Beyond the narrow streets of markets and hierarchies : a comparative case study of ownership variations and OFDI strategies among state-owned multinational enterprises in Mercosur

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Graduate School of Social Sciences

Beyond the Narrow Streets of Markets and Hierarchies

:

A Comparative Case Study of Ownership Variations and OFDI

Strategies among State-owned Multinational Enterprises in Mercosur

Niv Levy

11761733 Supervisor: Dhr. dr. Sebastian Krapohl Second reader: Dhr. dr. Lukas Linsi

22 June 2018 Master thesis Political Science, Political Economy Word count: 23,782

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Acknowledgments

The objective of researching the foreign investment behaviour of emerging market state-owned multinational enterprises in global south countries has proven to be a challenging academic task giving the accessibility of the materials relevant to conduct an in-depth research. I express my sincere appreciation to all the people who have made this project possible and contributed to its academic maturity. Firstly, I would like to thank Doctor

Sebastian Krapohl for an outstanding guidance and inspiration throughout the research period. I appreciate Doctor Krapohl for his support and assistance during the seminars and meetings that made me acquire an enormous set of tools to conduct proper political science research. Secondly, I would like to acknowledge the contribution of my classmates in the seminars and thank them for providing me with rewarding suggestions and feedbacks during the research period. Thirdly, I would like to thank my girlfriend Ida and the city of Maastricht for facilitating an adequate environment for me to complete this research.

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Abstract

The internationalization of emerging market state-owned multinational enterprises (EM-SOMNEs) from the global south has become a prominent phenomenon in the international business arena, yet it has not been addressed sufficiently by the prevailing State-owned enterprise (SOE) and Multinational enterprise (MNE) theories. Accordingly, this research cross-fertilizes such scholarships in their analyses of foreign investment behaviour and

introduces two arguments for the study of EM-SOMNEs: the extraterritorial SOE rationale for internationalization and the political-economic rationale for foreign investment behaviour. While the first argument shows that unique firm-level capacities and a favourable domestic policy environment strongly shape the decision of EM-SOMNEs to internationalize, the second contention draws a link between the state’s political and economic capital and the EM-SOMNEs’ selection of location, industry and entry mode to attain national objectives abroad. Based on a comparative case study of two Brazilian minority and majority EM-SOMNEs (Vale and Petrobras) and a Venezuelan fully EM-SOMNE (PDVSA) within the context of Mercosur, the research confirms that EM-SOMNEs may develop technological and organizational capacities through foreign alliances or benefit from political and economic privileges to decrease home and foreign market constraints and internationalize. In conjunction with the conceptual framework, these cases additionally prove that the non-economic foreign investment behaviour of EM-SOMNEs is strongly associated with a higher level of state ownership and oriented towards regional states through a higher ownership investment mode. However, the commercially-driven foreign investment behaviour of EM-SOMNEs is aligned with a lower level of state ownership and performed through a higher ownership investment mode and across broader sectoral diversification, according to the munificence of the host market's institutional environment.

Keywords: State ownership, Multinational enterprises (MNEs), State-Owned enterprise (SOEs), Internationalization, Outward Foreign Direct Investment (OFDI), Mercosur

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List of Abbreviations

BNDES Brazil Development Bank

CCSI Columbia Center on Sustainable Investment E&P Exploration and Production

EM-SOMNEs Emerging market State-Owned Multinational Enterprise GFC Global Financial Crisis

IFDI Inward Foreign Direct Investment IIAs International Investment Agreements IOCs International Oil Companies

JV Joint Venture

LOF Liability of Foreignness M&As Mergers and Acquisitions MNEs Multinational Enterprise MSSD Most Similar Systems Design NOC National Oil Company O&G Oil and Gas

OFDI Outbound Foreign Direct Investment

OPEC Organization of the Petroleum Exporting Countries R&D Research and Development

S&T Science and Technology SOE State-Owned Enterprise

SPE FDI Special Purpose Entity Foreign Direct Investment TNI Transnationality Index

U.S. United States of America

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List of Figures

Fig. 3.1 Dimensions of Interest 27

Fig. 3.2 Causal Mechanism 30

Fig. 4.1 Composition of Research’s hypotheses 31

Fig. 5.1 Vale's Operating Revenues in Natural Resource Sectors, 2001-2014 43

Fig. 5.2 Vale’s Regionality Index, 2005-2015 44

Fig. 5.3 Vale’s Volume Sold by Destination with or without IIAs, 2005-2015 45

Fig. 5.4 BNDES Loans by Industry as a Percentage of Total Loans, 2002-2009 46

Fig. 5.5 Top Five Recipients of BNDES Loans in 2004 and 2009 47

Fig. 5.6 Regionality of Cross-border M&As and Announced Greenfield FDI projects by Vale 2003-2015 47

Fig. 6.1 Petrobras' Degree of Regionality, 2006-2015 57

Fig. 6.2 Petrobras' Volume Sold by Destination with or without IIAs, 2005-2015 59

Fig. 6.3 Petrobras’ Extraction Costs with and without Government Participation, 2006-2014 60

Fig. 6.4 Petrobras' Cross-Border M&As and Greenfield Projects by region, 2000-2013 61

Fig. 7.1 PDVSA’s Cross-Border M&As by region, 2000-2011 61

Fig. 7.2 Intra-Mercosur/Alba Trade: Heavy Petroleum-Related Exports in Countries with and without Mixed Enterprises with PDVSA 78

List of Tables

Table 5.1 Vale's Cross-Border M&As and Greenfield Projects, 2000-2013 48

Table 6.1 Petrobras' Allocation of Capital Expenditures in International Development Activities, 2004-2010 56

Table 6.2 Petrobras’ Operations as of 2010 Per Sector (24 countries)

58

Table 6.3 Petrobras' number of Cross-Border M&As and Greenfield Projects 61 in compare to the national and regional level,

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Table 7.1 Regionality of PDVSA's Crude Oil Exports Including Subsidiaries,

2000-2004 71

Table 7.2 PDVSA's Crude Oil Exports by Destination, 2012-2015 71

Table 7.3 PDVSA’s Operations as of 2013 Per Sector (19 countries) 72

Table 7.4 The TNI of PDVSA in 2004, 2009, 2011 and 2014 73

Table 7.5 PDVSA's number of Cross-Border M&As and Greenfield Projects in compare to the national level, 2001-2011 and 2003-2011 respectively 75

Table 7.6 PDVSA International Programs, 2006 76

Table 7.7 PDVSA’s Real and Accrued Supplies as well as Quotas in the Context of PetroCaribe, 2005-2014 77

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Introduction

The internationalization of EM-SOMNEs from the global south and the wide range of

political and economic approaches taken by the state as a cross-border investor have changed the architecture of the global investment system in recent decades.1 While the prominent global FDI trends throughout the 1950s until the 1980s were driven by the expansion of developed market enterprises into developing countries, the adoption of neo-liberal economic agenda by emerging economies in the 1990s gave room to the creation of new variants of MNEs (Kowalski et al., 2013). By 2010, there were more than 300 EM-SOMNEs responsible for the most ambitious and diverse cross-border activities, reaching more than half of the global GDP (Aguilera et al., 2017). Nevertheless, their expansion into the global investment scene has had consequences on the study of SOE and MNE, as EM-SOMNEs’ rationales for internationalization do not fit to the ones shaping the foreign investment behaviour of

developed market MNEs.2 Consequently, the SOE and MNE scholarships’ overreliance on the western experience of internationalization has left the configuration of the EM-SOMNE study rather incomplete, requiring an integrative platform to record the underlying political and economic mechanisms that allow such enterprises to become a leader in their industries.

