Master’s Thesis
MSc in Business Administration – Strategy
Track
How high institutional
embeddedness affects the
responses of a mixed owned
firm to an environmental jolt?
Supervisor: Francesca Ciulli
Anastasia Bakoglou-10602836 8-31-2015
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Statement of originality
This document is written by Student Anastasia Bakoglou who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
2 | P a g e Table of Contents Abstract ... 3 Introduction ... 4 Literature Review ... 8 Institutional embeddedness ... 8 State Ownership ...14 Environmental jolt ...21 Strategic Response ...24 Methodology ...29 Research design ...29 Case Selection...31 Data collection ...32 Results...34 PPC’s Background ...34
Electricity Market in Greece ...37
2009: Realising the upheaval ...38
2010: Untouched by the crisis...49
2011: On the edge ...57
Discussion ...68
Conclusion ...73
Limitations ...75
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Abstract
The study, building upon the concept of institutional embeddedness, aims to investigate how the latter, as a firm’s antecedent, affects and shapes the responses of a firm to an environmental jolt. Institutional embeddedness represents the degree to which a firm corresponds and fits to its environment by complying with the rules and norms imposed by the institutions. During times of upheaval the once enacted strategies might prove insufficient, ineffective and become obsolete. An environmental jolt, an economic crisis in particular, amplifies all weaknesses and rearranges the power held by economic actors. An exogenous disruption, interrupts the routines adopted by companies, even those that had held them successful and profitable. Nevertheless, the extent of the impact it is defined by the firm’s ties with the institutional environment in which it operates. Thus, this study aims to shed some light on how institutional embeddedness affect a firm’s responses to an environmental jolt by employing a longitudinal single case study. The unit of analysis is the Greek Public Power Company, partially owned by the Hellenic Republic. Its mixed ownership signals the degree of its institutional embeddedness and the ongoing economic crisis in Greece represents the ideal environmental jolt and context of study. The results suggest that high institutional embeddedness directly affects the firm’s strategy, initially by exposing the company to dangers and challenges its less embedded counterparts are not faced with and subsequently by dictating its responses and shaping its reactions to the environmental jolt.
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Introduction
“Oftentimes, to win us to our harm,
The instruments of darkness tell us truths”
William Shakespeare (Macbeth)
What it certain about any crisis it that it sheds light to the most dark places. A crisis acts like a magnifying glass; it amplifies the smallest detail and highlights any vulnerability. The forces that stay quiescent during times of prosperity are awakened by the environmental jolt and impose pressures to organizations. Those that are well prepared have nothing to fear and they can even capitalize on the opportunities that might arise during a crisis (Wan and Yiu, 2009) but for those unwilling to adapt and adjust their actions to the circumstances can even become extinct (Miles and Cameron, 1982).
It is by now an undeniable fact that the recent financial crisis kneeled even those companies that were “too big to fail” let alone those of less significant size. Nonetheless, it also brought to the forefront of discussions the need of state intervention; governments and central banks provided the necessary safeguards so as the crisis would not be further deteriorated (Kellermann, 2011). States’ intervention in economic life has been longed considered as a cause of market failures and many governments were induced by the World Bank to proceed in massive privatizations especially in the Eastern-European countries (Hamm et al., 2012). Nevertheless, scholars have argued how in times of upheaval, like the one we are facing now, states arise as those institutions entrusted by the public to bring the economy back to equilibrium. As Borisova et al. (2012) aptly describe: “the ongoing global financial crisis has led to the largest increase in state intervention since the Great Depression. Direct government ownership in public-traded corporations has increased dramatically since 2008”. This shift,
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however, towards state ownership has several implications for firms and eventually, their performance (Borisova et al., 2012).
In addition, Bortolotti and Faccio (2009), using a sample of firms from OECD countries, showed that the project of privatization is far from complete, since governments are owners of almost one-third of firms as they can still exercise control through golden shares. As a result, there is a need to explore how governments affect organizations by integrating these effects into strategic management theories (Pearce et al., 2009). So far, studies on state-owned enterprises (SOEs) have been focusing on emerging or transition economies (eg. Doh et al., 2004; Ramamurti, 2003; Puffer and McCarthy, 2007; Tian and Estrin, 2007), yet developed countries cannot be left outside considering the vast amount of SOEs performing in these economies (Okhmatovskiy, 2010). Moreover, studies focusing on SOEs are limited to the extent that they examine the implications of state vs. private ownership while they should also examine different forms of state ownership (Okhmatovskiy, 2010).
