The Impact of Institutional Distance on State-owned Oil & Gas
Firms International Mergers and Acquisitions
Student: Luis E. Bertolin Student Number: 11385480
Course: MSc in Business Administration – International Management track Institution: University of Amsterdam
Supervisor: Vittoria G. Scalera Date: June 23rd, 2017
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Statement of originality
This document is written by student Luis Bertolin who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Table of Contents
Abstract ... 5
1. Introduction ... 6
2. Literature Review ... 11
2.1 SOEs and Institutions ... 11
2.2 SOE Internationalization ... 13
2.3 Institutional Distance... 15
2.4 Governments and the Oil & Gas industry ... 19
2.5 Research Gap... 22
3. Hypotheses Development... 24
3.1 Institutional Distance... 24
3.2 Country dependence on the Oil and Gas industry ... 26
4. Data Sample and Methodology ... 29
4.1 Database ... 29 4.2 Variables... 31 4.2.1 Dependent variable ... 31 4.2.2 Independent variables ... 32 4.2.3 Moderating variable ... 34 4.2.4 Controls ... 34 4.3 Model specification ... 35 5. Results ... 36 5.1 Descriptive Statistics ... 36 5.2 Correlations ... 37 5.3 Regressions Analysis... 40 5.3.1 Institutional Distance ... 41 5.3.2 Oil Dependency ... 41 5.3.2 Moderation... 42 5.3.3 Control variables... 42
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6. Discussion and Conclusion ... 45
6.1 Academic relevance ... 47
6.2 Managerial and Policy implications ... 48
6.3 Limitations and suggestions for future research ... 49
6.4 Concluding remarks ... 50
Acknowledgement ... 51
References ... 52
List of Figures
Figure 1 – Conceptual Model ... 28Figure 2 – Performance Formula ... 32
Figure 3 – Moderation Interaction ... 42
List of Tables
Table 1 – Database Statistics ... 31Table 2 – Descriptive Statistics ... 36
Table 3 – Correlations ... 39
Table 5 – Models Summary ... 41
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Abstract
National oil companies (NOCs) have expanded their reach and power during the last decade. Governments have been trying to control more oil and gas (O&G) resources or spread their influence worldwide through the support of their NOCs internationalization. Research on state-owned enterprises and institutional distance have used multiple industries from a single country, resulting in different motives from an individual reference point to study the impact of distance on performance. Isolating them by similar objectives, allowed us to study the real impact institutional distance exerts on the internationalization of the firms. Through a quantitative research on 6 countries that made deals in 62 other nations during the period from 2006 to 2015, it was possible to bring a different perspective to the literature. The studied firms made deals with a broad range of institutionally strong and/or weak countries. In addition, the impact that oil dependency and the resource curse theory has on NOCs complemented the research. The
influence institutional distance exerts on the performance of the NOCs although existent it is marginal. Moreover, oil dependence proved to have the opposite direction from previous studies, which attested that the resource curse negatively impacts a country’s economy. We concluded that NOCs from oil dependent countries perform better and institutional distance does not show a relevant impact on these NOCs internationalization. This study contributes to the literature by showing a different perspective to measure distance on cross-border mergers and acquisitions and how isolating the motives could bring a different result to the relevance of distance and if it compensates moving to riskier countries.
Keywords: Institutional distance; state-owned enterprise; national oil companies; resource curse;
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1. Introduction
In the late 19th century oil industry magnate John D. Rockefeller detained 90 percent of US oil refineries and pipelines (History, 2016). He was attributed the quote: “The best business in the world is a well-run oil company. The second best business in the world is a badly run oil company”. This quote demonstrates that since a long time ago, people had attested the attractiveness of the Oil and Gas (O&G) industry. Governments did not wait much longer to have their share of this industry and explore the wealth of their nation soil. The creation of state-owned enterprises aimed at exploring oil and gas resources, the so called National Oil
Companies (NOC), started to appear in the 1920s in Argentina, with the creation of YPF, followed a little later, in 1930s, by Mexico, with Pemex. Although this movement started in the early 20th century, only in 1970s, triggered by state intervention and nationalism, a major increase of NOCs unfolded. OPEC (Organization of Petroleum Exporter Countries) was created in this latter period, to defend the interests of its members (McPherson, 2003).
Nowadays, OPEC members control 73 percent of total proved oil reserves worldwide, and in 2015 they were responsible for 43 percent of crude oil production (EIA, 2016). Besides most of the countries inside OPEC allowing privately owned firms from the O&G industry, defined as International Oil Companies (IOC), to operate inside their borders, the clear majority of their production comes from NOCs each of the governments from the organization possess within their nation.
The primary market for oil is the transportation industry (fuel for planes, cars, and ships). Natural gas is primarily used for heating, cooking and electricity generation. The O&G industry provides energy to approximately 60 percent of worldwide population (Alukal, 2017). The concentration of the industry is another relevant aspect. In 2012, 100 companies produced the equivalent of 84 percent of the world oil. NOCs were responsible for 58 percent of the
worldwide total production (Casade, 2015). Oil is the biggest single component of the energy industry and the world most traded commodity, representing approximately 1.5 trillion dollars of exports per year (Ballard et al, 2016).
Under a scenario of significant ownership contrasts and interests, both IOC and NOC dedicated efforts for internationalization over their history. There were 278 deals of mergers and acquisitions (M&A) in the O&G industry in 2014, representing 304 billion dollars in business
7 (PwC, 2016). Still in 2014, oil price fell 46 percent, a downfall that started in the second half of that year. Nevertheless, Saudi Arabia prime-minister, estimates a worldwide investment need of about one trillion dollars in the oil industry for the next 25 years (The Economist, 2016 p. 5).
Companies move from different regions according their singular expectation and macro scenarios. Under a context of several countries with large oil reserves, but at the same time high political instability (e.g Venezuela, Iraq), the institutions of those nations play a crucial role to determine where the firms should direct their cross-border investments. The risk of assets expropriation, property rights appropriation and the level of corruption from the potential host country, comparing with the firm’s home country, are some of the elements that constitutes the institutional distance to be discussed on this study. This institutional distance becomes more crucial in an industry that is the main source of energy worldwide (Alukal, 2017), and at the same time the largest component of several countries wealth (e.g Kuwait and Saudi Arabia) (Hutt, 2016).
North (1991), had already provided a broad view of what institutions represent and how they are divided, but studies on the application, research, and test of their impact on the firm performance are still recent and demands further development. Peng et al (2009), brought the idea of institutional base view, as the third element of the tripod of strategic management (complemented by the industry and resource-based views), enlightening the importance of the institutions for a firm’s strategic decisions. The impact of institutions on NOC has two sides. The first one regards to the institutions of its home country, and consequently its government, exert in how the company is managed (Wolf, 2009). The second refers to the host country institutions, where the NOCs are planning to enter. When internationalizing to acquire a strategic resource, which in several cases follow the objective of the country which controls the NOC, the state-owned firm needs to deal with barriers the host country government may impose (Duanmu, 2014; Cuervo-Cazurra et al, 2014).