Despite the academic endeavours aimed at explaining the creation of SOEs in the domestic market (Lindsay, 1976; Lawson, 1994), scant attention has been given to address the enterprises’ extraterritorial economic and political rationales for OFDI. Although the creation of SOEs has been traditionally argued to serve the government’s need to fix home market imperfections, the growing expansion of SOEs into the world stage since the early 2000s stands at odds with the guidelines of the conventional literature (Cuervo‐Cazurra, 2012). Importantly, it poses questions regarding the capacity of SOEs to move beyond the confines of the domestic market to engage in cross-border activities under commercial logic and become a multinational enterprise. It furthermore accentuates the necessity to understand the ways in which the government can exercise its control on EM-SOMNEs outside the national territories to achieve socioeconomic and political goals.

1_{This research solely focused on emerging market enterprises from global south regions such as Africa, Central}

and Latin America and most of Asia, but particularly selected its cases from Mercosur trade bloc. Thus, the term EM-SOMNEs is referred in this research to state-owned multinational enterprises from Mercosur member states.

2_{In the following, the research uses the term MNEs whenever it refers to privately-owned enterprises, which}

actively engage in cross-border activities and own foreign assets. The same principle is applied to the terms SOEs and SOMNEs, where the former is meant to serve the domestic market, the latter is directed towards the international arena (same as MNEs).

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In order to find solutions for the challenges mentioned above, the state ownership level in EM-SOMNEs is crucial and requires a further investigation. By selecting two

Brazilian minority and majority EM-SOMNEs (Vale and Petrobras) and one Venezuelan fully EM-SOMNE (PDVSA), the research identified the factors that explain their foreign

investment behaviour within and outside the context of Mercosur between 2000-2015. Therefore, the main question this research attempted to answer is: How do different levels of

state ownership affect EM-SOMNEs’ foreign investment behaviour in Mercosur member states?

This research is of great relevance for two main reasons. Academically, the

exploration of the differences among EM-SOMNEs in terms of government involvement does not only uncover the political mechanisms modifying the orientation of an investment tool such as FDI but also shed additional light on the paradigm drawing the boundaries of the firm in the global south. Societally, this research deepens the understanding of how political considerations shape the economic goals of EM-SOMNEs through the obtainment of assets and control on rations of sales as well as employment aboard. This objective can be moreover instrumental in promoting the creation of an intergovernmental body offering SOE guidelines to endorse a fair set of rules for the game EM-SOMNEs and MNEs play in the global

investment system.

In the following chapter (1) a review of relevant literature and theories will firstly be given to establish the theoretical foundation for this research. In the third chapter, the research will link the arguments derived from the theoretical framework to the research question and formulate three sub-questions and hypotheses. In chapter four the research design will be presented along with the methods, possible limitations as well as justifications for the

selection of cases. Chapter five will explore the case of the minority EM-SOMNE Vale, while chapter six and seven will discuss the cases of the majority EM-SOMNE Petrobras and the Fully EM-SOMNE PDVSA in a similar way respectively. Finally, in chapter eight the

research results will be summarised and theoreticallyinterpreted based on the hypotheses and the comparative case study design. Chapter eight will additionally suggest possible directions for future research on this topic along with limitations.

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Chapter 1: Literature Review

The study of EM-SOMNE covers a broad range of perspectives and dimensions. As such, it does not only borrow aspects from the MNE scholarship regarding the internationalization of commercial firms, but it also relies on views from the SOE literature to understand the non-economic behaviour of state-owned enterprises in an international setting. Since none of these paradigms reveal the full story behind the foreign investment behaviour of politically-induced enterprises, a synthesis of these perspectives is needed to identify how the socioeconomic and political considerations of the state are translated in EM-SOMNEs’ foreign investment

activities. Accordingly, a review of relevant streams of thought on emerging market state-owned enterprises will firstly be given to expose the unique characteristics that enable EM-SOMMEs to behave non-economically in foreign markets. Based on this foundation, an assessment of MNE scholarship will follow to examine the relationship between emerging market multinational enterprises’ economic motivations for internationalization and their home institutional environment. Lastly, a synergy of both assessments will form two rationales that comprehensively explain the study of EM-SOMNEs and are used as the theoretical framework of this research in chapter 2.

1.1 The Emerging Market SOE Logic of Internationalization and Foreign Investment Behaviour

The SOE literature has largely been confined to the domain of the domestic market where the government employs local enterprises to fulfil its political and economic objectives. Despite the SOE scholarship’s ability to explain the socioeconomic and political rationales for the creation of enterprises at home, the recent empirical evidence on EM-SOMNEs neither fits this domestic orientation nor represents the homogeneity of the traditional logic but rather displays a new wave of enterprises with hybrid ownership structures holding the goal of going global (Pinto et al., 2017). Nonetheless, EM-SOMNEs challenge the conventional literature by showing how domestic national objectives can be translated into the foreign investment behaviour of state-owned enterprises (Duanmu, 2014).

1.1.1 The Evolution of the EM-SOMNE Model: From Inward Orientation Through Ownership Variations to Globalization

Within the academic field of International Business, the classical view of SOEs has

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administrative bureaucracy due to state ownership (Lindsay, 1976; Megginson & Netter 2001). This scholarship has been based upon socioeconomic and political perspectives to accentuate how the financial interests of the firm conflict with the non-economic objectives of the state. For instance, Shapiro and Willig (1990) and Gupta (2005) convey that governments often follow a ‘double bottom line’ strategy by requiring SOEs to meet goals other than profitability, such as low consumer prices and high employment. Although contemporary voices within this scholarship advocate for the positive effects of state investment in propelling development beyond what is possible under free markets (Rodrik, 2008; Levy-Yeyati, Micco & Panizza, 2004), the general approach taken by the traditional SOE literature is that state ownership generates negative externalities (Cuervo-Cazurra et al., 2014).