Indeed, most firms, especially in developed countries, are only partly controlled by governments, making mixed-owned enterprises (MEs) the dominant model. Yet, only few studies have used MEs as their unit of analysis (e.g. Sun and Tong, 2003; Qi et al., 2000; Vining and Boardman, 1992). Moreover, extant literature has neglected an important aspect related to state-owned firms, which is their level of institutional embeddedness, and as a result even fewer studies have examined issues of embeddedness expressed as the relation between firms and the state (Okhmatovskiy, 2010). Additionally, those studies that addressed institutional embeddedness, they mostly did it in relation to multinational firms (MNEs) (eg. Rugman and Verbeke, 2003; Cantwell, 2009; Cantwell et al., 2010; Rizopoulos and Sergakis, 2010). Highly institutional embedded firms can have different characteristics and they stand in the middle of several opposing forces. A mixed-owned firm represents a particular kind of embeddedness which has to cope not only with its competitors, as any other company, but also
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with the pressures that institutional constituents exercise upon it and, in particular, with the ones of the government. Indeed, having the government as an owner results in a higher degree of embeddedness which is likely to impact the firm’s strategy and performance.
It is certain that environmental pressures constrain a firm's strategic choices (Zammuto, 1988) and in times of upheaval existing strategies become obsolete (Meyer et al., 1990). The environmental jolt coupled with the power that institutions exercise over firms narrow the scope of action and call for certain responses. The rearrangements in environment induce the firm to reconfigure its strategy yet, institutional embeddedness has been disregarded in the investigation on the impact it has on firm’s responses to an environmental jolts.
Most studies have focused on how firms respond to institutional pressures (eg. Oliver, 1991; Pache and Santos, 2010) but only limited attention has been given to firms located within highly institutionalized environments (Rodrigues and Child, 2003). There is a general consensus that a fit between environment and strategy is of critical importance for a firm's success (Venkatranan and Prescott, 1990). In particular, the turmoil that an environmental jolt creates in the institutional environment triggers organizational responses. These responses are influenced by the firm's characteristics, like its structure and ownership, which can play an important role that, however, has been overlooked (Greenwood et al., 2011)
Any crisis can be interpreted either as a threat or as an opportunity, but one thing is certain; a crisis dictates change. The question though is, whether a highly institutionally embedded firm has the same tools in its arsenal as any other firm. In order for firms to be able to harness the momentum and turn a crisis into an opportunity they must be flexible and capable of adapting to the changing environment. As Teece et al. (1997) would say, firms have to have dynamic capabilities, meaning “the ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments”. In other words, firms must have the ability to sense, seize and manage opportunities and threats.
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However, for organizations operating in highly institutionalized environments, their ability to act in a completely autonomous manner is limited, since they have to act in alignment with the institutions' expectations and they can only resist these pressures when they are not dependent in institutional constituencies (Goodstein, 1994). Organizations in highly institutionalized environments face internal and boundary-spanning contingencies and are expected to align their activities with those that the institutional environment suggests in order not to undermine their ceremonial conformity and jeopardize their legitimacy (Meyer and Rowan, 1977). Nevertheless, Uzzi (1997) claimed that any positive effects rises up to the a certain threshold and that “the same processes by which embeddedness creates a requisite fit with the current environment can paradoxically reduce an organization's ability to adapt”. Dacin et al. (1999) though, suggested that embeddedness might seem to impose limits on organizational actions, but also provides opportunities.
Nevertheless, institutional embeddedness is a significant factor that poses certain constraints on firms especially in times of upheaval when agility and flexibility are the sine qua non of a firm’s survival. Thus, the purpose of this paper will be to answer the following research question:
How high institutional embeddedness affects the responses of a mixed owned firm to an environmental jolt?