Among the components that influence the internationalization of SOE, legitimacy is appointed by Globerman & Shapiro (2008) as one of the most important. Cuervo-Cazurra et al (2014) mention a triple agency problem as another challenge SOEs face, where different from the usual principal – agent relationship, SOEs have the dual role of the principals, consisting of both the politicians and the citizens of the country. The distinct interaction in the host country is
8 appointed as one of the differences between private and state-owned firm entry-mode strategies (Klaus et al, 2014).
In summary, the path to review the literature already published, their impact and addressing the existent gap, will be to first understand the relationship between the NOC and institutions. Secondly, the relationship between the NOC and internationalization. Thirdly, it will be to study how the effect of institutional distance impacts the internationalization of NOCs. Finally, the specificities of the O&G industry, NOCs’ home country dependency from this industry and their relevance for this study will be developed.
This research aims at bridging the gap from previous studies (e.g Goldeng et al, 2008; Globermand and Shapiro 2008; Li et al, 2014), which focused in a singular country, all the state-owned industries inside the respective nation or the differences in performance between SOEs and private firms. The approach used here will be the opposite. It will be focused on a singular industry (Oil & Gas) and study all the mergers and acquisitions performed by NOCs worldwide in the period between 2005 and 2015. A NOC will be considered a firm in which the government holds any of its share percentage.
This study will extend the literature by researching the impact institutions have in the internationalization of specifically SOE (in this case NOC, as it refers to the state-owned enterprises of O&G industry). Studies either focused on the country level of foreign direct investment (FDI) flows (Cezar and Escobar, 2015; Demir, 2016) or did not distinguished the ownership at the firm-level (between private or state-owned). The impact governments could exercise to promote the interests of their NOC will extend the literature providing insights of how much risk they may be willing to take, through the assumption from studies like Ghemawat (2007), saying that a higher distance brings a higher risk for the firm internationalization.
Goldeng et al (2008) removed from their research natural resource extraction firms, as they considered such industry overly regulated and which governments’ desire to control the use of natural resources is seen as an argument for public ownership. This creates a gap for a better understanding of how such regulation on a strategic and regulated sector may impact on a firms’ cross-border activities. While a higher regulation could create barriers in the relationship
between some governments, it may also bring benefits if the country from the acquirer NOC has a strong relationship with the target country.
9 Furthermore, Peng et al (2009) pointed a need to a deeper study on how the firms adapt to institutional changes and to overcome the broad and encompassing perspective institution-based view could have. This research will help to address this gap through the understanding of how NOCs perform when going abroad and trying to adapt to different contexts outside their home country. Using a single industry at a specific ownership (state-owned firms), will help overcome those constraints mentioned in Peng et al (2009). The flaws mentioned by Hoorn and Maseland (2016) of using a few reference points usually strong correlated between them to study the distance is another part this thesis will help overcome through a broad and heterogeneous sample. Moreover, this study will also provide insights of the power from the state, on how it could influence the performance of the firms. Xu and Shenkar (2002) attested that institutional distance affects the performance of firms. Duanmu (2014) mentions the impact of the state influencing the host country through political or economic actions. The maintenance of both these studies results (Xu and Shenkar, 2002; Duanmu, 2014) remains an open question.
The impact natural resources abundance has limiting the economic development of a country in possess of such wealth have already been studied (e.g Stevens & Dietsche, 2008; Mehrara, 2009). The influence institutions could exert inhibiting this curse are still in its earlier stages. Mehlum et al (2006) attest that for a nation overcome the resource curse it needs market friendly institutions. Hertog (2010) go further and explain that even a country with poor
institutions could make their SOEs overcome the curse, as long the management of the firms are market oriented, autonomous and protected from political and bureaucratic predation.
Under this structure, this project aims at bringing an answer to the research question of
how does the institutional distance between national oil companies and their target country affect the performance of the acquirer? And how does oil dependency play a role in this relationship?
The research question will follow the framework and hypotheses presented and explained in the hypothesis development section of this study. The test of the hypotheses will be performed using a quantitative analysis with linear regressions, based on the dataset from ten years of mergers and acquisitions in the O&G industry of six selected countries. Furthermore, institutional distance will be measured using four distinct scores from four different
organizations, aiming for a non-biased and industry specific measure of institutional distance, capturing the most relevant factors for the firms’ internationalization. Finally, the impact of the
10 dependency from O&G industry in the countries the NOCs come from, will be measured based on the percentage this industry represents on their nation’s total economy.
The results for the research questions explaining the impact of institutions will follow, bringing relevant insights both from an academic and managerial perspective. Finalizing the project, the discussion and conclusion with the most important achievements, impacts for both the literature, policy, and managements, as well as possible gaps that need further study will be discussed.
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2. Literature Review
Considerable research was already performed on both ownership impact on the performance of the firm when internationalizing (e.g Goldeng et. al, 2008; Li et al 2014; Globerman & Shapiro, 2008; Wolf, 2009) as the Institutional impact proportioned by different measures of cross-border distance (e.g Cuervo-Cazurra et al, 2014; Hutzschenreuter et al, 2015; Ghemawat, 2001). A review of the studies going from a broad view of the impact of institutions in NOCs, to the understanding of internationalization in NOCs and the impact of institutional distance will follow on.
Although the focus of this research is with NOCs, most of the studies related to ownership focused on SOEs. Their difference is only the exclusivity of NOCs belonging to a single industry (oil and gas), which is a piece of the whole SOEs group. Both acronyms refer to state-owned firms.
2.1 SOEs and Institutions
State-owned enterprises are the firms controlled by the state with two traditional explanations for its existence: be a solution for market imperfections or to follow ideology and political strategies from the government (Cuervo-Cazurra et al, 2014). As previously mentioned, NOCs are part of the state-owned firms inside the O&G industry, its existence relies in a mix of both explanations. Winston Churchill, British Prime Minister, considered security and diversity of supply of oil of great importance and key on all economic chain of a country (Wolf, 2009), demonstrating a concern to the state act as provider or facilitator of these resources since a long time ago. Moreover, NOCs started to have their exponential growth in 1970s triggered by a nationalism and enthusiasm for state intervention and ownership which culminated in the creation of the Organization of Petroleum Exporting Countries (OPEC) (McPherson, 2003). OPEC continue nowadays to be an influential player in the O&G industry, with a broad set of institutional diverse countries as their members.
North (1991) defined institutions as the human devised constraints that structure political, economic and social interaction. The author then separated the institutions among formal rules, consisting of constitutions, laws and property rights, and informal constraints, which are sanctions, taboos, traditions, and codes of conduct. Moreover, North (1991) attests that
12 institutions are those who provide the incentive structure of an economy. While institutions may serve many purposes, their most fundamental role is to reduce uncertainty and provide meaning (Peng, 2006; Scott, 2008b cited in Peng et al, 2009).