In contrast, other explanations have commonly been centred on both economic and political logic for the creation of SOEs. While the economic view defines SOEs as national tool to correct market imperfections, the political view refers to the ideological and political strategies of government officials regarding the private ownership of strategic assets. Thereby, this scholarship shows that governments employ a mix of both strategies to justify the

development of SOEs (Cuervo-Cazurra et al., 2014). Given the straightforward political and economic explanation for the creation of SOEs, SOEs are thus perceived as dependent on the government’s capacity to hold an adequate institutional environment for commercial activities (Lawson, 1994).

Despite the relevance of these views in explaining the creation of SOEs and their domestic objectives, the global deregulation and privatization process of the 1980s and 1990s resulted in a large variety of mechanisms by which governments own, manage and direct these enterprises. With the removal of Import Substitution Industrialization policies that dominated their macroeconomic apparatus until the late 1980s, emerging economies opened their economies to international competition and privatised their SOEs to attract much-needed foreign investment (Duanmu, 2014). Since the creation of SOEs was driven by nationalistic objectives, the high political cost for privatization led to the creation of the majority and minority models, with the government possessing less than full equity stakes in the SOE (Cuervo-Cazurra et al., 2014). However, the advances in transportation technologies and the liberalization of trade and investment in the late 20st-century facilitated the global expansion of all firms, thus augmenting SOEs to invest in a variety of activities abroad and become a multinational enterprise (Inoue, Lazzarini & Musacchio, 2013).

With the growing number of EM-SOMNEs redirecting their attention to the global economy, the state has consolidated its power as the locus for the recruitment of capital and

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judicial benefits for internationalization (Liang, Ren & Sun, 2015). This is because private and public investors are constantly challenged to allocate resources and overcome the lack of capital needed to realize investments and develop competitive advantages for foreign

production. Intrinsically, the ability of the state to intervene in the commercial affairs of EM-SOMNEs intensifies the more these enterprises are dependent on the reception of states’ political and economic capital. Accordingly, the difference in the composition of public-private considerations in EM-SOMNEs can be influential to the way these enterprises architect their foreign operations (Sun et al., 2012). Thus, the picture depicted by the

traditional SOE literature regarding state control and public-private relationships varies from that portrayed in the recent internationalization trajectories of EM-SOMNEs.

1.1.2 The Emerging Market State Ownership Variation Logic for Foreign Investment Behaviour

The classification of EM-SOMNEs by their level of ownership is dependent upon the extent to which the state can effectively exercise ownership and operating controls in these

enterprises. Whereas governments have maintained majority and minority equity positions through sovereign wealth funds, holding companies and development banks, the means to implement control over firms have been largely shaped by the home institutional environment (Choudhury & Khanna, 2014). Given the difference between the institutional design of developed and emerging economies, acute negative externalities can arise from the inability of governments to hold a stable capital market and an effective legal enforcement system to propel the entrepreneurial activity of local firms. These institutional voids challenge the ability of private investors in emerging economies to recruit capital for investment and

diminish the regulatory pressure from the state (Cuervo-Cazurra et al., 2014). Simultaneously, it also raises the attractiveness of government ownership as the state can economically and politically support enterprises in pursuit of investments in foreign markets. As follows, the foreign investment behaviour of EM-SOMNEs is inherently shaped by the state ownership level and the institutional environment at home.

Within the study of EM-SOMNEs, two main variants of state ownership can be identified and reveal the implications on EM-SOMNEs’ foreign investment behaviour. According to the majority EM-SOMNE model, the government attempts to partially privatize the SOE to retain a direct control over the firm’s assets and activities. By listing the SOE on stock exchanges, the government attracts minority private investors to help run the firm and expand its access to new investment opportunities (Inoue, Lazzarini & Musacchio, 2013). Due to the hybrid nature of these firms, there is relatively more financial and managerial autonomy

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in employing professional management and board of directors vis-à-vis fully EM-SOMNEs, where the state is the only shareholder. However, the government can still be involved in co-opting board members by potentially exercising its control as a majority investor (ibid).

In opposition to the majority EM-SOMNE model, the government can alternatively act as a minority shareholder by granting private investors the ability to manage and direct EM-SOMNEs that it wants to support financially. Connectively, Inoue, Lazzarini and

Musacchio (2013) allege that given the diluted state control, minority SOMNEs are naturally less exposed to dysfunctional political interference and thus work to improve their capacities and financial performance to undertake profitable projects at the firm level. Connectively, Wu (2011) grapples that the government’s ability to interfere in the investment decisions of minority EM-SOMNEs declines the more its actions conflict with the economic objectives of majority private owners. Thus, upon relinquishing control to other private owners holding majority stakes, the possession of effective state control in the EM-SOMNE is dependent on the orientation of the private majority owner and its relationship with the home government.

From the perspective of capital accumulation to realize investments, the level of state ownership in EM-SOMNEs can be instrumental in mitigating dimensions of uncertainty and risk associated with the institutional environment of host markets. Kornai (1986) has

theorized the concept of Soft Budget Constraint to argue that the government may provide firms with financial aid to prevent bankruptcy in a constrained foreign institutional

environment. He reasons that this syndrome occurs more often when the government owns part of the equity of the firm and is accordingly requested additional funding upon the investment of the EM-SOMNE in uncertain foreign institutional environments (ibid). Therefore, he concludes that this factor shapes the firm managers’ behaviour since they expect state support in cases of financial bailout and act accordingly (ibid). Based on Kornai’s logic, Inoue, Lazzarini and Musacchio (2013) propose that since majority EM-SOMNEs can recruit more long-term investment from the state than minority enterprises, they are naturally less prone to face the condition of constrained opportunity resulting from the inability of firms to attract long-term funding.

Consequently, the probability of requiring additional funding is higher, the more the EM-SOMNE has access to financial aid from the government, which is contingent upon the level of state ownership in the firm (Cuervo-Cazurra & Genc, 2008). Thus, majority EM-SOMNEs hold better access to additional resources from the home government and can effectively withstand risks and uncertainties in foreign countries than firms with lower levels of state ownership (Shi, Markóczy & Stan, 2014). Appropriately, Pan et al. (2014) establish

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that majority EM-SOMNEs are more likely to follow the state’s non-economic objectives, as there is no significant counterbalance by external private shareholders to the imposition of non-economic considerations in the EM-SOMNE.

Correspondingly, the foreign investment behaviour of EM-SOMNEs is significantly determined by the relationship between the state ownership level and the home institutional environment. A noted implication of this analysis is that the existence of institutional voids in emerging economies should alleviate the resource constraints of firms and influences the extent to which the state can exert control on the foreign activities of EM-SOMNEs. Given this environment, a stronger state ownership in EM-SOMNEs should be more instrumental than of private owners since the government can foster new investments and direct capital needed for the development of competitive advantages. Therefore, the hybrid nature of minority and majority SOMNEs in the context of emerging economies' institutional environment enables the government to exercise control far above the ownership level it possesses.

