Ownership characteristics and the degree of foreign equity
commitment by emerging market multinationals
By Vivianne de Bruine 11147474
June 24, 2016
MSc Business Administration: International Management Master Thesis
Supervisor: dr. Niccolò Pisani
STATEMENT OF ORIGINALITY
This document is written by student Vivianne de Bruine who declares to take full responsibility for the content of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
ABSTRACT
This thesis examines the effect of ownership characteristics on the degree of foreign equity commitment by emerging market multinational enterprises. More specifically, this research focuses on the effect of private- versus state ownership and the degree of internationality of shareholders of the firm. Furthermore, we investigate the moderating role of firm size on these relationships. Using a sample of India’s 100 biggest companies measured by turnover in 2014, we find that private ownership is negatively related to degree of foreign equity commitment. However, we also find that this negative relationship is weakened at a bigger firm size.
Keywords: Emerging Market, Emerging Market Multinational Enterprise, Private-owned Enterprise, State-owned Enterprise, Internationality of Shareholders, Foreign Equity Commitment
TABLE OF CONTENTS
1. INTRODUCTION 6
2. LITERATURE REVIEW 8
2.1 Internationalization Strategies 8
2.2 Emerging Markets 11
2.3 Emerging Market Multinational Enterprises 12
2.4 Internationalization of EM MNEs 13
2.5 Entry Mode Choice 16
2.6 Firm Ownership 19
2.7 Research Gap 21
3. HYPOTHESIS DEVELOPMENT 23
3.1 State Ownership and Foreign Equity Commitment 23 3.2 Degree of Internationality of Shareholders and Foreign Equity Commitment 24
3.3 The Moderating Effect of Firm Size 26
3.4 Conceptual Model 27
4. METHODS 28
4.1 Sample and Data Collection 28
4.2 Measures 29
Dependent variable 29
Independent variables 30
Moderating variable 30
Control variables 31
4.3 Statistical Analysis and Results 32
5. DISCUSSION 39
5.1 Academic Relevance 40
5.2 Managerial Implications 41
5.3 Limitations and Suggestions for Further Research 42
6. CONCLUSION 43
ACKNOWLEDGEMENT 45
LIST OF FIGURES AND TABLES
Figure 1. Conceptual model 28
Table 1. Descriptive statistics: means, standard deviations and correlations 36
Table 2. Results of regression 1: Private- versus state ownership, Degree of
foreign equity commitment, Firm size 37
Table 3. Results of regression 2: Degree of internationality of shareholders,
1. INTRODUCTION
While the majority of global foreign direct investment (FDI) is still done by multinational enterprises (MNE) from developed countries, emerging market (EM) MNEs are responsible for a significant share (Guillén & García-Canal, 2009; UNCTAD, 2016). Emerging economies have established themselves as key players in the world economy as recipients of inward FDI, but more recently also as outward investors. According to UNCTAD (2014), the amount of outward FDI from emerging markets had reached a level of over one-third of the total worldwide outward FDI flows in 2014, with a high contribution coming from the BRICS (Brazil, Russia, India, China and South Africa) countries. While for emerging markets in general FDI activities decreased over 2015, the BRICS countries still account for a significant share of the world’s total FDI flows and are expected to rise again in 2017 (UNCTAD, 2016). Hence, this proves the current relevance and importance of investigating what factors influence EM MNE foreign equity commitment.
Entry mode choice and therefore degree of foreign equity commitment is one of the most important choices a firm has to make when expanding internationally. Degree of foreign equity commitment choice has implications on resources required, control over foreign operations and investment risk (Zhao, Luo & Suh, 2004). Equity investment choice means the choice between establishing equity joint ventures and wholly owned subsidiaries (Pan & Tse, 2000). A joint venture is generally preferred when a firm is of smaller size and does not have the financial resources to establish a wholly owned subsidiary (Slangen & van Tulder, 2009). However, some EM MNEs follow a new and a rather radical strategy. Instead of gradually expanding and building knowledge internally, these EM MNEs expand through aggressive mergers and acquisitions (Gubbi, Aulakh, Ray, Sarkar & Chittoor, 2010: Sun, Peng, Ren & Yan, 2012). The choice for such different equity commitment strategies
depends on a range of factors, including industry-specific factors, country-specific factors and firm-specific factors (Luo, 2001). One of these firm-specific factors is owner type.
Existing research suggests that state- and private-owned firms differ in their internationalization objectives, access to resources and corporate strategies (Cuervo-Cazurra, Inkpen, Musacchio & Ramaswamy, 2014; Ramasamy, Yeung & Laforet, 2012). Furthermore, Liang, Lu and Wang (2012) suggest that private- and state-owned firms react differently to perceived risk, which may cause different preferences in foreign equity commitment. Other research suggests that private-owned firms, in general, have higher efficiency and higher firm performance than the state-owned counterparts (Estrin, Hanousek, Kočend & Svejnar, 2009). The same increase in efficiency and performance is argued for firms of which shares are at least partially foreign-owned (Douma, George & Kabir, 2006). Additionally, Bhaumik, Driffield and Pal (2010) argue that foreign shareholders can help a firm in making optimal internationalization decisions, as they provide a firm with linkages to, and information about, foreign markets. However, while these studies highlight important implications of ownership characteristics for EM MNE’s internationalization, none of these studies look at the effect of these ownership characteristics on degree of foreign equity commitment specifically. And, because the state-, private- and foreign-owned firms are the most pervasive firm types in emerging markets (Xia & Walker, 2015), these make for an interesting topic of investigation. The purpose of this thesis is to contribute to the explanation of what factors influence EM MNE’s degree of foreign equity commitment. We aim to provide more insight into the relatively unexplored effect of a firm’s ownership characteristics on the degree of foreign equity commitment in an emerging market context, by investigating the ownership characteristics on two levels: a firm being private- versus state-owned, and the EM MNE’s degree of internationality of shareholders. Additionally, we examine the moderating role of firm size on these proposed relationships.
This thesis is structured as follows. In the next section, we discuss the relevant literature on internationalization strategies, emerging markets, EM MNE, EM MNE internationalization strategies, entry mode choice and firm owner type. In the third section, we discuss the theoretical framework and we develop the hypotheses. In the subsequent section, the methodology, we discuss the data collection, the variables and the method used to conduct this research, followed by the statistical analysis and the results. In section five we discuss the interpretation of the results, academic and managerial implications and the limitations of this research. Finally, in section 6 we end this thesis with concluding remarks.
2. LITERATURE REVIEW
2.1 Internationalization Strategies
Enterprises become multinational enterprises (MNEs) when they are conducting business in at least one, or more foreign locations. Several streams of theories can be identified when looking at the literature on the internationalization process of firms (Benito & Gripsrud, 1992). In the following section, we discuss the process oriented-, economic-, transaction cost-, resource based-cost-, and institution-based approach.