Peng et al (2009) brought an application of the impact institutions have on strategic management. He considered the institution-based view as the third leg on the strategic tripod, complemented by the industry-based and resource-based views. The institution-based view argues that in addition to industry and firm-level conditions, companies should also consider the influence of formal and informal rules of the game, complementing the strategy tripod (Peng et al, 2009). “The institution-based view predicts that the more formal market-supporting
institutions develop in emerging economies, the more we can expect a reduced reliance on informal network-based strategies and a heavier reliance on arm’s length market-based strategies” (Peng, 2003 cited in Peng et al, 2009 p.69).
SOEs possess advantages proportioned by their strong tie with the government. Cuervo-Cazurra et al (2014) mention advantages like the implicit backing of their home country
governments and the use of political relationship and diplomacy. This allow SOEs to perform riskier and larger investments with subsidized credit or diplomatic support to deal with foreign governments. Furthermore, Cuervo-Cazurra et al (2014) attests the positive effect
internationalizing can bring to SOEs through the increase of the independence firm managers will receive when obtaining a steady source of revenues from abroad.
The concept of effective ownership can vary. Governments can exert control through golden shares or voting right provisions. This would grant them power even when they possess a relatively smaller share of the company (Cuervo-Cazurra et al, 2014). Furthermore, the most likely type of SOE that would seek to internationalize would be the ones that are effectively wholly owned or majority owned by the state. In contrast to wholly-owned SOEs, firms that are indirectly owned by the government, are likely to internationalize similarly to private firms, as governments would have limited decision power. (Cuervo-Cazurra et al, 2014).
Estrin et al (2016) researched the connection between the influence of home country institutions from SOEs into their internationalization. The authors argued that SOEs need to be subject to effective control through a solid institutional structure so as not to deviate from profit-oriented to political motives. Estrin et al (2016) based their research at the hierarchy level of institutions from Williamson’s (2000), which distinguishes them between: informal, formal and
13 governance institutions. The results point to a complex association of SOEs internationalization at all three institutional levels. Furthermore, they found that the more institutions provide
effective control of decision-makers, the more SOEs will follow similar strategies (profit/market-oriented) from private firms (Estrin el al, 2016).
2.2 SOE Internationalization
In 1914, the British government acquired a stake in the Anglo-Persian Oil company, which granted them control of the firm. This created a precedent for several other state-owned or National Oil Companies to follow internationalization (Wolf, 2009).
The motives behind a firm’s decision to internationalize can vary significantly. Dunning (1993 - cited in Dunning 2000), attested they could be four. The first is market-seeking, where the firm seek internationalization to satisfy a particular foreign market. Second is resource seeking, when companies aim to gain access to natural resources. Third is efficiency seeking, when a firm look for a more efficient or specialized way to improve their portfolio. Finally, the strategic asset seeking, which consists in the firm protecting or augmenting the ownership of investing firms. (Dunning, 2000). Cuervo-Cazurra et al (2014), says that even if some SOE investment may be influenced to achieve profitability based on any of Dunning’s motivations, in some occasions the governments that control the firms may induce them to internationalize to achieve political rather than profitability objectives.
According Klaus et al (2014), state-owned multinationals (SOMNE), differ in their foreign entry strategy from their private-owned (PO) counterparts, due to the distinct interaction in the host country. Among the different problems SOMNE can face, Cuervo-Cazurra et al (2014) highlights three. First, a triple agency problem, consisting of politicians and the citizens of the home country of the firm acting as principals, with different objectives for the agent - firm managers - this results in SOMNEs investing in foreign projects that have lower business value than those selected by private MNEs. Second, a discrimination from host country governments or consumers, which may cause the block of bid for assets considered strategic by the host nation. Finally, the authors mention that SOMNEs must engage harder than private firms to gain legitimacy in the host country (Cuervo-Cazurra, 2014). Furthermore, the pressure state-owned and private companies face when internationalizing have different institutional circumstances and ways to adapt their business strategy (Klaus et al, 2014).
14 The historical perception of SOEs is rooted in the view that these organizational forms were solely created by state capital, managed by political appointees, and chartered to serve the collective good of the country (Ramswamy, Kroeck & Renforth, 1996; Ramswamy, 2001; Shleifer & Vishny, 1998 cited in Cuervo-Cazurra et al, 2014). Thus, SOEs often confined their operations to their home country and usually internationalized via exports, especially of raw material or energy products, providing foreign exchange reserves to their home governments. (Aharoni, 1986; Anastassopoulos et al. 1987; Vernon, 1979 cited in Cuervo-Cazurra et al, 2014).
Under new pro-market reforms, several countries embraced the privatization process on late 20th century, resulting in a reduction on the number of SOEs. With the change of control from the state to private firms, their behavior changed too. However, the privatization did not spell the end of the state ownership. Instead, it created a new range of hybrid state and private companies. Viewed as means for the state to exercise its foreign policy and diplomacy goals (Cuervo-Cazurra et al, 2014).
The efficiency of public firms and their management was already studied and compared with their private counterparts. Boyne (2002) reviewed several researches concerning this
comparison between private and public. The author only found support for managers values from public firms being less materialistic and having a lower level of commitment to the organization than the private ones, resulting in difficulties like the use of performance-related pay.
Furthermore, Boyne (2002) also found that public organizations are more bureaucratic, this stem from the monitoring bodies requirement and public-sector accountability, between other reasons. Nolan (1999), studied Chinese SOEs and found that beside their processes, management, and way of doing business differing significantly from private firms and World Bank
recommendation (the World Bank attested that SOE should be privatized to become competitive) they could survive and succeed. Chinese SOEs followed a different path, modernizing quickly and changing its operational methods, playing a central and essential path in China’s new industrial revolution (Nolan, 1999).
Peng et al (2004) researched strategic groups ownership in China using Miles and Snow (1978) four strategy types (defender, prospector, analyzer and reactor) to segregate the groups. As a result, Peng et al (2004) considered SOEs a defender group, characterized by stable customer base, narrow product focus and a stable administrative structure, managed by older, conservative managers. The private firms fitted the prospector type, with focus on innovation
15 and change, and a flexible structure managed by younger and more entrepreneurial managers. Peng et al (2004) findings show SOEs as less prone to risk, less proactive and less aggressive than the other groups. In contrast, private firms were at the opposite side, willing to take higher risk, be more proactive and more aggressive. Under those characteristics, he found that the SOEs group seem to be the best performing one, while private firms were the worst performers.
Among his explanations for this not so obvious result, we may focus on three of them: first, without a stable institutional framework, SOEs’ defender strategy may create a better fit with the uncertain environment (Peng, 2003; Tan and Litschert, 1994 cited in Peng et al 2004). Second, at the time of the study, Chinese government still maintained extensive support for their SOEs. Finally, this result could be industry-specific, as the research only focused on Chinese electronics industry.