1.2 The Emerging Market Multinationalization Logic for Internationalization

The leading economic explanations for MNEs' internationalization have largely been based on the early experience of western enterprises in technology-intensive industries during the 1920s. Technological, marketing and managerial strengths have been viewed as enabling developed market enterprises to internationalise and overcome the Liability of Foreignness (LOF) effects in foreign markets (Guillén & García-Canal, 2009; Ramamurti, 2004).3

However, the global expansion of EM-SOMNEs in the early 2000s has introduced new

internationalization trajectories based on the exploration of different home market advantages, the reception of the state's political and economic capital and the acquisition of technological capacities abroad (Estrin, Meyer & Pelletier, 2018). Consequently, EM-SOMNEs' alternative capacities for internationalization reflect a different set of push factors that are not associated with the internationalization models of developed market MNEs.

1.2.1 Alternative Capabilities for Internationalization in the Context of Emerging Markets

The MNE scholarship suggests that firms engage in FDI activities to exploit their capabilities, broaden their capital portfolio and increase their profitability as they seek markets, natural

3_{Liability of foreignness (LOF) at its core is the insight that firms may face social and economic costs when}

they operate in foreign markets. Both the host market environment and the EM-SOMNE’s specific

characteristics can alter the degree of LOF upon internationalization. As such, the type of technological and organizational capabilities possessed by the enterprise can alternatively decrease or increase expected degree of LOF in different host markets (Gaur, Kumar & Sarathy, 2011).

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resources, strategic assets or efficiency (Buckley & Casson, 1976; Dunning, 2001). However, contemporary studies advocate that the recent expansion of EM-SOMNEs into foreign

markets has not been driven by conventional ownership advantages but rather based on different types of political and economic resources that allow them to cope with institutional constraints at home (Mathews, 2006; Luo & Tung, 2007; Madok & Keyhani, 2012).4

Although the previous section has shown that such capabilities can be a consequence of the state ownership level in EM-SOMNEs, the perspective taken by the MNE literature is rather focused on an economic foundation. Nonetheless, a shared point of agreement between these scholarships is that the range of capabilities that a multinational enterprise can exploit differs between emerging and developed market enterprises and is largely dependent on their

institutional environment at home.

Borrowing from Hymer’s Firm-Specific Advantages perspective (1976), Dunning (1977, 2000) has developed the OLI paradigm to exhibit the conditions upon which an MNE should seek to engage in FDI by considering the firm’s ownership, locational, and

internalisation advantages.5_{While the paradigm proposes that developed market MNEs hold}

various ownership advantages that allow them to overcome the degree of LOF, it furthermore views these advantages as stemming from the stable capital and judicial environments

prevailing in the western world (ibid). Providing support for Dunning’s premise, Rugman (2009, 2010) contends that the foundation for the internationalization of emerging market MNEs is different from the one of developed market MNEs as it is based on scaling production and holding a monopoly over natural resources and state services, rather than focused on innovating technological capacities. Responding to Rugman’s stipulation, both Mathews (2002) and Madok and Keyhani (2012) maintain that emerging market MNEs internationalize to obtain the ownership-competitive advantages they lack by acquiring advantages externally and adopting learning-by-doing practices. This contention was further developed by Luo and Tung (2007) into the Springboard Theory of Internationalization to

4_{According to Dunning and Lundan (2008), ownership advantages include the ability of the enterprise to}

possess property rights, intangible, complementary as well as institutional assets to hold superiorities in foreign markets and engage in OFDI activities.

5_{Hymer (1976) attempts to explain the motivation for FDI by looking up the firm-level strategy decision rather}

than a capital market financial decision. In fact, FDI is believed to take place if the benefits of exploiting firm-specific advantages outweigh the costs of operating abroad. Although Hymer bases its theory on the existence of home market imperfections as an impetus for the creation of MNE, he nevertheless acknowledges the problems arising from information costs, currency risk, and the treatment of host governments that MNEs face upon penetration into foreign markets.

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claim that emerging market MNEs internationalize to obtain strategic resources needed to avoid home market deficiencies and compete more effectively against their western

counterparts. Thus, they conclude that emerging market MNEs use internationalization as a springboard to acquire strategic resources to reduce institutional constraints at home (ibid).

Although these perspectives are focused on the disadvantages of the constrained institutional environments in emerging economies while neglecting the differentiation between state- and privately-owned enterprises, another stream within the MNE scholarship offers alternative views. For instance, Meyer et al. (2009) vie that since emerging markets lack patent and judicial systems, local enterprises are forced to focus on developing

advantages that are not protected externally but rather internally. These advantages include the creation of new business models, organizational capabilities and process innovations (ibid). Consequently, they claim that emerging market MNEs may utilize some of these advantages to manage operations in changing and challenging institutional environments of other emerging economies (ibid). Connectively, Guillen and Garcia-Canal (2009) plead that emerging market MNEs’ ability to operate in such environments have enabled them to develop high organizational adaptability and strong political capabilities to catch up with developed market MNEs. Likewise, Cuervo-Cazurra et al. (2014) assert that EM-SOMNEs’ reception of economic and political capital from their states can be alternatively viewed as an ownership advantage, as it may lessen the degree of LOF in high institutional distant

countries.6 However, they emphasize that these privileges may not be enjoyed in host countries carrying hostility towards state-owned enterprises from emerging economies since they may impose foreign investment restrictions and consequently upsurge the degree of LOF (ibid).

Therefore, it appears that the MNE literature draws an incomplete picture concerning the effect of the constrained institutional environment in emerging economies on SOMNEs' development of ownership advantages. This deficiency is rooted in the scholarship's inability to differentiate between state- and privately-owned enterprises and its neglect of the role played by the home government in decreasing the degree of LOF in foreign markets. In other

6_{Pinto et al. (2017) argue that greater political, economic and cultural dissimilarities between the home and}

host countries hinder firms from pursuing foreign markets aggressively. Such dissimilarities are a source of added uncertainty, information asymmetry, organizational costs and difficulty of transferring knowledge. Accordingly, the level of institutional distance between home and host governments reflects their degree of political and economic commonness, which can impede or benefit the EM-SOMNE's OFDI operations (ibid).

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words, the unique ownership advantages of EM-SOMNEs are not fully covered by the guidelines of the MNE scholarship.

1.2.2 Foreign Investment Behaviour in the Context of Emerging Markets

As demonstrated in section 1.1.2, the home market environment has been shown instrumental in facilitating the formation of ownership advantages needed for EM-SOMNEs to

internationalize. The logic implies that since EM-SOMNEs hold unique ownership

advantages based on the government’s political and economic capital, they can minimize the degree of LOF and enjoy privileges not associated with privately-owned enterprises from developed markets. However, this argument does not specify how the selection of location, industry and entry mode for OFDI is decided by EM-SOMNEs in the context of their state ownership level, foreign, as well as home market constraints (Cuervo-Cazurra, 2008). Accordingly, the MNE scholarship’s ability to formulate predictions regarding the type and scope of MNEs’ OFDI can be useful in adding an additional layer to the analysis of EM-SOMNEs’ foreign investment behaviour.