A prominent model explaining the process-oriented approach to the internationalization of MNEs emerged in the 1970's. This model is the Uppsala (or Scandinavian) model of Johanson and Vahlne (1977). The Uppsala model explains internationalization as a series of gradual steps, where firms build on past (international) experience and knowledge. A firm learns from each step in the internationalization process and moves to the next, more complex step over time when it has established a vast amount of knowledge and when it discovers new opportunities (Gaur, Kumar & Singh, 2014). Furthermore, firms with little knowledge and experience enter a foreign market by non-equity investment like exporting and licensing, and when knowledge and experience increase they
are able to move to equity investments such as joint ventures or acquisitions (Gao, Murray & Kotabe, 2010). According to Johanson and Vahlne (1977), internationalizing firms are affected by psychic distance. This means that firms will typically start by entering foreign markets in which they are relatively familiar geographically, culturally and institutionally and will move to more psychic distant countries over time.
A second approach to discuss is the economic approach to internationalization, which stems from mainstream economics. The fundamental assumption of the economic approach to internationalization is that decision makers are rational and thus always choose the optimal solution (Andersson, 2000; Buckley, Devinney & Louviere, 2007). Therefore, economic theory suggests that a company engaging in foreign investments has access to perfect information and will choose the location that minimizes total costs, given the distribution of demand in national markets. Also, for the economic approach, individual investment decisions are discrete phenomena and lack of experience is seen as a cost component of developing and controlling foreign investments (Hirsch, 1976). An important economic approach to internationalization is the Transaction Cost Approach (Buckley & Casson, 1976; Coase, 1937). Coase (1937) argued that under certain conditions, it is more efficient for a company to create an internal market than to enter a foreign one. Transaction costs are incurred with the reorganizing, carrying out and controlling of transactions among firms. In a perfect market, these costs would not exist. However, in reality, a perfect market is highly unlikely. Thus, when transaction costs are high, companies will rather decide to internalize the transaction (Williamson, 1979).
One of the most well-known theories on a company's abilities to internalize markets to their advantage is Dunning's (1977,2000) ownership, location, internalization model (OLI), also known as the eclectic paradigm. The model explains different advantages a firm can exploit by taking part in foreign direct investment. Ownership advantages are competitive
advantages of the investing firm, relative to the advantages of other firms in the country. Location advantages refer to country-specific advantages (CSA) of the host country, spanning from natural resources to institutional environment. Last, internalization advantages are the advantage a firm has from keeping firm-specific advantages (FSA) inside the firm, and being able to exploit them without having to contract outside parties.
Both transaction cost economists (Buckley & Casson, 1976) and Dunning (2000) with the eclectic paradigm argue that firms need to equip their subsidiaries abroad with firm-specific advantages (FSA). The resource-based view (RBV) of internationalization specifies these FSA as resources and explains how firms gain competitive advantage through acquiring or developing these resources in a new market (Barney, 1991; Wernerfelt, 1984). These resources can be tangible or intangible, but they must be valuable, rare, imperfectly imitable and non-substitutable (VRIN) to provide a sustainable competitive advantage and economic rent (Barney, 1991; Dierickx & Cool, 1989). In the RBV, entering a new market can be seen as a dynamic, longitudinal process because companies should not only learn how to exploit resources but also how to develop and explore them (Peng, 2001).
The last view to be discussed is the Institution based view. Both formal and informal institutions influence the internationalization strategies of firms. Institutions are a country's social, political and legal rules, also referred to as the ‘rules of the game'. These ‘rules of the game' significantly affect firm strategies, as they shape the business environment and the way firms (are allowed to) behave (Meyer, Estrin, Bhaumik & Peng, 2009; North, 1990; Peng, 2003; Wright, Filatotchev, Hoskisson & Peng, 2005). Well-developed institutions provide firms with a more stable business environment and allow firms to conduct business more efficiently using the market. However, underdeveloped institutions make market-based exchanges less efficient and create higher transaction cost (Hoskisson, Eden, Lau & Wright, 2000).
The theories discussed above are prominent theories and widely used throughout internationalization literature. However, these descriptions of MNEs and MNE internationalization processes assume the home country to be developed and are not always useful when applying them to EM MNEs. Therefore, we will now discuss theory that different scholars have developed on emerging markets and EM MNEs internationalization specifically.
2.2 Emerging Markets
Emerging markets are defined relatively to growth in income level, development of the economy measured in size and degree of openness, and growth in financial markets. However, emerging markets are also characterized by a lack of maturity of the market and a lack of political stability. Hence, the emerging economy is in a transitional phase, being in the process of moving from a developing market to a developed market.
Luo and Tung (2007:483) define emerging markets as “countries whose national economies have grown rapidly, where industries have undergone and are continuing to undergo dramatic structural changes, and whose markets hold promise despite volatile and weak legal systems”. Lack of property right protection, non-transparent litigation systems, poor enforcements of commercial laws, inefficient market intermediaries, unpredictable regulatory changes, government interference, bureaucracy, and corruption are direct examples of effects of these weak legal systems and institutional voids. Institutions should facilitate the functioning of markets where buyers and sellers can efficiently come together. However, because of the absence or inefficiency of these institutions in emerging markets, higher transaction costs and operating challenges appear which hinder the competitiveness of companies situated in emerging markets. Furthermore, the instability of the institutional context also increases uncertainty and risk for both firms and foreign investors, deterring inward foreign direct investment (FDI).
Despite these drawbacks and uncertainties, emerging markets have experienced rapid growth and transformation in the past decades (Luo & Tung, 2007). The most well-known emerging markets are the BRICS countries, which are Brazil, Russia, India, China and the later added South Africa. These countries became a popular subject of investigation, as the BRICS countries alone count for over 40 percent of the total world population and have a significant influence on the world economy (Ono, 2011). The rise of these emerging markets is one of the most significant international business phenomena today. Khanna and Palepu (2010) argue that the rise of the BRICS is due to several factors. The opening of these economies to global capital, talent and technology has drastically changed their business and economic environment. Large populations in these countries have been lifted out of poverty, creating new middle classes. Second, the low-cost, large and increasingly educated labor pool provides these markets with a competitive advantage. And last, these countries possess growing pools of entrepreneurs who pursue innovation and prosperity.
2.3 Emerging Market Multinational Enterprises
Luo and Tung (2007) define EM MNEs as “international companies that originated from emerging markets and are engaged in outward FDI, where they exercise effective control and undertake value-adding activities in one or more foreign countries” (p.482). Because EM MNEs are based in emerging economies characterized by low- or middle-level incomes and weak institutional environments, their firm- and country-specific advantages differ from MNE from developed countries. EM MNEs mostly do not possess traditional ownership advantages such as technological know-how, managerial and organizational capabilities or a strong brand name (Madhok & Keyhani, 2012). However, other scholars argue that EM MNEs do possess certain ownership advantages in other forms, reflecting the distinctive conditions of their home market (Cuervo-Cazurra & Genc, 2008; Govindarajan & Ramamurti, 2011). These ownership advantages include the ability to function in difficult
business environments, the understanding of customer needs in developing markets and the ability of producing products and services at ultra-low cost (Ramamurti, 2012). Other advantages for the EM MNE are country-specific, such as cheap semi-skilled labor, growing domestic demand base or access to natural resources such as gas and oil (Ramamurti, 2012). While private-owned firms are on the rise in emerging markets, a vast amount of EM MNEs is, for political, historical and economical reasons, still state-owned. Furthermore, the extent of geographical coverage or international diversification varies across EM MNEs. To further characterize EM MNEs, Luo and Tung (2007) make a distinction between four types of EM MNEs by dividing them into categories based on ownership type and level of international diversification. First, non- state-owned firms with narrow focused product coverage in international markets are defined as niche entrepreneurs (Luo & Tung, 2007:483). The second category of non state-owned EM MNEs is world-stage aspirants. Unlike niche entrepreneurs, their product offerings and geographical coverage is relatively diversified. Third, there are transnational agents. These state-owned EM MNEs have invested abroad extensively to expand their business, while still being exposed to home government influences and instructions. Last, there are commissioned specialists, which are also state-owned EM MNEs. These firms focus on outward investment in a few foreign markets in which they hold competitive strength, however, they also fulfill governmentally mandated initiatives.