2.3 Institutional Distance
In the context of the criteria a firm must look for, when seeking to internationalize their activities, Hutzchenreuter et al, (2015) studied the concept of distance, defining such as the extent of differences between country pairs. Distance introduces friction (Shenkar et al. 2008) and complexity (Vermeulen and Barkema, 2002) to cross-border activities, increasing the challenges of achieving and sustaining successful cross-border activities (Hutzchenreuter et al, 2015).
In the case of this research, focused on the institutional distance, what can be observed is that this specific concept was introduced to the literature only recently. Studies tried to research and find a specific form to measure the institutional distance between nations. Di Maggio and Powell, (1983) attested that institutional distance encompasses differences in the regulatory, normative and cognitive pillars of institutions. Hofstede (1980) measured the cultural distance between countries through a broad and recognized study, encompassing power distance, masculinity/femininity, individualism and uncertainty avoidance.
The cultural distance relation with cross-border acquisition performance was already studied. The research of Morosini et al (1998) found a positive relation between cultural distance and internationalization acquisitions performance. The authors highlighted the fact that the firms making cross-border acquisitions to countries with a more distant set of routines and repertoires were performing better. Moreover, an acquisition in cultural distant countries can provide a
16 diverse access of routines and repertoires, which may enhance performance over time (Morosini et al, 1998).
When looking to measure the distance, most studies rely on objective country-level differences, although some researchers argue that distance should be captured at the individual level (e.g Sousa and Bradley, 2010; Swift, 1999), as at the end those are the ones responsible for key decisions (Hutzschenreuter et al, 2015). Distance requires two entities to be measured, what may create doubt is the reference point. Hutzechenreuter (2015) found that in almost every article the home country is the reference point.
Besides higher distance usually being associated with higher cost of doing business, Hutzechenreuter (2015) found that greater distance could also bring better decision-making, as managers who consider a foreign country to be like their country may be unobservant or inattentive to crucial differences in country contexts. In this way, greater distance increases the comprehensiveness of market research (Evans and Mavondo, 2002 cited in Hutschenreuter, 2015). The outcomes affected by distance are divided in four by Hutzechenreuter (2015): market selection, entry mode, performance and knowledge transfer, and inter-organizational
relationships.
The effects of institutional distance in the researches done up to this moment found mixed results. Both Negative effects (e.g Castellani et al, 2013; Xu et al, 2004) and positive relationships were found (e.g Contractor et al, 2014; Schwens et al, 2011). Even inside the institutional approach mixed results were seem - as Arslan and Larimo (2010) researched, formal institutional distance is negatively related, whereas informal institutional distance is positively related to greenfield investments (Hutzechenreuter, 2015). Ghemawat (2001) attests that besides what some researchers argue that recent information technologies and global communications are shrinking the world, in the business environment distance still matters. Companies must explicitly and thoroughly account for distance when they make decisions about global expansion.
Hoorn and Maseland (2016) research a different view towards institutional distance. The authors attest that most of the studies until now focused on firms from a single or institutionally homogeneous set of countries. The countries end up strongly correlating among themselves, and in the view of the authors this could turn the researches invalid. Furthermore, the lack of clarity impacts not only the theory but also managerial practices. Firm efforts to overcome institutional distance could become marginal or even pointless if the actual challenge facing the firm is one of
17 low institutional quality, rather than unfamiliarity with the target country institutions (Hoorn and Maseland, 2016). To overcome this kind of issue, the authors complement saying that research needs to move beyond partial perspectives, and start using multiple reference points.
The conceptualization of distance has other critics too. Zaheer et al (2012) attest that distance has been constructed in a superficial manner, without the proper attention to what mechanisms influence it, or to the conceptualization and measurement of distance. The authors suggest four approaches to give distance a direction. First, to avoid the oversimplification of complex relationships. Second, to test the symmetry assumption, as distance is not the same from location A to B compared to location B to A. Third, building distance considering firm
heterogeneity and the possibilities of it being endogenous, as difference is not experienced and perceived at the same way for all firms and managers. Finally, distance should pay attention to the mechanisms and constructs from a variety of disciplines other than international business itself (Zaheer et al, 2012).
For the Oil and Gas industry the institutional variable is of relevant impact, especially when their firms decide to invest abroad. This industry deals with one of the most demanded and safeguarded natural resources available. Several of the worldwide largest producers protect their national market from foreign entrants or impose restrictions for them to operate in their country. The regimentation of how, for how long, at what cost, in which way they could operate in that specific host country would be crucial for a successful international investment. While
institutions serve many functions, their most fundamental role is to reduce uncertainty and provide meaning (Peng, 2006; Scott, 2008b cited in Peng et al, 2009).
Xu and Shenkar (2002) attest “…institutional distance triggers the conflicting demands for external legitimacy (or local responsiveness) in the host country and internal consistency (or global integration) within the multinational enterprise (MNE) system.” The three pillars with which institutions are formed are: regulative, which aims at monitoring and enforcing the rules; normative, that prescribes desirable goals and the means to attain them; and the cognitive, which highlights the internal representation of the environment by actors (Xu and Shenkar, 2002). The pillar that impacts NOCs more significantly when deciding to invest abroad is the regulative one. The rules of the game, the stability of the institutions and risk of expropriation are encompassed as regulative measures which vary from country to country.
18 As organizational practices are shaped by the institutional environment, the successful transfer of these practices from the headquarters to the foreign subsidiary, depends on the distance between the host and home environments: the larger the distance, the more difficult the transfer (Kostova, 1999 cited in Xu and Shenkar, 2002). MNEs with a global strategy
(concentrated production and management in a single location, reaping scale economies) will invest in host countries where institutional distance is small, avoiding difficulties in parent-subsidiary cooperation. In contrast, MNEs with a multi-domestic strategy (foreign subsidiaries focused on local markets, with larger autonomy) could rely on investing in institutionally distant markets, as they don’t rely heavily on parent-subsidiary coordination and are less concerned with institutional conflict within MNEs (Xu and Shenkar, 2002).
Not only the institutions from different countries vary, but also in countries which are geographically large and with different forms of governance inside it. Li et al, (2014), studied the varieties of capitalism and how SOEs differ from each other. The groups considered in the study include “Central SOEs, with concentrated monopoly features and business groups characteristic to act as policy instruments of the state. Their formal mandates to support macro-level industrial growth and social welfare distances them from purely profit-maximizing practices” (Li et al, 2014 p. 995). This category fits for most NOCs, as they develop their activities further than only profit-seeking motives.
Host country legitimacy is one of the greatest challenges when SOEs decide to
internationalize their activities. In the natural resources industry, specific in the O&G industry, this challenge is amplified. In several countries, the block for foreign firms to access natural resources already exist. Globerman & Shapiro, (2008), researched the impact of SOEs from China internationalizing to the United States (US). In one of the mentioned cases, a Chinese National Offshore Oil Company (CNOOC) tried to takeover Unocal, a US oil producer. Strong opposition from US politicians, along with a long process for approval, made the Chinese SOE withdraw from their bid. This process shows how challenging it could be for a NOC to establish its investments in foreign soil, especially in cultural or institutionally distant countries.