Within the MNE theory, two primary perspectives prevail in the comprehension of EM-MNEs’ foreign investment behaviour. On the one hand, various scholars have explained the sharp deviation of EM-MNEs' internationalization trajectories from the western models by looking at their firm-level competencies. Ramamurti (2004) claims that EM-MNEs have broken the perceived internationalization sequence by expanding into economically and geographically distant countries before accessing closer markets. He contends that such firms are driven by the motivation to acquire ownership capacities in foreign markets where they can exploit their technological differences and face less competition. Moreover, Madhok and Keyhani (2012) allege that a strong state support induces EM-MNEs to access new markets through the deployment of greenfield projects to increase short-term profits and compensate for their lack of experience in foreign markets. Likewise, Estrin, Meyer and Pelletier (2018) state that given EM-MNEs’ reliance on state support, they are more prone to select a higher ownership investment mode (such as greenfield ventures) to penetrate into like-minded countries where they enjoy political and economic privileges. Although these stipulations clearly show that EM-MNEs' internationalization pathways are unique and unconventional, they still lack considerable attention to the differences between state- and privately-owned enterprises.

On the other hand, another bulk of scholarship alternatively emphasize the changes in the global business and sectoral environments that augment EM-MNEs to modify their

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foreign investment behaviour to decrease foreign technological and financial constraints. Knight and Cavusgil (2004) argue that the rapid internationalization of EM-MNEs is predominantly influenced by the global conditions that may proportionally decrease or increase the costs of globalization. Ramamurti (2012) vies that the foreign investment behaviour of EM-MNEs in the past two decades has been greatly crafted by the declining relevance of the cement, steel and petroleum industries in western economies, giving rise to the trend of South-to-North FDI strategies. He adds that these strategies can be manifested through EM-MNEs’ conduction of vertical FDI to either find consumer good markets (downstream) or key intermediate input suppliers (upstream). Another strategy is to embark on horizontal FDI to invest in industries that have matured in the western world but are becoming popular in emerging economies through building scale or obtaining technological capacities via lower ownership investment modes such as Mergers and Acquisitions (M&As) or Joint Ventures (JVs) to avoid a capacity glut (ibid).7_{Nevertheless, Cuervo-Cazurra et al.}

(2014) offer that the current views of EM-MNEs do not acknowledge the alternation in the foreign investment behaviour of state-owned enterprises to decrease the degree of LOF associated with their politically-induced ownership advantages. They contend that EM-SOMNEs’ foreign investment behaviour is not only influenced by sectoral and global business dynamics but is also determined by their level of state ownership, steering them to operate according to a non-economic set of considerations to manage alternative foreign market constraints (ibid).

Hence, these stipulations have shown that the OFDI behaviour of EM-MNEs works on an economic logic that pays attention to the changes in the context of international business but does not distinguish between state- and privately-owned enterprises. Consequently, this analysis needs to be supported by an integrative view of the role of the state in shaping the foreign investment behaviour of EM-SOMNEs to extend its explanatory reach.

7_{A joint venture is a common way of combining resources and expertise of two unrelated firms. In fact, joint}

ventures allow enterprises to grow without having to borrow funds, look for outside investors or join forces with local firms in purchasing, researching and developing products and capacities (Kogut, 1988).

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Chapter 2: Theoretical Framework

As stipulated in the literature review, the contemporary internationalization trajectories of EM-SOMNEs have been shown to divert considerably from the experience of their western counterparts in terms of their possession of unique ownership advantages and the type of domestic and foreign constraints. A theoretical implication of this examination is that the conventional SOE and MNE scholarships do not reveal the full picture regarding EM-SOMNEs’ foreign investment behaviour. Whilst the SOE literature does not formulate adequate elucidations on EM-SOMNEs’ selection of location, industry and entry mode for foreign investment, the MNE scholarship does not account for the fundamental differences between state- and privately-owned enterprises in emerging economies. By attempting to overcome this theoretical gap, a synergy of both scholarships is needed to capture how EM-SOMNEs’ foreign investment activities are shaped by the state ownership level. Therefore, two rationales are introduced in this research: the extraterritorial SOE rationale for

internationalization, showing how the state’s socioeconomic and political considerations are translated in the internationalization decision of EM-SOMNEs, and the political-economic rationale for foreign investment behaviour, focusing on how these drivers shape EM-SOMNEs’ selection of location, industry and entry mode for OFDI. Subsequently, the theoretical framework of this research consists of both rationales that cover various angles of the study of EM-SOMNEs.

2.1. The Extraterritorial SOE Rationale for Internationalization in the Context of Emerging Market State Ownership Variations

As shown in chapter 1, the existence of SOEs in a domestic setting is based upon clear socioeconomic and political drivers that appear to be incompatible with SOEs’ motivation to venture overseas in recent decades. Since the government benefits from the employment of SOEs to correct market imperfections and increase the welfare of its citizens, the

internationalization of SOEs stands against the fulfilment of such domestic goals (Cahen, 2015). Despite this oxymoron, the traditional SOE literature can contain an extraterritorial explanation when combined with the majority and minority models of EM-SOMNE to uncover how the government’s non-economic considerations are translated in EM-SOMNEs’ decision to internationalize.

Cuervo-Cazurra et al. (2014) have developed the Internationalization Logic of SOMNEs to comprehend why SOMNEs internationalize when they are meant to correct

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domestic market imperfections and accommodate national goals. This logic demonstrates that SOMNEs can be used as an extraterritorial vehicle by the home government to strengthen its economic and political influence in the region and leverage international prestige through the creation of economic and political alliances where the SOMNE plays a pivotal role.

Specifically, SOMNEs can facilitate diplomatic relations between home and host

governments through the establishment of production facilities to benefit the welfare of the host governments’ citizens. Accordingly, this mechanism can work in two distinctive ways. Firstly, it can redirect attention from the involvement of the home government in the

operations of SOMNEs by providing economic benefits to the host government. Secondly, it can secure the home government’s future not only by reducing dependence on foreign entities but by also increasing its geopolitical power and sphere of influence (ibid).

Due to Cuervo-Cazurra et al.’s (2014) lack of focus on the complex interactions between state ownership variations and the institutional environment in emerging markets, Musacchio and Lazzarini (2014) specifically address the implications of this relationship on the internationalization of SOMNEs. Their framework shows that since majority EM-SOMNEs are more exposed to the state’s political and economic capital in the shallow capital environment of emerging economies, they should be able to overcome resource scarcity and recruit long-term funding to accomplish national objectives in like-minded countries. It moreover demonstrates that the economic and political capital from the state can be manifested by fiscal incentives and a favourable domestic policy environment to equip the EM-SOMNE with ownership advantages to decrease the degree of LOF upon entering into foreign markets. Alternatively, a lower level of state ownership in the EM-SOMNE reflects a greater reliance on the development of unique technological and managerial capacities to realize foreign investment plans given the lower reception level of state support.