2.4 Internationalization of EM MNEs
In the past ten years, there has been a significant increase in FDI from emerging markets (Si, Liefner & Wang, 2013; Williamson et al., 2013). An important issue still open in literature is whether or not we can explain the internationalization behavior of EM MNEs with the traditional models of internationalization (Cuervo-Cazurra & Ramamurti, 2014; Williamson Ramamurti, Fleury & Fleury, 2013). Some scholars argue that existing theories, for example
Dunning’s OLI model, can be accurate to explain EM MNE internationalization strategies. They argue that EM MNE, despite having limited traditional ownership advantages, become MNE by building on their location advantages and their geographical patterns will then soon resemble those of developed MNEs (Dunning, Kim & Park, 2008; Narula, 2006). Other scholars argue that EM MNEs are a new type of firm, and EM MNE internationalization processes can only be explained with new theories (Guillén & García-Canal, 2009; Luo & Tung, 2007; Mathews, 2006). Last, several scholars argue that the answer lies in the middle; certain parts of the original models do apply to EM MNEs, however, they need to be adjusted to the different context or need to be extended (Cuervo-Cazurra, 2012; Ramamurti, 2012). In this research, we focus on the latter two views, which are mostly used in more recent literature.
According to Luo and Tung (2007), EM MNEs are new types of firms, and their internationalization processes need to be explained with new theories. They state that while being highly dependent on their performance in the home market, EM MNE generally face several market- and institutional constraints in their home country. Thus, the success of the EM MNEs lies in the ability to simultaneously leverage core competencies at home and explore new opportunities abroad (Luo & Tung, 2007, p.485). To overcome the constraints in the home country and to be able to compete more effectively with their global rivals, EM MNEs need to acquire new resources through international expansion. For example mergers with or acquisitions of MNEs from developed markets can transfer management- and technological skills, knowledge of international markets and international experience to the EM MNE (Luo & Tung, 2007). Luo and Tung (2007) name this strategy of outward investment to obtain strategic assets the ‘springboard model’. Guillén and García-Canal (2009) also discuss the internationalization process of EM MNE as a new theory, proposing that these firms follow an accelerated internationalization strategy while exploring critical
assets to upgrade their capabilities. According to them, EM MNEs have weak competitive advantages compared to traditional MNEs, but EM MNEs can possess strong political capabilities and high organizational adaptability, which can help them with establishing themselves in a new market more effectively. Furthermore, they argue that EM MNEs simultaneously enter developed and developing countries and that these firms mainly use alliances and acquisitions to internationalize. Another scholar proposing a new model to explain internationalization strategies for EM MNEs is Mathews (2006) with the linkage, leverage and learning (LLL) framework. The LLL framework proposes that all EM MNEs have a latecomer disadvantage, which they need to overcome. EM MNEs can do this through internationalization. Mathews (2006) argues that while traditional MNEs exploit their existing competitive advantage while internationalizing, EM MNEs should use internationalization to gain new competitive advantages. These competitive advantages are gained by acquiring intangible resources, such as technological knowledge, strong brand names and management expertise, in developed markets (Thite, Wilkinson, Budhwar & Mathews, 2016). Thus, EM MNEs need to link with existing firms and leverage resources from these linkages (Thite et al., 2016). Because this process is repeated multiple times, EM MNEs learn to be more efficient at this process, accumulate knowledge and get to catch up with their competition.
Finally, some scholars (Cuervo-Cazurra, 2012; Ramamurti, 2012) argue that several aspects of existing theories on internationalization are universally valid, while other aspects need modification or extension to be useful for explaining EM MNE internationalization behavior. For the incremental internationalization model as proposed by Johanson and Vahlne (1977), the separation of psychic distance and market attractiveness can make the model useful in the EM MNE context. EM MNE have the option to choose between expanding into another emerging country with low psychic distance because of similarities in
institutions and customer characteristics, but also low market attractiveness because of the low levels of consumer income; or EM MNE can choose to expand into advanced economies that have a high market attractiveness because of the higher income level of consumers but also high psychic distance because of the different conditions in developed countries, and thus not following the sequential internationalization process (Cuervo-Cazurra, 2012). Next, as a contribution to the OLI framework as proposed by Dunning (1977), Ramamurti (2012) argues that EM MNEs internationalize differently because they internationalize to obtain advantages. The environment of the EM MNE facilitates this rapid internationalization because EM MNEs tend to exploit differences rather than similarities in their internationalization. In addition, Cuervo-Cazurra (2012) argues that EM MNEs not only internationalize to gain ownership advantages but also to reduce ownership disadvantages and escape location disadvantages such as weak institutions of their home environment. Also, EM MNEs might not make use of the traditional ownership advantages in their internationalization process, but do use other advantages such as business model innovations and efficient processes and their ability to thrive in less stable environments.
2.5 Entry Mode Choice
Choice of entry mode is one of the most important decisions of a firm when expanding internationally as it has strong implications on investment risk, control over operations and resource commitment required (Zhao et al., 2004). Previous studies show that entry mode choice and desired level of equity ownership depend on a range of factors including country-specific factors, industry-country-specific factors and firm-country-specific factors (Luo, 2001; Tse, Pan & Au, 1997). Home and host country characteristics, size of the new operation and parent firm characteristics are examples of such specific factors influencing the choice of entry mode (Brouthers & Hennart, 2007).
The first topic to discuss for entry modes is the choice of firms between equity and non-equity entry modes (Demirbag, Tatoglu & Glaister, 2009; Pan & Tse, 2000). Pan and Tse (2000) classify entry modes in non-equity based and equity-based in their well-known hierarchical model of entry modes. Equity and non-equity entry modes are the first level identified. On the second level, further distinction is made between non-equity modes as exports and contractual agreements, and equity modes as equity joint ventures (JV) and wholly owned subsidiaries (WOS). JV can be divided further into minority-, 50% share- and majority JV, and WOS can be further divided into greenfields and acquisitions. Several scholars argue that the choice of entry mode can be seen as a continuum of commitment, risk exposure, control, and profit potential (Hill, Hwang & Kim, 1990). For non-equity entry, there is not necessarily direct investment in a foreign location, implying lower resource commitment needed, a lower degree of risk but also lower control of operations. For equity investment, FDI is necessary. When engaging in FDI, a firm will face a higher degree of both commitment and risk, but also has a higher degree of control of foreign operations (Dikova & Witteloostujin, 2007). This research focuses on these equity entry modes.