Furthermore, Li et al (2014) attest that not only host country legitimacy need to be gained by SOEs, but also at the home country. The authors research the need of SOEs for a sustained access to information and to gain support from their home government. These mentioned
19 necessities force SOEs management to comply with government targets and priorities, gaining the legitimacy and consequently their backing.
Ghemawat (2001) developed the CAGE model with four dimensions to measure distance: cultural, administrative, geographic, and economic. For this thesis, the most relevant is the administrative or political distance. This dimension refers to historical and political associations shared by countries that greatly affect trade between them. Policies of individual governments pose the most common barrier to cross-border competition (Ghemawat, 2001). When a company aims at entering a new country, the target country government can impose barriers to this
foreigner competitor in order to protect the domestic ones. Ghemawat (2001) mentions that such barriers are more likely if the domestic industry meets one or more of the criteria: it is a large employer, it is seen as a national champion, it is vital to national security, it produces a staple product, it produces an “entitlement” good or service, it exploits natural resources or it involves high sunk-cost commitments. In his final argument of the administrative distance, Ghemawat (2001) highlights that a target country weak institutions damage cross-border economic
activities, as companies usually avoid doing business in countries known for corruption or social conflict.
2.4 Governments and the Oil & Gas industry
The study of the ownership impact on a specific industry, mitigates conceptual concerns of empirical studies as: sector-specific effects are automatically controlled; the global nature of the industry allows international competitors to be used as benchmarks; and public ownership is usually grounded in political motives rather than inherent market failures or financial losses (Wolf, 2009).
The production process in the oil and gas industry is divided in three phases: upstream (includes the exploration, drilling and production of oil), midstream (includes transportation and trading to refineries) and downstream (includes refining, storage, distributions and marketing to wholesalers and retailers) (Graaff, 2011).
Al-Obaidan and Scully (1991 - cited in Wolf, 2009), studied efficiency differences between international private and state-owned petroleum companies. The authors found that state-owned enterprises (SOE) are, on average, only 51-65% as technically efficient as their private firms’ counterparts. Victor (2007 - cited in Wolf, 2009) found that the largest private oil
20 companies are better at converting reserves into output, and tend to generate more revenue per unit of output. Victor (2007 - cited in Wolf, 2009) concludes her work affirming that some of the NOCs reserves are “dead oil”.
When Oil & Gas prices are commercialized at high prices in the market, governments often try to spread their power and show “kindness” across borders using their NOCs. Cuervo-Cazurra et al (2014) mention the case of the Venezuelan government request for their own NOC (PDVSA) to sell deeply subsidized oil to Cuba, Jamaica, Haiti and Nicaragua, which were detrimental to PDVSA’s profitability.
In a different environment, China NOCs had a government hunger for resources to fuel its economic expansion. Chinese central state adopted policies in the early 1990s to favor large SOEs transnational operations. In 2001, the Chinese government made the “Going Out” strategy one of the main goals for their Five-Year Plan, enacting numerous additional preferential policies to encourage large SOEs to invest abroad. China’s oil industry experienced organizational
changes that decentralized the energy sector during the 1990s. The Chinese government divided its oil industry in four NOCs: CNPC (responsible for onshore oil exploration), CNOOC
(responsible for offshore oil exploration), Sinopec (in charge of refineries and petrochemical plants) and Sinochem (engaged in international trade of crude oil and chemical products). This restructuration was and effort of the government to introduce market mechanisms to make the companies more efficient. This resulted in an oligopolistic competition between them. (Liou, 2009).
This show how two countries rich in natural resources, who have in public controlled firms the way of extracting O&G, manage distinctly their firms. While their objectives could be similar at some point, the way they manage their means to achieve it through political
benevolences (Venezuela) or free-market efficiency (China) may impact considerably the performance of the NOC.
Many NOCs are blessed with a favorable resource endowment. Even where private and public firms compete, the state firms usually have preferential access to the most attractive assets. The horizon of planning from private and state-owned oil firms is another aspect that diverges. Private firms are never fully assured of their property rights in the long-term (Wolf, 2009), different from NOCs which count with government backing, especially at their home
21 country. The company profile also impacts their performance. While the upstream return on capital averaged 17.0%, at the refining and marketing was only 10.2% (Wolf, 2009).
Wolf (2009) found that NOCs, in particular OPEC NOCs, produce a much lower annual percentage of their upstream reserves than a firm from the private sector. Which he attests that may be caused by a more conservative policy, an overstatement of oil reserves or a combination of the two. Wolf (2009) found support on his hypotheses attesting that “ownership matters” in the sense that private firms encourage better performance and greater efficiency than state ownership does.
2.4.1 Country dependence
Scholars already studied the impact natural resources wealth has not only at the firm level, but in the country economy (e.g Stevens & Dietsche, 2008; Mehrara, 2009). Most of the resource-rich countries are not able to transform the revenue from natural resources extraction into a broad societal benefit. These exporting countries are in most cases not able to implement policies that can generate progress to their nations (Stevens and Dietsche, 2008), growing slower than economies without substantial resources (Mehlun et al, 2006). This paradigm of transforming resource wealth into sustainable growth to the entire economy is called resource curse.
Literature highlights six explanations for the existence of the resource curse: Dutch disease (increase in one sector and decrease in the other sector of the economy), governance, conflict, excessive borrowing, inequality, and volatility. (Mehrara, 2009). Those explanations are broad and do not provide a clear determinant to how this curse takes place in a nation. Stevens and Dietsche (2008) discuss the impact institutions can have to mitigate the resource curse. The authors mention that the wealth from the natural resources tends to maintain and consolidate political regimes which undermines social and cultural changes that have facilitated democratic transitions elsewhere. Continuing, Stevens and Dietsche (2008) say that the power holders in resource-abundant countries (typically politicians and bureaucrats) take personal advantage of natural resource wealth, robbing their countries from the opportunities resource wealth could generate. In other words, bureaucrats engage in politically rational but economically inefficient decision-making. The determinants and applications of what are and how should be used good institutions in resource rich countries is subjective and cannot be copied from elsewhere. What should really be fixed are the ‘constituencies’ not the institutions (Stevens and Dietsche, 2008).
22 The impact exerted by the institutions in the resource curse was studied by Mehlun et al (2006). The authors researched the influence of producer friendly and market friendly
institutions for the development or harm in the economy of a country rich in resources. The result is that institutions do matter to overcome the resource curse, where producer friendly institutions help countries to take advantage of their resources wealth, on contrary to the countries with grabber friendly institutions (Mehlun et al, 2006).
