent Variable (SWF/SOE)

Whether the parent acquirer is a SOE or SWF is measured by a dichotomous variable. When an observation contains data on SWF acquisitions, the value 0 will be assigned to the variable and when the observation concerns data on acquisitions done by an SOE it will get the value 1.

4.3.3 Moderator Variables

In this study, two moderator variables taken into account: cultural distance and trade agreements.

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Cultural distance is measured by two of Hofstede’s Cultural Dimensions (1984), which are most relevant to the research question. The cultural dimensions have also been used isolated in previous studies (Contractor et al., 2014; Tse et al., 1997; Tang, 2012; Pan, 2003). Data on the cultural dimensions are collected from Hofstede’s website. For the observations that have either a home- or host country that is not included in Hofstede’s cultural dimensions (being: Armenia, Angola, Bulgaria, Bahrain, Bahamas, Bermuda, Congo, Côte d’Ivoire, Cameroon, Algeria, Jordan, Kenya, Kuwait, Cayman Islands, Kazakhstan, Sri Lanka, Liberia, Morocco, Monaco, Macao, Mauritius, Maldives, Mozambique, Niger, Oman, Papua New Guinea, Pakistan, Qatar, Romania, Rwanda, Seychelles, Sudan, Syria, Chad, Tunisia, Tanzania,

Ukraine, Uganda, Uzbekistan, Virgin Islands, Viet Nam and Zambia) these will be marked as missing. Kogut and Singh’s (1988) cultural index is a widely used approach to measure cultural distance (Imm, Anne Lee & Soutar, 2007). A similar equation is used to calculate the measure for cultural distance uncertainty avoidance and power distance, like has been done by Chari and Chang (2009).

𝐶𝐷(𝑈𝐴) =(UAa − UAt)

2

V_𝑢𝑎 𝐶𝐷(𝑃𝐷) =

(PDa − PDt)2 V_𝑝𝑑

Even though points of criticism have been made, like the one-company-approach argument that only IBM has been used as a company to identify the dimensions, or that Hofstede

assumes that culture is homogeneous in a country, there are arguments in support of the use of Hofstede’s dimensions to measure culture too. For example the fact that it makes it easy to compare countries, that his approach is relevant because there had not been any credible advice yet before he developed his cultural dimensions, that it was based upon a rigorous design with systematic data collection and coherent theory and lastly, that it is relatively accurate (Jones, 2007). The most important reason to use Hofstede’s dimensions in this study is that cultural differences between countries are compared, and Hofstede’s (1994) framework