When discussing foreign equity investment for EM MNEs, several scholars highlight the specific choice between JV and WOS (Cui & Jiang, 2009; Demirbag et al., 2009). Cui & Jiang (2009) argue that for EM MNEs the choice between a JV or a WOS is primarily influenced by two factors: the strategic fit in the host industry and the strategic intent of the firm to conduct FDI. Their research suggests that WOS are preferred when a firm is adopting a global strategy, is seeking for assets and when it faces severe competition in the host country. A JV is preferred when a firm is investing in a high-growth host market or when a firm is of smaller size and does not have the (financial) resources to establish a WOS. Another benefit of the JV structure is that it can limit the initial cultural distance to the host
country when establishing a JV with a local partner, by giving access to the partner’s knowledge and network in the host country environment (Slangen & van Tulder, 2009). Another specific form of equity entry mode gaining attention in EM MNE literature is the aggressive merger and acquisition (M&A) strategy some EM MNEs tend to follow (Deng, 2009; Gubbi et al., 2010; Liu, 2007; Sun et al., 2012). The aggressive M&A strategy enables EM MNEs to internalize tangible and intangible assets, which are both difficult to trade through market transactions. Acquiring other MNEs gives EM MNEs access to external know-how, resources, international experience and strategic tools. These assets and resources would take more time to develop internally and are an important strategic lever of value creation. Additionally, especially literature on EM MNE cross-border M&As argues that M&As are used by EM MNEs to avoid institutional voids in their home countries, but also to take advantage of the political and financial state of the host country. Last, Madhok and Keyhani (2012) argue that the aggressive M&A strategy of EM MNEs operating in advanced economies is an act and form of entrepreneurship, aimed to serve as a way to catch up with the advanced economy MNEs through opportunity seeking and capability transformation. We conclude this section with the understanding that the choice of entry mode of the EM MNE depends on a wide range of factors, and that EM MNEs, even under similar conditions, can choose different internationalization paths. Thus, it is important to understand what drives firms to choose certain internationalization strategies and entry modes. According to Luo (2001), internationalization strategy and entry mode choice are influenced by industry-specifc factors, (host) country-specific factors and firm-specific factors. One of the firm-specific factors is owner type and thus a firm’s ownership characteristics. In this study, we focus on these ownership characteristics.
2.6 Firm Ownership
Different MNE ownership structures are widely studied in literature (Bhaumik et al., 2010; Greenaway, Guariglia & Yu, 2014; Ramasamy et al., 2012). However, in the EM context, the most pervasive types of ownership to study are state-, private- and foreign ownership (Xia & Walker, 2015). State-owned enterprises specifically differ from private-owned enterprises in objectives, access to resources and corporate strategies (Ramasamy et al., 2012). Meyer et al. (2014) argue that because of these differences, state- and private-owned enterprises adapt their international strategies in a different way, making them an interesting subject of investigation in studying foreign equity commitment. Additionally, we discuss the effect of foreign shareholders.
State-owned enterprises are enterprises that are majority- or wholly owned by the state. While state-owned enterprises are present in emerging and developed markets, they are more common in emerging markets (Xia & Walker, 2015). For example in China, where over 60 per cent of the enterprises in the country were still controlled by the government in 2015 (Kostova & Hult, 2015). In the 90’s, state-owned enterprises were seen as inferior to private-owned enterprises due to their generally domestic focus, however in the past decade a significant number of state-owned enterprises has been successful not only in their home countries but also internationally (Bruton, Peng, Ahlstrom, Stan & Xu, 2015; Cuervo-Cazurra et al., 2014; Meyer et al., 2014). Over the past years, state-owned enterprises have become more powerful and wealthier and their presence in several market economies has increased significantly (Cuervo-Cazurra et al., 2014; Peng, Bruton, Stan & Huang, 2016). Additionally, more state-owned enterprises have expressed a stronger international focus (Cuervo-Cazurra et al., 2014). In the internationalization process, state-owned enterprises in EMs have certain resource endowment benefits over private-owned enterprises. State-owned enterprises tend to have easier access to financial resources, for example bank loans, at below market rates
(Warner, Sek Hong & Xiaojun, 2004). Because state-owned enterprises are owned by the state, they are usually endorsed and supported by the home government in business transactions. Furthermore, the home government can provide financial aid to state-owned enterprises to facilitate and foster the internationalization process (Rui & Yip, 2008). State-owned enterprises’ connection to the home government can also provide them with access to a local suppliers network, giving them further benefits compared to their rivals. On the other hand, state-owned enterprises might also be pressured to fulfill political and social objectives of the home government while internationalizing (Cuervo-Cazurra & Dau, 2009). Meyer et al. (2014) argue that when state-owned enterprises internationalize they are subject to more complex institutional pressures in host countries than private-owned firms. These complex institutional pressures are caused by possible ideological conflicts with the host country, perceived threats to national security and/or claimed unfair competitive advantage of the state-owned enterprises due to support by their home government.
Private-owned enterprises are enterprises that are established, owned and operated by private individuals instead of by a government or government-related agencies. Thus, in private-owned enterprises, individuals hold the largest share. Private-owned enterprises are the dominant type of enterprise in developed countries, while in emerging markets they make up for a smaller share of the total amount of enterprises (Liang, Lu & Wang, 2012). Other than sate owned enterprises, private-owned enterprises in emerging markets generally face strong domestic competition and enjoy little to no government protection. Therefore, private-owned enterprises in emerging markets have a disadvantage in resource endowment compared to state-owned enterprises because they lack governmental support in both financial and network perspectives (Wei, Clegg & Ma, 2015). However, these conditions in the home country might also drive private-owned enterprises to escape their home institutional environment, look for investment opportunities abroad and tap into foreign
resource pools (Sun en al., 2015). Furthermore, because private-owned enterprises enjoy little government protection in the home country and face strong domestic competition, they are forced to focus more on efficiency and development of R&D related practices, managerial capabilities and the establishment of their brand name. Thus, in general, private ownership may also lead to higher efficiency and higher firm performance (Estrin et al., 2009).
The focus of this study lies on ownership characteristics of the parent firm. Thus, we discuss the parent firm with shares held by foreign holders, and not the foreign-owned subsidiary (Bhaumik et al., 2010). Several studies argue that firms that are at least partially foreign-owned, outperform wholly domestic owned firms as foreign investors can contribute to a firm’s internationalization process (Douma, George & Kabir, 2006; Yudaeva, Kozlov, Melentieva & Ponomareva, 2003). Bhaumik et al. (2010) suggest that foreign shareholders provide a firm with linkages to and information about overseas markets that is not publicly available. Therefore, foreign shareholders can help firms in making optimal internationalization decisions. Additionally, Douma et al. (2006) argue that foreign shareholders in EM MNE are associated with positive performance and a signal of better quality of management of the firm. Chhibber and Mujamdar (1999) argue that these benefits are unlikely to arise when a firm has very few foreign shareholders, as these minority owners are not able to exert significant control in decision-making processes. On the contrary, Yudaeva et al. (2003) find that the positive effects do not vary with the amount of shares held by foreign investors.