In a different study view, Hertog (2010) explains how countries rich in natural resources and with poor institutions could partially overcome the resource curse. He develops his study based on the success from several Middle Eastern countries had creating and maintaining SOEs. The view of state-owned firms as political extensions of country bureaucrats is not a reality for some of the Gulf Cooperation Council (GCC) countries. The immediate cause for this difference in those nations is a profit and market-oriented management, which are autonomous and protected from political and bureaucratic predation. These firm characteristics can only be obtained in countries with: the absence of a populist-mobilizational history and substantive regime autonomy in economic policy-making. (Hertog, 2010). Similar approach was researched by Li et al (2014), which mentioned the administrative decentralization as one of the points that enabled local governments inside China run their SOEs more freely.
2.5 Research Gap
As described through the literature review, several studies already researched distance and highlighted the importance it has for the firm internationalization; since the four motives companies have when internationalizing (Dunning, 2000), to the focus of how SOEs differ on their entry strategies (Klaus et al, 2014) and their impact on firms’ performance (Morosini et al, 1998). These studies tried to bring a generalizable research for distance, but their gaps bring divergent results, but distance can matter in different ways for different companies with particular internationalization aims.
Zaheer et al (2012) proposed to refine the use of distance through four already mentioned concepts. This thesis will focus on two of them: oversimplification avoidance and to the
mechanisms and constructs of distance. Hoorn and Maseland (2016) proposition to study distance with multiple reference points without strong correlation between them, is another hiatus we will research. Moreover, as Peng et al (2009) pointed, the understanding of how
23 institutional changes impact firms and how these firms adapt to them demands further
clarifications.
The specificities of the O&G industry, with triple agency and state support (Cuervo-Cazurra et al, 2014) make us go in this industry details and move further than institutional distance to research the impact oil dependency has on NOCs internationalization performance. The resource curse (Stevens and Dietsche, 2008) theory already proved the negative impact of natural resources abundance in a country economic development. The necessity to understand the impact of resource curse theory at NOCs and go further on researches that already tried to capture the effect of institutions at firm performance (Hertog, 2010) will also be studied in this thesis.
To address these gaps the following research question is formed:
How does the institutional distance between national oil companies and their target country affect the performance of the acquirer? And how does oil dependency play a role in this
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3. Hypotheses Development
In this research, two main concepts that impact the internationalization of the NOCs and consequently their performance were studied: institutional distance and oil dependency.
3.1 Institutional Distance
Institutional distance may create a series of concerns when a firm is internationalizing. Barriers and cost of doing business abroad are common problems faced by firms. The lack of legitimacy when entering a new country is one of the barriers enhanced for SOEs (Globerman & Shapiro, 2009). Differently from other industries, O&G is part of the natural resources considered
strategic for both security and economic development of a nation, as so a foreign firm is seemed more as attacker to the country sovereignty than as player improving competition when entering the host nation (Globerman & Shapiro, 2009). The case already mentioned between Unocal acquisition in United States by Chinese NOC CNOOC, which was blocked by US politicians, is one example of the barriers that could occur when investing in a strategic industry cross-border (Globerman & Shapiro, 2009). Li et al (2014) complements the lack of legitimacy barrier, attesting that this problem is commonly associated with incompatibility between home and host country institutional values and practices in the regulatory, cognitive, and cultural domains. In other words, a distance between some of the institutional instruments from home and host countries.
Distance has been used in a superficial manner in research, disregarding what
mechanisms are at play and influence it (Zaheer et al, 2012). This created an overly simplistic and sometimes incorrect way to measure distance. From the four ways to refine distance concepts researched by Zaheer et al (2012), two of them are crucial for this research: oversimplification avoidance and drawing on mechanisms and constructs from a variety of disciplines distance can be studied. This thesis investigates distance using a specific measure to what we believe answer the main concern in the internationalization of the NOCs - institutional distance. This institutional distance between their home country with the host country they are entering is believed to be a crucial instrument to evaluate the performance of their mergers and acquisitions cross-border. Furthermore, constructing distance on four distinguishing indicators from four also distinguishing sources creates a specific measure which suppresses the
25 oversimplification flaw. Relying those indicators on institutional constrains that O&G firms face when internationalizing caters to the second gap from Zaheer et al (2012) of drawing distance on a variety of disciplines on distance research. This structure allows this research to better
understand the internationalization performance of a particular industry (O&G) by their similar motives (or at least closer than through diverse industries) to understand institutional distance real impact.
The effect distance can generate to firms is a concern their management face when internationalizing. Different researches already studied the impact distance can bring in terms of entry mode (e.g Klaus et al, 2014), ownership (e.g Bass & Chakrabarty, 2014, Goldeng et al 2008) and the impact acquisitions generate on the whole firm performance after the deal is complete (e.g Dikova et al, 2010). The latter one will be the base of this study, aiming at how institutional distance influences the performance of the acquirer. Institutional distance is a recent area of study in international business, most of the studies that targeted measuring structural differences between countries and the effect they generate on firm’s performance, had focused on the cultural distance aspect (e.g Morosini et al, 1998). Moreover, even the studies which focused on institutional distance, suffer from the flaws pointed by Hoorn and Maseland (2016), of using a single reference point (country) to measure distance or using countries with strong correlation between them. These concerns need to be addressed through the research of multiple reference points sufficiently diverse.
Ghemawat (2001) highlighted the importance of distance for firms doing business cross-border. From the four dimensions of his CAGE model, the administrative (or political) distance affect directly the internationalization of NOCs. The exploitation of a natural resource vital for a country national security, may create barriers that are beyond the financial impact it may have on a nation economy. Considering the relation between all the costs from the barriers above, with the benefits that entering the potential country could bring becomes strategic for a firm looking to maximize its performance results. As Zaheer et al, (2012) commented, the conceptualization of distance is not a struggle simply because of its difficulty of measure; it also has problems because of potential differences in how it is experienced and perceived.
Mixed results are found in the literature regarding the impact of distance on performance. From the positive relation of high cultural distance improving the internationalization
26 impacting the post-acquisition performance (e.g Xu and Shenkar, 2002; Ghemawat, 2001). Associated with these ambiguous results, the mentioned gaps like the over simplification (Zaheer et al, 2012) and overgeneralization (e.g Peng et al, 2009; Li et al, 2014) of studies of distance, and a need for the use of multiple reference points to avoid strongly correlated countries (Hoorn and Maseland, 2016), are between the motives that lead us to search for a better understanding of the real impact of institutional distance on performance. This results in the first hypothesis:
H1 –There is a negative relationship between the institutional distance of the acquiring and the target firm and the performance of the acquiring company.
3.2 Country dependence on the Oil and Gas industry
NOCs usually enjoy endowments from the vast oil and/or gas resources of the country they are from (Wolf, 2009), often leaving themselves to the management of people appointed by the government and who are not professionally competent to efficiently explore such resources. Furthermore, as compared to private oil firms, the objectives of NOCs are not always economical. As Li et al (2014) says, the use of SOEs as policy instruments exercising non-commercial strategies with political motives, generates higher conflicts with the host country government.