Accordingly, minority EM-SOMNEs are more likely to rely on the accumulation of capacities abroad, the formation of foreign alliances and the acquisition of international experience, to develop ownership advantages for internationalization (ibid).

In the context of the constrained institutional environment in emerging economies, a higher state ownership level should be more instrumental in forming unique ownership advantages that allow the EM-SOMNE to pursue greater national objectives, thereby following paths beyond profit maximization. However, the state’s political and economic capital may not help the EM-SOMME to exploit its ownership advantages to decrease the degree of LOF in host countries with which the home government does not hold political-economic relations. Alternatively, the lower the level of state ownership, the less driven the

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EM-SOMNE is to internationalize under non-economic considerations, since it is neither motivated by state capital incentives nor carries state-induced ownership advantages. Thus, the higher the state ownership level in the EM-SOMNE, the more likely it is to

internationalize under stronger state considerations and exploit its unique ownership

advantages in countries where it can decrease the degree of LOF through political-economic ties.

2.2. The Political-Economic Rationale for Foreign Investment Behaviour in the Context of State Ownership Considerations

As commonly argued by the MNE literature, MNEs internationalize to increase their profitability while seeking markets with valuable natural resources and intangible assets (Dunning & Lundan, 2008; Rugman, 2009). Since the MNE scholarship is based on the internationalization experience of western enterprises, it does not record the modes of internationalization that are shaped by national objectives. This is because EM-SOMNEs must factor in their governments' foreign political-economic goals, which are not driven by business objectives underlying the creation of economic value (Finchelstein, 2017). Hence, the second argument combines the foreign investment strategies of EM-MNEs and the non-economic considerations for EM-SOMNEs’ OFDI to explain how the state’s socio-non-economic and political considerations influence the selection of location, industry and entry mode for foreign investment.

Ramamruti (2012) offers an improvement for the EM-MNE literature by including the changes in the sectoral and global business contexts in which EM-MNEs operate as not only shaping their investment behaviour but also pushing them to exploit alternative ownership advantages. Ramamruti (2012) quibbles that EM-MNEs are more prone to invest in markets that are geographically or economically distant since their strategies are based on exploiting differences rather than similarities across markets. This includes EM-MNEs that begin as contract manufacturers or supplier affiliates of developed country enterprises and then

become MNEs. Therefore, he contends that the growing trend of South-to-North FDI over the last two decades in natural resource industries is mostly attributed to EM-MNEs’ motivation in building scale by serving foreign markets and obtaining sophisticated technologies through lower ownership investment modes (M&As or JV agreements) in developed countries (ibid).

Despite the strength of Ramamurti’s thesis in providing additional variables that add clarity to the OFDI strategies of EM-MNEs, it does not put these factors in the context of different state ownership variations to detect how the state’s socioeconomic and political

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considerations are translated in EM-SOMNEs’ selection of location, industry and entry mode for foreign investment. By building on Penrose’s (1959) Resource-Based View, Cuervo-Cazurra et al. (2014) have developed a framework that regards the state ownership of

SOMNEs as a resource with dual influence on EM-SOMNEs’ competitive advantage abroad. The first type of influence is direct where the government becomes a resource for the

SOMNE, which either aids or hinders its global strategy depending on the perceptions of the host country about the EM-SOMNE’s country of origin. The second type of influence is indirect where the government triggers the EM-SOMNE to develop intangible resources to hold competitive advantages over foreign competitors upon internationalization.

On the one hand, state ownership can directly reduce uncertainty and risks that arise from the institutional differences between the home and host countries, amid decreasing the degree of LOF. For instance, the host government can give a preferential treatment to EM-SOMNEs from countries with which it holds friendly historical relations, trade as well as investment agreements. Additionally, it can provide EM-SOMNEs with capital and judicial benefits to encourage investment if it perceives their home governments as bringing desirable resources to the country. However, state ownership can impose a negative effect on the EM-SOMNEs’ foreign operations by attracting extreme nationalist sentiments among the host government’s consumers, which may dislike foreign products over domestic ones since they are made in or by a foreign government (Cuervo-Cazurra et al., 2014).

On the other hand, state ownership can indirectly augment EM-SOMNEs to develop resources to solve domestic market imperfections and pursue specific foreign objectives. For instance, due to the constrained institutional environment at home, EM-SOMNEs learn how to manage high transaction costs and develop unique ownership advantages designed to operate in risky and unstable foreign markets. This enables EM-SOMNEs to leverage their capacities to enter other emerging economies with similar institutional features. Thus, the government can shape the foreign investment behaviour of the EM-SOMNE by reducing the institutional distance with the host market and enhancing the ability of the EM-SOMNE to take risks across borders (Cuervo-Cazurra et al., 2014).

Given the dynamic changes in the global and sectoral investment markets together with the home-host government relationship, a lower state ownership level provides EM-SOMNEs with more economic leverage to invest in less politically-close countries (higher institutional distance) across a broader range of industries and gear their OFDI operations to commercial considerations. This means that a JV with a local company in advanced markets should be less expected since minority EM-SOMNEs face lower host country institutional

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pressures vis-à-vis majority SOMNEs and can therefore deploy higher ownership investment modes such as greenfield ventures. Alternatively, since the government plays a more diluted role in lessening uncertainty levels in undeveloped institutional environments, minority EM-SOMNEs should prefer guarding themselves against riskier operations by pursuing structural solutions involving a lower commitment of resources in developing markets. This coincides with their lower reception level of political and economic capital from the government, which induces them to adopt a risk-averse behaviour. Accordingly, their investment strategies would likely be executed via JV agreements with local companies or the acquisition of lower

ownership in local firms.

In opposition, since majority EM-SOMNEs are more exposed to hostility from host governments than minority enterprises upon any kind of investment, they are likely to invest in countries with which they hold established political and economic relations, thereby allowing them to pursue greater national objectives. Given the shorter institutional distance from these host markets, majority EM-SOMNEs should be able to increase investment spillovers in friendly countries by giving preference to greenfield operations over M&As or JVs. Furthermore, it allows majority EM-SOMNEs to enter countries considered risky or unattractive to private companies since their home governments can support them in case of financial complications. Nonetheless, their expansion into countries with a higher level of institutional distance should be mostly performed through JV agreements with local partners under shared ownership or M&As to decrease the degree of LOF associated with a foreign SOE acquiring a local company. Thus, by selecting lower ownership investment modes for OFDI, majority EM-SOMNEs exchange a larger level of ownership and profitably for legitimacy in non-politically and higher institutionally-distant close countries.