In order to answer this question, a longitudinal single case study design will be adopted having as unit of analysis the partially state-owned Public Power Corporation S.A. (hereinafter PPC). The Greek economic crisis presents a unique opportunity and serves as the environmental jolt while PPC, a mixed-owned enterprise, since 51% of its shares are being held by the Hellenic Republic, is an ideal representative of highly institutionally embedded firms. The period of study is 3 years (2009-2011) and the data used were collected from various sources including PPC’s documents and reports as well as articles regarding the company derived from two Greek
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newspapers, “Ta Nea” and “Elefterotupia” which are the two newspapers with the highest circulation (Argos S.A., Press Distribution Agency).
The paper is organized as follows: The next section discusses the theoretical background and presents an overview of the literature review upon which the study is built. Subsequently, the methodology and the data sources are presented followed by the results section in which the actions of PPC during the years of study are illustrated. In the following section, the results are further discussed and finally, the paper is completed with the conclusion part and the presentation of the limitations of this study.
Literature Review
Institutional embeddedness
“Actors do not behave or decide as atoms outside a social context, nor do they adhere slavishly
to a script written for them by the particular intersection of social categories that they happen to occupy. Their attempts at purposive action are instead embedded in concrete, ongoing systems of social relations. (…) The behaviour and institutions are so constrained by ongoing
social relations that to construe them as independent is a grievous misunderstanding”
(Granovetter, 1975, pp. 481-82, 487)
The concept of embeddedness was first introduced by Karl Polyani (1944) who suggested that no economic model can be applied on non-market societies due to the lack of economic institutions. Hence, in market societies, in which the evolution of institutions has rationalized economic activity, the application of economic models is possible and essential.
Granovetter (1985), drawing upon Karl Polyani, applied embeddedness in market societies and suggested that economic behaviour is influenced by the context within which it is expressed and hence, organizations and institutions are related to a greater extent than that economists and sociologists assumed. As a result, economic exchange is socially embeddded, economic
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organisations such as business companies are embedded in networks of interpersonal relationships and larger social structures (Nell and Andersson, 2012; Halinen and Tornroos, 1998) such as the state, families, professions, religion and ethnicity.
Zukin and DiMaggio (1990), in their study on the influence of social organisations on economic activities, further developed the concept of embeddedness suggesting that it refers “to the contingent nature of economic action with respect to cognition, culture, social structure, and political institutions” (p.15). Their point is that we cannot study economic activities regardless of the social organisational traditions which influence economic actors and define economic action.
Since “institutions directly determine what arrows a firm has in its quiver as it struggles to formulate and implement strategy, and to create competitive advantage” as Ingram and Silverman (2002, pp. 20) aptly described, the focus of this study will be on the firms’ embeddedness in the institutional context.
Institutions serve as the foundation upon which economy is built. They are the backbone of market economies and besides the increase in bureaucratization that they might cause, they manage to reduce uncertainty resulting to lower transactions costs, and eventually they determine firms’ profitability (North, 1991).
A firm cannot perform regardless of its environment, which is composed by several institutional actors each of whom exercises pressures upon the firm and dictates, to a certain extent, its behaviour. These interconnections between an organisation and its institutional environment, represent the degree of institutional embeddedness of an organisation (DiMaggio and Powell, 1983; Baum and Oliver, 1992).
Institutions consist of “both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights)” (North, 1991: p. 97).
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Yang and Modell (2013) approach institutional embeddedness as a multi-layered phenomenon constituted by institutionalized expectations as well as internalized values and beliefs of individual actors. Both these facets are important in studying institutional embeddedness yet, for ease of reference, we will follow Scott (1987) and Oliver (1997) in addressing institutions mostly as regulatory structures, governmental agencies, laws, courts, and professions.
Extant literature has argued that institutional embeddedness affects firms, their strategy and/or performance, and while some scholars stress the positive impact of institutional embeddedness on firms, others highlight its disadvantages and a consensus regarding this issue has not been reached. Peng et al. (2008) argued that national institutions affect a firm’s strategy and outcomes as powerfully as do industry and resource, and hence it should be taken into consideration when designing a firm’s strategy.