Mehlun et. al (2006) found that the resource curse only affects countries with grabber friendly institutions. The nations in possession of producer friendly institutions are not affected by this problem. In this way, the quality of institutions determines whether countries avoid the resource curse or not (Mehlun et al, 2006). Besides Mehlun et al (2006) research having
analyzed the country economy as a whole, NOCs inside those borders could suffer from the same flaws. Resource abundance and weak institutions may impact the performance of state-owned firms and their internationalization decisions.
The oil and gas industry is a cyclical, high-risk, and capital-intensive business segment, which demands flexibility, and the ability to execute difficult choices (Deloitte, 2016 p. 2). When the O&G prices operate at high prices, governments who rely on this industry and its profits to fund their budgets escalate their spending, but as the prices going down their need to continue exploiting company resources could create problems. Financing both the NOC home country spending at the same time the company guarantee resources for their expansion is a difficult
27 situation. This may affect how NOCs internationalize and under which economic scenario will be more ready or willing to move cross-border.
Robinson et. al (2006) found that politicians tend to over-extract natural resources relative to the socially efficient extraction as they only care about the future stock of resources if they are in power. Differently from private firms’ management who need to deliver results at the same time they are accountable and transparent regarding their decisions. Boyne (2002) found in his research that besides the higher bureaucracy of public firms from their private counterparts, management appointed by the state has poor organizational commitment and is less materialistic. Using an extreme example, Venezuela is a nation with one of the largest oil reserves in the world, but through the mismanagement of their NOC (PDVSA) and the extreme dependence of the country on oil exports, both its national economy and NOC had a severe downturn when oil prices dropped to below 50 dollars per barrel. By Deutsche Bank calculation, the government needs oil at 120 dollars a barrel to finance its spending plans (The Economist, 2014). Institutions play a crucial role in the better exploration of natural resources through permanent resource booms, since they can determine the extent to which political incentives map into policy
outcomes, promoting the accountability of politicians (Robinson et. al, 2006). These politicians’ accountability is clearly not the case for Venezuela and many other nations which rely on the O&G industry.
The “resource curse” (e.g Mehlun et. al, 2006; Stevens and Dietsche, 2007) and the mismanagement occurred in the control of NOCs by politicians (e.g Robinson et. al, 2006; Boyne, 2002), are central theories which embrace oil-dependent countries. These theories mostly focus on the performance of the country’s economy, marginally explaining how these
particularities affect NOCs internationalization and their performance. The effects a more diverse economy could create and as Hertog (2010) said “Defy the resource curse” with more market-oriented state-controlled enterprises and without politicians’ mismanagement, demands a deeper research. To provide a better view on this gap and understand the O&G dependency directly on the performance and on the relation with institutional distance, this study has the two hypotheses below:
H2 – The NOC home country’s dependence on the Oil & Gas industry into their entire economy, negatively impacts the performance of the NOC’s internationalization.
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H3 – The relationship between institutional distance and NOC performance is negatively moderated by the NOC home country’s dependence on the Oil & Gas industry into their entire economy.
The three hypotheses above proposed, are represented in the model shown on Figure 1.
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4. Data Sample and Methodology
This explanatory research will study the problem of NOC cross-border internationalization, trying to understand how institutional distance and oil dependency impact on it. The approach used was to first understand the theoretical basis by the study of the existing literature.
Following, the above-mentioned hypothesis will be tested through an experimental design. In this section, we will describe how the data from the sample and variables were gathered and why they are appropriate to be used. Finally, the method of analysis applied to this data will be
explained.
4.1 Database
This research collected data from reliable secondary data sources. Mergers and acquisitions data was collected through Zephyr database, which contains detailed information regarding the company and the deals themselves. It comprehended the period between 1st of January of 2006 and 31st of December of 2015, encompassing ten years of mergers and acquisitions at different moments of the worldwide economy. Going through one major financial crisis in 2008 and a shock on oil prices in 2014-15, this data is able to provide reliable information for the result of this research. The criteria selected on Zephyr to filter the deals was: first, select the period above mentioned; second, the deal types: acquisition, joint venture, merger and minority stake; third, the deal status: completed and completed-assumed; and fourth, the NAICS (North American Industry Classification System) 2012 for industry selection: oil and gas extraction, natural gas distribution, petroleum and coal products manufacturing, chemical manufacturing, plastics and rubber products manufacturing, chemical and allied products merchant wholesalers, petroleum and petroleum products merchant wholesalers, gasoline stations and pipeline transportation. Although some sectors are not primarily related to Oil and Gas extraction (e.g chemical manufacturing), it is important to have a broad filter to capture all the business from the NOC chain (upstream, midstream and downstream). The search resulted in a total of 23.028 deals from the Oil and Gas industry and its immediately related business. After this broad selection, the file was transferred to Microsoft Excel format, in which the six countries to be studied were selected: Brazil, China, Italy, Malaysia, Norway and Russia. Those countries were selected due to a restriction of information from other countries who besides having large NOCs don’t provide
30 open information from their firms (e.g Middle Eastern countries and Venezuela). The sample of six distinct countries in terms of geographical location, economy and institutional development, and oil dependency, overcome flaws from previous researches which used a single reference point or multiple but strongly correlated references, one of the literature gaps pointed by Hoorn and Maseland (2016).
Following the selection of countries, we filtered only the deals from its state-owned firms. The names of these firms were gathered from the Energy Intelligence Report 2016, which contains the top one hundred O&G firms worldwide, pointing which of them are private or have governments as a shareholder. The selection of state-owned firm will follow the criteria of the presence or not of a government as a shareholder of the O&G company, besides differences from fully-owned or minority ownership. As Cuervo-Cazurra et al (2014) says, the impact the
government could impose in the management even with a small ownership of the company needs to be considered. After this phase, we had restricted the sample of ten years to 176 deals,
comprehending 6 countries and 12 NOCs that made a cross-border merge or acquisition in a variety of 62 countries, as represented on Table 1.
31 NOC Home Countries Number of Deals Number
of NOCs Target Country
Number
of Deals Target Country
Number of Deals
Brazil 26 1 Armenia 5 Kazakhstan 3
China 34 4 Austria 2 Kyrgyz Republic 3
Italy 17 1 Bahamas 2 Libya 1
Malaysia 10 1 Belarus 6 Luxembourg 1
Norway 10 1 Belgium 2 Malaysia 1
Russia 79 4 Bermuda 4 Mexico 1
Bulgaria 1 Mongolia 2
Canada 3 Netherlands 7
Cayman Islands 2 Nigeria 1
Chad 2 Paraguay 1
Chile 3 Peru 1
China 1 Poland 2
Colombia 5 Portugal 1
Costa Rica 1 Romania 1
Cuba 1 Russia 5
Cyprus 3 Serbia 4
Czech Republic 3 Singapore 1
Denmark 2 Slovakia 1
Ecuador 1 Slovenia 1
Egypt 1 Sri Lanka 1
Estonia 1 Sweden 1 Finland 1 Switzerland 7 France 6 Syria 1 Georgia 2 Thailand 1 Germany 6 Turkey 2 Greece 1 Ukraine 4
Hungary 4 United Kingdom 14
India 1 United States 6
Iran 1 Uruguay 5
Italy 6 Uzbekistan 5
Japan 2 Venezuela 10
Table 1 – Database Statistics
4.2 Variables
4.2.1 Dependent variable
The performance of the firms is the dependent variable, and was measured by the revenue growth from the NOCs two years after the acquisition. Market based measures have already been suggested as superior alternatives for performance measure (Woo et al, 1992 cited in Morosini et
32 al, 1998). As discussed by Morosini et al (1998) the first two years after the acquisition are critical for the performance; and by the end of the second year, the process of integration is usually complete. In this way, the formula used to calculate the performance is represented in the Figure 2. This resulted in a percentage result that represent the variance in sales in the period. This data was obtained from Wharton Research Data Services (WRDS) – Compustat.