2.7 Research Gap
Very few studies looked at how ownership characteristics impact foreign equity commitment in the emerging market context. For example, Bhaumik et al. (2010) examined the impact of ownership structures of emerging market firms on their outward FDI behavior, however they only tested for family-, concentrated-, and foreign ownership and did not measure the degree
of foreign equity commitment. Cui and Jiang (2012) investigated state-owned firms and the effect of home and host regulatory and normative pressures in the choice of a joint venture commitment. However, they did not make the comparison with private-owned enterprises and only examined joint venture commitments. Liang, Lu and Wang (2012) investigated drivers of internationalization and risk taking tendency in foreign equity commitment for private-owned enterprises and state-owned enterprises. However, they focus on organizational capability advantages of private-owned enterprises versus state-owned enterprises and not on the specific relationship between ownership type and foreign equity commitment. Finally, Xia and Walker (2015) did examine state-, private- and foreign-owned firms, however, they focused on the effect of ownership on firm performance and not foreign equity commitment.
The above-mentioned theory shows that very few studies address ownership effects on foreign equity commitment and that ownership effect on degree of foreign equity commitment specifically has not been studied yet. Furthermore, previous studies only looked at firm size as a control variable, while Xia and Walker (2015) found that firm size has a moderating effect on the relationship between owner type and firm performance (Xia & Walker, 2015). Hence, it is interesting to investigate if firm size also moderates the relationship between ownership characteristics and degree of foreign equity commitment.
Thus, in this research, we investigate whether ownership characteristics (private- versus state ownership, and degree of internationality of shareholders) influence the degree of foreign equity commitment in an emerging market context. Additionally, we examine the moderating role of firm size on these relationships.
3. HYPOTHESIS DEVELOPMENT
3.1 State Ownership and Foreign Equity Commitment
As discussed previously, state-owned enterprises have advantages over private-owned enterprises when it comes to resource endowment and government support. This automatically leaves private-owned enterprises with a disadvantage in the domestic market. Private-owned enterprises might face legitimacy issues and can be subject to a discriminatory policy when it comes to resource access. The owner-type of the EM MNE also creates different motivations to engage in foreign equity commitment. State-owned enterprises may have a more political and social strategic intent led by government objectives, such as strengthening the international competitive position (Cuervo-Cazurra & Dau, 2009; Deng, 2009), while private-owned enterprises may want to escape the unsupportive business environment in the home country by entering new markets abroad (Gammeltoft, Barnard & Madhok, 2010; Luo et al., 2010).
Because of state-owned enterprises’ advantageous position regarding resource endowment and financial support in the home country, state-owned enterprises are argued to have larger budgets and more resources which enable them to take more risk while engaging in foreign equity commitment (Ramasamy et al., 2012; Wei et al., 2015). The home government can back their foreign investment operations and offer financial support, subsidies and preferential financing options (Gammeltoft et al., 2010). Furthermore, when the prospective host country has a weaker institutional environment, the home country government has the opportunity to exert influence over the host country government in favor of the state-owned enterprise (Knutsen, Rygh & Hveem, 2011). Furthermore, when relations between the home- and host government are good, this might enable the home government to enforce agreements and contracts in favor of the state-owned enterprise and reduce the risk for the international investments. A reduction of risk leads to a reduction in uncertainty and
decreased uncertainty of an investment facilitates higher degrees of foreign equity commitment (Dixit & Pindyck, 1994).
Next to the positive effects of state-owned enterprises’ government relations, these firms can also experience disadvantages from their government connections, resulting in complex institutional pressures in host countries (Meyer et al., 2014). These institutional pressures arise from by the host government perceived threats to national security, ideological conflicts and claimed unfair competitive advantage due to the home government support of the state-owned enterprise. The institutional pressures are specifically directed at state-owned enterprises and force them to adapt their entry strategies to enhance their legitimacy and reduce potential conflicts. However, when state-owned enterprises respond to these pressures effectively, they are able to proactively build legitimacy in the host society and overcome their disadvantage (Meyer at al., 2014).
Following this line of argumentation, we predict that private-owned enterprises are in a disadvantageous position compared to state-owned enterprises when venturing out of the developing home country. And, we argue that because of their lack of government support in risk reduction, resource endowments, and financial options, private-owned enterprises are less likely to engage in higher degrees of foreign equity commitment. Hence:
H1: Private- versus state-ownership is negatively related to foreign equity commitment in the context of EM MNEs
3.2 Degree of Internationality of Shareholders and Foreign Equity Commitment
EM MNEs generally lack international market knowledge and international business experience before they engage in foreign equity commitment. Therefore, we follow Mathews (2006) and argue that EM MNEs need a form of linkage to facilitate learning about the foreign business environment. Previous literature argued that these learning processes mainly
take place through the affiliate, for example when engaging in a JV with a firm that has access to local resources, relationships and has experience with the regulatory environment (Meyer et al., 2009). However, because EM MNEs possess less, or less transferable capabilities, they do not make for an attractive JV partner. Therefore, they need different forms of linkage to facilitate these learning processes.
Elango and Pattnaik (2007) argue that EM MNEs can learn from the international experience of firms in their network. However, EM MNE might also attract foreign holdings to build their internationalization capabilities internally. Dunning (1986) states that foreign shareholders may facilitate outward foreign equity commitment as they give a firm access to expertise and knowledge about foreign markets and business environments. Additionally, firms with more foreign shareholders tend to have better corporate governance quality and are less likely to think of engaging in FDI as a too risky strategy (Ramaswamy, Li & Veliyath, 2002). This comes from their better understanding of the source and nature of risk, which leads to a reduction in uncertainty of the investment, and therefore facilitates higher foreign equity commitment (Dixit & Pindyck, 1994). Furthermore, we can draw upon the research of Douma et al. (2006), Gurbuz and Aybars (2010) and Yudaeva et al. (2003), who argue that EM firms that are at least partially foreign-owned are more productive than firms that are entirely domestic owned. Hence, firms with higher productivity are more likely to engage in higher degrees of foreign equity commitment as they have more financial resources to engage in foreign equity commitment (Tomiura, 2007).
Following this line of argumentation, we predict that the degree of internationality of shareholders of the EM MNE is positively related to degree of foreign equity commitment due to foreign market knowledge of the shareholders, a better understanding of risk, and higher productivity of the firm. Hence:
H2: Degree of internationality of shareholders of the EM MNE is positively related to foreign equity commitment
3.3 The Moderating Effect of Firm Size
Dunning (2000) states that large firms are more likely to be international than small firms because they have several advantages over smaller firms when internationalizing. Large firms tend to have high labor productivity, rich retained earnings, strong headquarter functions, established distribution networks and consumer recognition (Tomiura, 2007). Additionally, Sinani, Jones and Mygrind (2007) state that larger firms tend to be more efficient, and that this efficiency provides the firm with more financial resources. Furthermore, larger firms tend to have better management capabilities to deal with the uncertainties and challenges that come with higher degrees of foreign equity commitment.