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Chapter 3: Sub-questions and Hypotheses

Sub-questions

As presented in the introduction, this research was aimed at answering the question: How do

different levels of state ownership affect EM-SOMNEs’ foreign investment behaviour in Mercosur member states? In order to determine the influence of state ownership level on

EM-SOMNEs’ foreign investment behaviour, it is crucial to record two important features in the internationalization decision of EM-SOMNEs. Firstly, EM-SOMNEs internationalize once sophisticated ownership advantages are developed to hold competitive advantages over foreign competitors. Since EM-SOMNEs have finalized their significant internationalization trajectories much later than their western counterparts, they face greater barriers to exert profits in the global business arena (Luo & Tung, 2007). Accordingly, EM-SOMNEs’ ability to develop alternative ownership advantages at home is what later enables them to

internationalize and hold superiorities over their foreign rivals.

Secondly, EM-SOMNEs decide to internationalize with the assurance that state considerations can be reinforced in their investment regime in foreign markets. Since EM-SOMNEs are partly motivated by economic considerations upon internationalization, political factors and socioeconomic welfare considerations are additionally put in the global context to gear EM-SOMNEs to greater national interests. However, state involvement can largely determine the degree of LOF for accessing foreign markets given the host governments’ attitude towards EM-SOMNEs. While strong political-economic relations between home and host governments can be considered as an alternative ownership advantage for the EM-SOMNE to internationalize, an absence of diplomatic relations can increase the degree of LOF and consequently modify the enterprises’ foreign investment behaviour.8 In effect, the level of state ownership in the EM-SOMNE does not only determine the orientation of the ownership advantages it possesses, but it also alters the enterprise’s ability to decrease LOF upon entry into foreign markets. Therefore, the first sub-question is:

Sub-question 1: Under which conditions do EM-SOMNEs decide to internationalize?

8_{Nevertheless, this condition is not applicable to the case of privately-owned enterprises since their entry costs}

are derived from their inability to allocate resources to exploit their ownership advantages abroad. Accordingly, these costs are additionally added to the costs EM-SOMNEs face in foreign markets where state ownership is negatively perceived (Cuervo-Cazurra et al., 2014).

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Additionally, EM-SOMNEs may need to modify their foreign investment behaviour to reduce the degree of LOF, exploit their ownership advantages, and reinforce their owners’ political-economic objectives with potential host governments. Given the different types of ownership structure and capital portfolio existing among majority and minority

EM-SOMNEs, their foreign investment behaviour should be largely shaped by the associated advantages and disadvantages each ownership model yields in the global business and sectoral context. This is correlated with the political-economic rationale for foreign investment behaviour, demonstrating that the level of state ownership imposes direct and indirect effects on EM-SOMNEs’ ability to recruit economic and political leverages to decrease the degree of LOF in foreign markets. Consequently, the second sub-question is:

Sub-question 2: What are the effects of state ownership on the selection of location, industry and entry mode for foreign investment?

Lastly, by revealing how different state ownership levels shape the motivation and foreign investment operations of EM-SOMNEs, it is crucial to examine why EM-SOMNEs can operate at the crossroads between the business and political domains, and considerably divert from the private-owned enterprise’s internationalization model. Recalling from both the political-economic and extraterritorial SOE rationales, the level of state ownership can

determine the level of political and economic capital received by the EM-SOMNE, which can substantially direct the orientation and objectives of foreign investments. Hence, the third question is:

Sub-question 3: How is the foreign investment behaviour of EM-SOMNEs shaped by the state political-economic considerations?

Moreover, fig. 3.1 illustrates the research’s dimensions of interest.

Fig. 3.1 Dimensions of interest9

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Hypotheses

Having formulated the sub-questions, it is now necessary to explain the hypotheses based on the theoretical framework. By following the guidelines of the political-economic and

extraterritorial SOE rationales, three expectations will be established for the three sub-questions.

The first sub-question detects the conditions under which EM-SOMNEs decide to internationalize by looking at their possession of alternative ownership advantages and their reception of the state’s political and economic capital to lessen the degree of LOF in foreign markets.According to the extraterritorial SOE rationale for internationalization, the

constrained institutional environment in emerging economies hinders the EM-SOMNEs' ability to recruit financial and judicial support to engage in entrepreneurial activity, thus creating dependency on the government's political and economic capital to realize foreign investments. Since majority SOMNEs represent a model where the state directly owns the enterprise, the government should direct more capital to such enterprises to develop

ownership advantages that can later not only reduce the degree of LOF in foreign markets but also help to attain greater national goals. Opposingly, minority EM-SOMNEs are less prone to follow non-economic investments since majority stakes are held by profit-maximizing private investors with the state having an indirect control over the enterprise. Consequently, minority EM-SOMNEs should seek to find alternative sources of capital and develop ownership advantages based on technological and managerial capacities. Thus, minority EM-SOMNEs should base their internationalization decision on economic rationales, thereby carrying less state-induced ownership advantages than majority EM-SOMNEs. As such, the first

hypothesis is:

Hypothesis 1: Minority, Majority and Fully EM-SOMNEs’

internationalization can be commonly induced by unique ownership advantages and the state’s political and economic capital yet driven by different rationales according to their level of state ownership

According to the political-economic rationale for foreign investment behaviour, the state imposes direct and indirect effects on the EM-SOMNE’s ability to lessen the degree of LOF and to ensure its alignment with greater national goals. Since state ownership is a dual-purpose resource that can be exploited abroad, the ability of the state to alter the EM-SOMNEs' foreign investment behaviour is greater the more it holds control over the enterprise. Since minority EM-SOMNEs are less augmented by the state’s political and

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economic capital to internationalize vis-à-vis fully and majority EM-SOMNEs, they can base their foreign investment strategy on economic considerations. This means that minority EM-SOMNEs’ OFDI operations in higher institutional distant countries should be performed via greenfield ventures to increase profits and benefit from technological and organizational privileges. Nonetheless, since minority EM-SOMNEs are not fully backed by the

government’s political and economic capital to decrease foreign markets constraints, their OFDI activities in developing markets should be therefore executed via M&As or JV agreements with local agents to minimize their exposure to financial risks. Alternatively, majority EM-SOMNEs should form JV agreements with local partners to invest in higher institutional distant countries with which the home government does not maintain political-economic relations. Consequently, majority EM-SOMNEs should employ greenfield projects in lower institutional distant countries to attain greater national objectives and benefit from a lower degree of LOF. Accordingly, the second hypothesis is:

Hypothesis 2: The higher the level of state ownership the more restricted the SOMNE is from investing in high institutional distant countries across different sectors, although it can pursue greater national objectives through high ownership investment modes in low institutional distant countries, and vice versa

As demonstrated earlier, sub-question 3 attempts to bring the first two sub-questions together and comprehend why EM-SOMNEs can behave non-economically and represents a model that is neither market nor hierarchy in the global investment sphere. By analysing the two rationales in tandem, one can argue that the economic rents collected by EM-SOMNEs according to their state ownership level can largely shape their type and scope of OFDI. Since a higher level of state ownership is associated with a greater reception level of political and economic capital from the state and a weaker resistance from private investors, the

government has more weight in shaping EM-SOMNEs' OFDI to fulfil national socioeconomic and political considerations. This can be done by investing in strategic host countries where the EM-SOMNE benefits from a lower degree of LOF, exploits its unique ownership

advantages and engages in higher ownership investment modes, to benefit the welfare of the home and host markets. However, a lower level of state ownership means a lower probability for the government to employ the EM-SOMNE as an extraterritorial tool to attain