Figure 2 – Performance Formula
4.2.2 Independent variables
The institutional distance measure comprises four different scores from all different sources. Through these indicators is possible to capture a broad view and at the same time not rely exclusively on one indicator, which could produce a bias for certain countries.
The first one is the Global Competitiveness Report (GCR) which assesses the competitive landscape of 140 economies, providing insight into the drivers of their productivity and
prosperity (Schwab, 2016). This report contains twelve main pillars to measure the
competitiveness of a country. The relevant pillar for this study was the Institutional. This metric will help to determine to what kind of host country oil firms expand. The Institutional pillar measures the efficiency and behavior of both public and private stakeholders, and the legal and administrative frameworks individuals and firms interact. (Schwab, 2016).
The Corruption Perception Index from Transparency International was the second indicator used. This organization has among its objectives the fight against corruption and elaborating every year the corruption ranking with the countries that have the best and worst corruption perception of their public sector.
The third indicator used to form the institutional distance measure is the International Property Rights Index. This report focuses on three core components to create a score of the countries that provide the best property protection. The first core component is legal and political environment. The second one is physical property rights. Lastly, they use the intellectual
33 property rights. With those three components, they aim at showing the best countries willing to govern democratically, improve the rule of the law and empower free economy (Montanari, 2016).
The last indicator used, is the regulator quality index from the World Bank. This indicator is part of the Worldwide Governance indicators from the World Bank. They report six
dimensions: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption. Besides the relevance of many of the World Bank indicators for this research, they overlap considerably the other three indicators mentioned above from different institutions, which are important to maintain a diversity of sources on this work.
Each of the indicators are measured on a different scale. In order for us to have a standard scale and make the proper formula to measure institutional distance between countries, the first step was to standardize all the scores in a scale from 0 to 100 (e.g a score of 2 out of 4 will be transformed into 50 out of 100, and so on).
With those four different institutional indicators from four different institutions or organizations, recognized in their research work formulating those indexes, it is believed that they can provide a strong perspective of the institutional distance between countries. These variables help to overcome part of the mentioned flaws discussed by Zaheer et al (2012)
To obtain the institutional distance score, firstly the average of each indicator
(institutional pillar, corruption index, intellectual property and regulator quality) over the ten years’ timeframe (2006-2015) was calculated. Secondly, a new average of the previous four indicators average results was calculated, resulting in a single score for each country. Although a few countries didn’t present the complete dataset for the entire period in all four scores,
institutional scores don’t vary significantly from one year to another, resulting in a minimal impact at the final score average. The institutional distance is the independent variable used to test hypothesis 1.
The second independent variable will be oil dependency. This indicator measure O&G industry dependence at a country economy. The score is based on oil rents as a percentage of the country Gross Domestic Product (GDP). According to World Bank (2017), oil rents are the difference between the value of crude oil production at world prices and total costs of
34 GDP, which constitutes the most reliable and used indicator to measure all the wealth created in the country on a respective year. All the data from this moderator was obtained through the World Bank website. It was used only NOCs home country oil dependency measuring the impact at the performance of acquirer. The oil dependency is the independent variable used to test hypothesis 2.
4.2.3 Moderating variable
The moderating variable used on this thesis is the oil dependency. As explained in the independent variables section, oil dependency measures the dependency of O&G industry in the entire country economy. To obtain the moderating variable, the first process was to standardize institutional distance and oil dependency variables on SPSS, resulting in two new standardized variables. The final step was to create the moderating variable through the multiplication of the two new variables, also through SPSS software. This moderating variable tested the impact it exerts in the relation between institutional distance and performance in hypothesis 3.
4.2.4 Controls
This research has used seven controls and a single time dummy to create a clear result of the relationship between dependent and independent variables, and the moderating variable.
Considering the nature of institutional distance as a macro factor inherent to every country environment, the indicators used here will follow similar logic. The first control was the host country GDP, the most used measure of economic activity of a country, representing the sum of gross value added by all resident producers (World Bank, 2017). It represents an important indicator to capture the entire economic scenario of the country and is expected to capture the general growth of the country economy NOCs are entering. The second control, was the foreign direct investment inflows as percentage of GDP. This indicator aims at capturing the attractiveness of the country economy as a whole; it represents all the investment entering the country in the respective year (World Bank, 2017). Li and Resnick (2003) found that increases in democracy and property rights encourages FDI inflows, influencing the internationalization path of firms. The third control used was the country savings as percentage of GDP. This indicator shows how much the determined country is saving from everything it produces in a year as a percentage of its GDP (World Bank, 2017). Its relevance to this research relies on the capacity those savings could help NOCs finance their deals. Misztal (2011) already highlighted the
35 and Clemens (1999) go further and attest that a more optimal natural resource extraction could boost a country savings. All these controls presented up till now will be used for both home and host country.
The fourth indicator, and first at firm level, is the NOC (acquirer) liabilities increase two years after the acquisition. Through this control we may capture the level of managerial
discretion inside the firm for two reasons: first because the managers will have less cash to use on discretionary spending; second because when a company make frequent use of debt they need to open their private information to debtors (Wu et al, 2011). These mentioned demands
influence in the accountability of NOCs managers, making them more responsible on the choice of the firm investments. Finally, the last control is the NOC (acquirer) assets variance two years after the acquisition, aiming at controlling how much the company expanded its assets in the period. This last indicator control not only the company internationalization or M&A process, but also the expansion inside the home country or captive entries cross-border. As Yoo and Kim (2015) attest, the assets growth variable can measure firm growth from a financial perspective. The time dummy used is the year when the deal was completed. As mentioned before, the analyzed data comprehends 10 years, where we faced a major financial crisis and an oil glut that made such commodity fell more than 50% (Ballard et al, 2016 p. 4).
4.3 Model specification
With this data organized, it was imported from a Microsoft Excel file to SPSS software, the latter was the tool used on all statistic models. The first process made, was to run descriptive statistics, aiming at checking for abnormalities or missing data. Secondly, a correlation was made to verify for highly correlated variables. Third, the linear regressions were performed in order to check for the validity of this study, impact of the variables and their relationships. This generated the results presented in the next section.