As larger firms tend to have more resources and are likely to have more extensive external networks (Hannan, 1998), a larger firm size might diminish the resource endowment advantage of state-owned enterprises compared to private-owned enterprises. The initial cost of foreign equity commitment, for example the construction of new sales networks, is constant regardless of the amount of goods or services produced. To pay this initial cost, firms need financial resources. And, as discussed before, the private-owned enterprise lacks government support in terms of preferential financing options and subsidies. However, for large firms that produce and sell more goods and services and enjoy the benefits of economies of scale, it may be easier to pay the initial cost. Furthermore, if the private-owned enterprise is of bigger size, it is better able to provide itself with resources, financial support, bargaining power, and international market knowledge through external relationships and networks. Hence, at a bigger size, the private-owned enterprise might not be at a disadvantage anymore compared to the state-owned enterprise, and therefore can engage in an at least equal degree of foreign equity commitment.
H3a: Firm size negatively moderates the relationship hypothesized in H1
Dahlquist and Robertsson (2001) argue that foreign investors, in general, prefer larger firms because larger firms are more likely to have widespread ownership and higher turnover. Furthermore, Huberman (2001) argues that foreign investors prefer firms with which they are familiar, and of which they have more knowledge. As larger firms are generally better-known because they are more present in the business environment and simply are a ‘bigger’ player, they are also more likely to be well-known to foreign investors. Hence, when a larger firm is able to attract more foreign investors, this results in more cumulative knowledge about foreign markets and business environments (Greenaway et al., 2014). Also, when the larger firm is able to attract more foreign investors, this would increase the diversity in international experience and knowledge about foreign markets, which further reduces uncertainty and risk, and therefore facilitates higher degrees of foreign equity commitment (Dixit & Pindyck, 1994). Hence, we argue that firm size is likely to positively moderate the relationship between the degree of internationality of shareholders and the degree of foreign equity commitment.
H3b: Firm size positively moderates the relationship hypothesized in H2
3.4 Conceptual Model
Figure 1.1 below presents the conceptual model used to explain the hypothesized relationships between the variables. Ownership characteristics are measured by two independent variables: Private- versus state ownership and degree of internationality of shareholders. Private ownership is proposed to have a negative effect on the dependent variable, foreign equity commitment. Degree of internationality of shareholders is proposed
to have a positive effect on degree of foreign equity commitment. Finally, firm size is proposed to have a negative moderating effect on the negative relationship between private ownership and degree of foreign equity commitment, and a positive moderating effect on the positive relationship between the degree of internationality of shareholders and degree of foreign equity commitment.
4. METHODS
4.1 Sample and Data Collection
This study uses a quantitative cross-sectional research design to test the effect of private ownership and degree of internationality of shareholders on EM MNE degree of foreign equity commitment. We also examine the moderating effect of firm size on these relationships. In this study, we use a sample of Indian firms as the representative for emerging market firms, as India is part of the BRICS countries and is classified as an emerging country. Furthermore, previous studies on EM firms have also used samples of Indian firms to generalize for emerging markets (Bhaumik et al., 2010; Douma et al., 2006). Figure 1. Conceptual model
Ownership characteristic H1: Private- versus state ownership Ownership Characteristic H2: Degree of internationality of shareholders Degree of foreign equity commitment H3a, H3b: Firm Size Degree of foreign equity commitment
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We construct a dataset containing the 100 largest companies of India measured by turnover in the fiscal year 2014. Firms are only included when their global headquarter is situated in India and when information from the financial year 2014 or 2013 is available in Orbis. We use data from the recognized database Orbis, as this is one of the most comprehensive databases with detailed information on public and private firms from all over the world (de Jong & van Houte, 2014). Furthermore, the annual report from the corresponding year needs to be available. To increase the reliability of information and reduce source bias, we make use of audited annual reports.
The constructed dataset includes general information such as firm size (measured by number of employees), year founded, ownership type (state- or private-owned) and major sector. Next, financial data is added such as net income, return on assets (ROA) and gearing. Finally, the dataset also consists of data on the division of the assets, number and location of affiliates and number and nationality of shareholders of the firm. In the final sample, only cases with complete information on ownership type, firm size, stake held by foreign shareholders, stake in foreign affiliates, date of incorporation, gearing, return on assets and industry type are included.
4.2 Measures
Dependent variable
The dependent variable in this study is the degree of foreign equity commitment. Foreign equity commitment is measured by the total stake a company has in the foreign affiliate, varying from 0 to 100 per cent (Chhibber & Majumdar, 1999). When the equity commitment is 0, this means that the firm has no equity commitment at all. A commitment of 100 per cent indicates the foreign affiliate is wholly owned, and a commitment of 50 per cent indicates involvement in a joint venture.
Independent variables
This study investigates two independent variables to explain the ownership effect: private- versus state-owned firms and the degree of internationality of shareholders. A firm is indicated as state-owned when the government holds a majority (>50 per cent) share of the firm (Ramasamy et al., 2012). A firm is private-owned when non-government parties hold a majority (>50 per cent) share of the firm (Ramasamy et al., 2012). The variable private- versus state ownership is calculated with a dummy variable, with the value of 1 indicating the enterprise is private-owned and a value of 0 indicating the enterprise is state-owned (Chhibber & Majumdar, 1999; Xia & Walker, 2015).
The second independent variable is the degree of internationality of shareholders. We make a general distinction between foreign shareholders and domestic shareholders, where domestic shareholders include solely shareholders with the Indian nationality, and foreign shareholders include all other nationalities except for Indian shareholders. For every firm, we calculate the total stake held by foreign shareholders in percentages (Douma et al., 2006).
Moderating variable
This study investigates firm size as a possible moderating variable. Large EM MNEs typically are more capable of taking advantage of economies of scale, achieve better performance and attract more foreign shareholders (Chao & Kumar, 2010; Tomiura, 2007). Multiple studies have used firm size as a control variable (Gubbi et al., 2010; Liang et al., 2012). However, in this study, we follow Xia and Walker (2015), and use firm size as a moderator to check for the effect of firm size on the proposed relationships between owner type and degree of equity commitment. Firm size is calculated by the logarithm of the total number of employees in order to account for the skewness of the data. The moderating effect of firm size is tested with the interaction term of the moderating variable multiplied by the
independent variable. Thus, in this study we create two interaction terms; private-owned enterprise multiplied by firm size, and foreign shareholder percentage multiplied by firm size.
Control variables
This paper also takes several control variables into account. A first control variable is financial performance measured by Return On Assets (ROA). ROA shows how profitable a company is relative to its assets and how efficient management is at converting its investments into profit (Bhaumik et al., 2010). Firms with better financial performance have more resources to engage in foreign equity commitment and are also more able to take risky decisions (Hitt, Hoskisson & Kim, 1997). We will use the firm’s ROA from the end of the 2014 financial year.