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Hence, the third hypothesis is:

Hypothesis 3: The higher the level of state ownership the more non-economically the EM-SOMNE’s foreign investment behaviour is, given the higher reception of state economic and political capital to fulfil national objectives in low institutional distant countries

Therefore, based on the arguments presented in the theoretical framework, one can argue that the higher the level of state ownership in EM-SOMNEs, the farther the enterprise is from behaving economically in politically-close countries and according to market principles. This mechanism can be characterized by the home government’s policy regarding OFDI, the EM-SOMNE’s reception level of political and economic capital from the government and the relations between home and host governments. Thus, the sum of these factors establishes that the non-economic behaviour of EM-SOMNEs in foreign markets is substantially shaped by the level of state ownership and control. Fig. 3.2 showcases a schematic overview of the research’s causal argument.

Fig. 3.2 Causal Mechanism10

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Chapter 4: Research Design

4.1. Comparative Case Study

Within the formulated hypotheses this research distinguishes four dependent variables. Firstly, the variable ‘Internationalization of EM-SOMNEs under different foreign market constraints’ (Y1) is identified with two independent variables being ‘Presence of ownership

advantages’ (X1) as well as ‘Government’s economic and political capital’ (X2) and

comprising the first hypothesis. The second hypothesis consists of another two independent variables being ‘Government’s foreign political and socioeconomic policy’ (X3) and ‘Host

country’s level of institutional distance’ (X4) to which two dependent variables are possible.

The first one is ‘Higher ownership investment modes across a broader number of sectors in high institutional distant countries’ (Y2) and the second one is ‘Higher ownership investment

modes across a broader number of sectors in low institutional distant countries’ (Y3). Since

the third hypothesis is largely based on the factors influencing EM-SOMNEs’ foreign investment behaviour, the last dependent variable ‘Non-economic foreign investment

behaviour’ (Y4) is derived from Y3, which is defined as X5 in this examination. Therefore, fig

4.1 displays the composition of the research’s hypotheses:

Fig. 4.1 Composition of Research’s hypotheses11

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In order to test the following hypotheses comprehensively, a comparative case study design with three cases was chosen to understand how features within and across different contexts influence the outcome of a given process. The comparative method is highly suitable to this research as it employs empirical data to establish relationships among two or more empirical or conceptual variables while other factors are held constant (Yin, 2017; Gerring, 2004). Accordingly, the comparative strategy of this research is the Most Similar Systems Design (MSSD) as it can identify the independent variables that explain the presence or absence of the dependent variable (Lijphart, 1971). It can additionally compare EM-SOMNEs that are similar in most aspects but differ on the state ownership level and its associated implications. Thus, MSSD can account for all the similar MNE and SOE features among EM-SOMNEs and demonstrate why the outcome is different between such firms according to their state

ownership level. Respectively, this research selected three cases of EM-SOMNEs in Mercosur that are similar in most aspects but differ on the independent variables.

4.2. Country and Industry Selection

The broader aim of this research was to provide an explanation for the internationalization trajectories of EM-SOMNEs in Mercosur and explain the underlying drivers for their foreign investment behaviour. The prioritization of Mercosur over other trade blocs within the global south is rooted in the empirical significance of the regional case studies. Mercosur SOMNEs reflect an entire spectrum of state ownership levels, which yields various types of foreign investment behaviour at both the regional and international level (Finchelstein, 2017).

As far as the selection of industries is concerned, extractive industries like Oil and Gas (O&G) and mineral resources are an appropriate context for this research for several reasons. Firstly, these industries are highly cyclical and are the home for the world's largest EM-SOMNEs, which helps in teasing out dependencies and industry eﬀects over time. This is because sharp distortions in the demand and supply of O&G and mineral resources tend to change mutual dependence relations between governments and enterprises in these industries (Rodriguesa & Dielemanc, 2018). Thirdly, EM-SOMNEs in these industries are not only subject to regulatory constraints but they are also naturally prone to government intervention since they substantially contribute to the national budget. This means that the home

government can be highly dependent on such enterprises and oppose to internationalization plans that hamper national interests by formulating policies aimed at orientating OFDI to accommodate state objectives (ibid).

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In regard to the selection of countries, Brazil and Venezuela have been in the top three largest OFDI contributors in Mercosur throughout the 2000s and 2010s (Finchelstein, 2017). Brazil is the largest Latin American country and has been employing active state actions against local enterprises' internationalization plans since the early 2000s (Cuervo‐Cazurra, 2008, 2012). Conversely, Venezuela is a smaller country that concluded a constitutional reform in the late 1990s, which led to the nationalization of the local oil industry through the reinforcement of statist public policies (Finchelstein, 2017). Therefore, these countries present an interesting variation in the types of public policy and state actions besides leading the regional OFDI contribution in the O&G and mining industries.

4.3. Case Selection

The selection of cases for this research was based on concise definitions of SOMNE and the internationalization process of the firm. Accordingly, the analysis of these cases was

performed within a timeframe of 15 years, from 2000 to 2015, to record the alternations in the enterprises’ foreign investment behaviour. In fact, before 2000, the OFDI volumes from Mercosur member states were relatively low, which left little data for observation and

analysis (Cuervo-Cazurra, 2008). However, the chosen period coincides with the privatisation of various EM-SOMNEs in Latin America in the early 2000s, which did not only allow them to occupy a larger share of the global commercial market but also led to the involvement of private holding companies in their operations, resulting in majority and minority EM-SOMNEs.

Following the definition set by the United Nations Conference for Trade and

Development’s (UNCTAD) World Investment Report for 2017, SOMNEs are defined as legal entities established by governments to conduct commercial activities through the acquisition of affiliates abroad or the engagement in non-equity modes. Furthermore, an additional criterion is that a state entity should either own at least 10% of the capital, benefit from a Golden Share or be the largest shareholder (UNCTAD, 2017a).12_{Borrowing from}

Cuervo-Cazurra et al.’s (2014) typology concerning variations of state investment in enterprises, this research maintained the distinction between a fully-state-owned firm, majority- and minority state-owned firm. Although these types share common mechanisms such as separate budget and managerial structure, they differ in the level of state ownership. While a fully state-owned firm is exclusively owned by the state, a majority EM-SOMNE has 51% or more of state

12_{A golden share is a type of share that provides the state with special voting rights and the ability to block any}

Beyond the narrow streets of markets and hierarchies : a comparative case study of ownership variations and OFDI strategies among state-owned multinational enterprises in Mercosur