A second control variable is firm age. Firm age is measured in the number of years since the date of incorporation, until the year of reference for this paper (2016). The age of the firm can affect the degree of foreign equity commitment as it is believed an older EM MNE has had more time to develop the required resources, gain experience and engage in multiple foreign equity commitment projects than a younger firm (Bhaumik et al., 2010; Douma et al., 2006). Our sample consists of a wide dispersion of age with the youngest firm being 9 years old and the oldest firm being 121 years old.
The third control variable is gearing. Gearing is calculated by dividing the total debt by the shareholder equity. This ratio reflects the amount of equity that would be required to pay off the outstanding debts. In general, a low gearing ratio means that a firm is financially more stable, and is considered to have lower risk for investors.
The fourth control variable is industry type. Type of industry influences the motives a firm has to engage in foreign equity commitment (Douma et al., 2006). We use the industry types as indicated in the Orbis database. The 100 considered Indian firms belong to one of the following five different industries: banks, financial companies, industrial companies,
insurance companies or private equity firms. The five industries are coded into four dummy variables, where the value of one is awarded when the company belongs to the certain industry, and 0 for all other industries.
4.3 Statistical Analysis and Results
Descriptive statistics and correlations between the dependent, independent and the control variables are presented in table 1. We check the variables for multicollinearity, which occurs with high levels (>0.7) of correlation between the variables. From Table 1 we see that none of the variables correlate highly, as all variables have values below 0.7. Because multicollinearity indicates problematic constructs, we also check the data for more subtle forms of multicollinearity by calculating the tolerance levels and variance inflation factors (VIF) (Pallant, 2010). Tolerance levels need to be higher than 0.2 and VIF values need to be below 10 but are preferred below 5. The tolerance levels for all variables are above 0.2 (0.239 - 0.902), and the VIF values are below 5 (1.109- 4.184), indicating that there is no multicollinearity present between the variables.
The descriptive statistics (Table 1) show that the average total stake Indian firms of the sample have in their foreign affiliate is very high at 91,25 per cent. The descriptives also indicate that the amount of private-owned firms in the sample is very high at 98 per cent, and the average amount shares held by foreign investors per firm is 20,65 per cent. Finally, the average age of the firms included in the sample is 57,71 years since the date of incorporation.
This study uses a linear regression analysis to test if the ownership characteristics of private-owned and degree of internationality of shareholders have an effect on the degree of foreign equity commitment. To test the impact of the moderator variable firm size, we calculated the interaction term between the independent variable and the moderating variable by multiplying the two independent variables by the moderator. The regression analysis is performed in two models, one for each independent variable and its relationship to the
dependent variable with the moderating effect included. For each model, we first introduce the control variables, the dependent variable, the moderator and then the interaction term to be able to observe additional explanatory power (R Square) for each variable.
Table 2 and 3 show the linear regression analysis. The Beta standardized (b) coefficient shows if the variables included in the model contribute to the prediction of the dependent variable and indicate a positive or negative relationship. The significance value (p) shows whether the variable is making a significant contribution to the prediction of the dependent variable. Last, the R Square indicates the goodness of fit of the model and the amount of variance in the dependent variable that is explained by the explanatory variable (Pallant, 2010).
In Hypothesis 1, we state that private ownership of an EM MNE has a negative effect on foreign equity commitment. Hypothesis 1 is tested by a multiple linear regression. The outcome of this analysis is presented in table 2, model 2. The R Square shows that 15.5 per cent of the variance in the model is explained by the control variables and the IV private ownership, however, most of the variance is explained by the control variables (14.3 per cent) and only 1.2 per cent of the variance in the model is explained by the independent variable. The results of the regression analysis show that the relationship between a private-owned firm and degree of foreign equity commitment is negative and significant (b = -23,374, p <0.01), indicating that private ownership of a firm indeed has a negative effect on the degree of foreign equity commitment. Therefore, Hypothesis 1 is supported.
Hypothesis 3a predicts a negative moderating effect of firm size on the relationship between private ownership and degree of foreign equity commitment. When we include the interaction variable, the percentage of variance explained by the model raises to 16 per cent. To accept or reject the hypothesis, we examine table 2, model 4. The model shows that the coefficient associated with the interaction term is indeed negative, but insignificant at the 95
per cent confidence level (b = -7,165, p =0.062). However, the impact of the interaction is significant at a 90 per cent confidence level.
In hypothesis 2 we state that the degree of internationality of shareholders of the EM MNE is positively related to foreign equity commitment. Hypothesis 2 is also tested by a multiple linear regression. The outcome of the analysis is presented in table 3, model 2. The R Square shows that 14.4 per cent of the variance in the model can be explained by the control variables and the independent variable. However, the control variables again take account for most of the variance explained (14.3 per cent), indicating that the independent variable has no significant additional explanatory power (<0.05). The results of the regression also show that there is no significant relationship between degree of internationality of shareholders and foreign equity commitment (b = -0.031, p = 0.446). Therefore, hypothesis 2 is rejected.
In hypothesis 3b we predict a positive moderating effect of firm size on the relationship between the degree of internationality of shareholders and the degree of foreign equity commitment. When we include the interaction variable, the percentage of variance explained by the model only raises by 0.2 per cent, indicating that the interaction variable has no significant additional power either. Furthermore, Table 3, model 4 shows that the coefficient associated with the interaction term is negative and insignificant (b = -0.004, p =0.912). Hence, the moderating effect of firm size is not statistically confirmed and we reject hypothesis 3b.
For the control variables, we find strong support for the firm age variable (b = -0.254, p <0.01) and the return on assets (ROA) variable (b = 0.227, p <0.01). These results indicate that the age of a firm and its performance measured by ROA have an influence on the degree of foreign equity commitment. On industry level, we find that the industry dummies for banks (b = -33.680, p <0.01) and industrial companies (b = -10.846, p <0.05) are significant
at the 95 per cent confidence level, and for financial companies (b = -8.282, p <0.1) at the 90 per cent confidence level. Thus, the belonging of firms to these industries also has an effect on their degree of foreign equity commitment.
36 b le 1. Descrip tive sta tistics: m ean s, stan d a rd d eviation s an d correlation s Va ri ab le Mea n S. D 1 2 3 4 5 6 7 8 9 10 1. D eg ree of fo reig n e q uity commi tme n t 91.25 24.61 2. P riv at ve rsus st at e-owned en terp rise 0.98 0.18 -.0 2 3. Deg ree of in ter n at io nal ity o f sh areh old ers 20.65 21.93 .1 3** .1 1** 4. Fi rm s ize 10.47 1.18 -.1 0* * -.0 1 -.2 4* * 5. Fin anc ia l pe rfo rm ance ( R OA) 10.66 9.57 .1 9** .05 -.0 7* * .3 4** 6. Fi rm age 57.71 29.96 -.3 3* * -.08* * -.5 2* * .4 9** -.2 8* * 7. Ge ari n g 33.82 299.45 -.0 3 .2 2** .06* .1 2** .04 .32* * 8. B an k 0.03 0.16 -.1 3* * -.3 6* * .04 .02 -.1 6* * -.0 6* -.5 7* * 9. Fin anc ia l c ompa n y 0.04 0.19 .04 -.0 1 -.1 4* * -.0 6* -.0 7* * -.1 0* * .03 -.0 3 10. Indust ria l c ompa n y 0.91 0.29 .02 .2 1** .06 .012 .1 8** .05 .2 7** -.5 1* * -.6 0* * 11. Insur anc e co mp an y 0.00 0.03 .01 -.2 2* * -.0 3 -.015 -.0 2 .04 -.1 0* * -.0 1 -.0 1 -.0 9* * 0.01, * p < 0.05
37 lts of regressi on 1 : Private- v ersu s state ow nersh ip , Degree of f o reign equity comm it ment , Fir m size Con trols H1 H3a n t variable: D egr ee of fo rei gn equity co mmi tmen t Mo del 1 Mo del 2 Mo del 3 Mo del 4 trol Var ia b les Bet a Sig. Bet a Si g. Bet a Si g. Bet a Si g. m a ge -.254 .000* ** -.266 .000* ** -.308 .000* ** -.302 .000* ** ar ing -.002 .493 -.002 .575 -.001 .650 -.001 .647 nc ia l pe rfo rma nc e ( R OA ) .227 .002* * .212 .003* * .104 .243 .125 .161 -33.680 .000* ** -40.510 .000* ** -42.182 .000* ** -43.833 .000* ** ina nc ia l c ompa ny -8.282 .097 † -9.080 .067 † -9.491 .056 † -9.814 .048 * rial compa ny -10.846 .004* * -11.083 .003* * -10.910 .003* * -10.913 .003* * nc e c om pa ny 7.598 .745 -15.115 .526 -14.056 .555 -9.702 .685 v ari ab le ivate - v er sus state -o w ne d en te rpr is e -23.374 .000* ** -24.512 .000* ** 50.621 .213 der at or v ari able m s iz e 1.579 .043* 8.453 .025* era ct io n t erm ivate - v er sus state -o w ne d en te rpr is e x Firm size -7.165 .062† sta n t 114.580 .000 138.839 .000 126.916 .000 54.296 .174 ar e .143 .155 .158 .160 ed R Squa re .138 .150 .152 .153 n ge in R Squar e .143 .012 .003 .002 p < 0.000 . * * p < 0. 01. * p < 0.05. † P < 0.1
38 sults of regression 2: D egre e of internationality of s h areh old ers, D egr ee of f o reig n equity commit m ent, Fir m siz e Con trols H2 H3b n t variable: D egr ee of fo rei gn equity co mmi tmen t Mo del 1 Mo del 2 Mo del 3 Mo del 4 trol Var ia b les Bet a Sig. Bet a Sig. Bet a Sig. Bet a Sig. m a ge -.254 .000* ** -.271 .000* ** -.326 .000* ** -.326 .000* ** ar ing -.002 .493 -.001 .751 7.224E-05 .982 -1.583E-05 .996 nc ia l pe rfo rma nc e ( R OA ) .227 .002* * .207 .007* * .084 .397 .084 .399 -33.680 .000* ** -33.041 .000* ** -33.851 .000* ** -33.957 .000* ** ina nc ia l c ompa ny -8.282 .097 † -9.281 .072 † -10.456 .044* -10.460 .044* rial compa ny -10.846 .004* * -10.986 .003* * -10.916 .004* * -10.952 .004* * nc e c om pa ny 7.598 .745 8.297 .723 11.006 .639 10.939 .641 v ari ab le ree o f in te rn at io na lit y of sh ar eh ol de rs -.031 .446 -.055 .190 -.019 .955 der at or v ari able m s iz e 1.565 .057† 1.636 .119 era ct io n t erm ee o f i nternati on ality o f sha re hol de rs x Fir m size -.004 .912 sta n t 114.580 .000 116.500 .000 105.071 .000 104.360 .000 ar e .143 .144 .146 .146 ed R Squa re .138 .138 .140 .139 n ge in R Squar e .143 .000 .002 .000 p < 0.000 . * * p < 0. 01. * p < 0.05. † P < 0.1
5. DISCUSSION
This research investigates the effect of ownership characteristic on the degree of foreign equity commitment in an emerging market context. While previous studies have focused on, and found evidence for the effect of EM MNE owner characteristics on firm performance (Douma et al., 2002: Xia & Walker, 2015), internationalization objectives and host country choice (Ramasamy et al., 2012) and internationalization strategies (Meyer et al., 2014), this research suggests that specific owner characteristics also have an effect on the degree of foreign equity commitment. We measured two specific ownership characteristics; state- versus private-owned, and the degree of internationality of shareholders of the EM MNE. The results show that private ownership of a firm has a direct negative effect on the degree of foreign equity commitment in the emerging market context. However, as we expected, this effect is negatively moderated by firm size, meaning that as the firm size increases the relationship between being private-owned and degree of foreign equity commitment becomes less negative. The bigger private-owned enterprise has more extensive external networks and more resources, decreasing its government support and resource endowment disadvantage compared to the state-owned enterprise. While we predicted that degree of internationality of shareholders would also positively affect the degree of foreign equity commitment due to foreign market knowledge, a better understanding of risk and higher productivity, the results show that degree of internationality of shareholders does not have a significant effect. Furthermore, against our expectations, the results also show that firm size does not have a positive moderating effect on this relationship.
In the following section, we will discuss the academic relevance, managerial implications, limitations and suggestions for further research.
5.1 Academic Relevance
This research contributes to the existing literature on ownership effects and foreign equity commitment in the emerging market context by investigating the relationship between these variables and by examining the moderating role of firm size. As very few studies have addressed the effect of ownership on foreign equity commitment (Bhaumik et al., 2010; Cui & Jiang, 2012; Liang et al., 2012), this research contributes to the filling of this gap in literature by specifically investigating private- versus state-owned firms and degree of internationality of shareholders in the emerging market context.
Wei et al. (2015) show that private-owned enterprises in emerging markets have a disadvantage compared to state-owned enterprises because they are at a disadvantageous position regarding governmental support in financial, network and risk perspectives when engaging in foreign equity commitment. They also suggest that, because of their resource endowment and government support, state-owned enterprises would be more likely to engage in higher risk foreign equity commitment like acquisitions. The outcomes of this study support this argument and extend the literature by showing that the private- versus state ownership, indeed leads to lower degrees of foreign equity commitment.
Bhaumik et al. (2010) argue that a higher amount of foreign investors in the EM MNE has a positive impact on outward FDI. However, the results of our study show no significant relationship between the degree of internationality of shareholders of the firm and the degree of foreign equity commitment. A possible explanation for these different results could be the effect of the different industries; they examined firms in the Indian automotive and pharmaceutical sectors, while in this study firms from five other industries were analyzed. Our results show support for the effect of a firm being a bank, industrial company, or financial company on its degree of foreign equity commitment.