In a stable environment, this conformity to institutional expectations can be a vital factor to organizational success and survival (Baum and Oliver, 1992; DiMaggio and Powell, 1983; Oliver, 1991). Institutions affect the capacity of firms to interact and therefore affect the relative transaction and coordination costs of production and innovation (Mudambi and Navarra, 2002), their presence minimizes the level of transaction costs as previously discussed (Williamson, 1973; Wan and Hoskisson, 2003). An example of the advantages represented by institutional embeddedness is the liability of foreignness (Zaheer, 2002) suffered by foreign firms which have no or weak ties with “the cognitive, normative and regulatory domains of the local institutional environment (Scott, 1987, 1995; Kostova, 1999)” (Zaheer, 2002, p. 352). In other words, there are institutional costs for firms that do not share ties with the actors of the institutional environment in which they operate or they want to operate. This means that a firm’s position in an institutional environment and its linkages with important actors will determine its access to information and resources (Zaheer, 2002). Institutionally embedded firms can lobby institutional actors, shape, through institutional entrepreneurship (Maguire et
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al., 2004), favourable policy changes (Dieleman and Sachs, 2008), gain public support (Hillman and Hitt, 1999; Henisz, 2003) and acquire better access to government-controlled resources (Henisz, 2003; Boddewyn and Brewer, 1994). Firms’ survival depends on resources controlled by institutional actors and those firms highly embedded in this environment can exploit their strong ties with the salient institutional actors and guarantee the unhindered flow of these resources (Frynas et al., 2006; Pfeffer and Salancik, 1978).
This asymmetric possession of resources, which embeddedness supplies firms with, opens the channels through which firms can contribute to the evolution of governments and practices (Child et al., 2012). Constraints on firms are mostly imposed through regulations which to a great extent are related to specific resources and capabilities of the firms within the institutional environment (Prinkse and Kolk, 2012). With countries generally allocating resources to their domestic industries (Lenway and Murtha, 1994), institutionally embedded firms can develop firm-specific advantages (Lenway and Murtha, 1994) and gain a sustainable competitive advantage, since they can ease the uncertainty stemming from government regulations in their favour (Peng, 2008).
Nevertheless, for a firm, to be institutionally embedded means also that there are several forces pressuring it for compliance. We could therefore argue, that institutional embeddedness is a constraining power exercised upon firms.
If, on one side, institutional embeddedness can provide advantages to firms, on the other side, extant literature has identified also disadvantages, in particular in situations of environmental change. Indeed, if change can be an opportunity for firms (Rodrigues and Child, 2003), less embedded firms might be in better position to harness this opportunity and show better reflexes (Sun et al., 2010). Siegel et al. (2010) argue that “outsider-based” firms have an advantage over highly embedded firms since they are less constrained by institutions, they can identify the emerging opportunities and cope with change better and quicker.
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Selznick (1992) claims that ‘institutionalization constrains conduct in two main ways: by bringing it within a normative order, and by making it hostage to its own history’ (pp.322). Institutional embeddedness, thus, may lead a firm to a path-dependent behaviour, making it more difficult to adjust to radical changes, since formal and informal institutions often reflect past preferences (Cantwell et al., 2010), and any path-breaking behaviour is excluded (Sydow et al., 2009).
Uzzi (1997) has identified a key disadvantage of embeddedness, the “paradox of embeddedness”, which implies that firms might become too embedded in their environment which as a result might lead to inertia and inability to adjust to any change. Sun et al. (2010) argue that high embeddedness can lead to a declining, and even negative, effect on long-term firm performance “through cost-inefficiency and under-development” (pp. 1179) of market-based capabilities.
Moreover, firms, in many cases, by complying with their institutional pressures, might adopt practices for legitimation reasons and not necessarily for efficiency reasons (Meyer & Rowan, 1977; Zucker, 1987; Kostova and Roth, 2002). For example, Hillman and Keim (2001), argue that firms might use corporate resources for social issues which may not create value for the firm and its shareholders. Profit maximization lies in the core of business action, yet firms in their effort to placate institutional pressures, might incline from their profit-seeking road and engage in actions merely for the cause of satisfying socially and institutionally expressed needs. In addition, a highly institutionalized environment generates conditions of low selection and therefore restricts choice in different ways, as information is restricted and selective, which encourages managerial inertia and reinforces institutional isomorphism and conformity (Oliver, 1991; Rodrigues and Child, 2003).
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The literature on institutional embeddedness does not provide solid conclusion about the effect of institutional embeddedness, signalling that it can be either an advantage or a disadvantage and, in many cases, it can be both at the same time. Institutions set the ‘rules of the game’ (North, 1991), and however strict these rules might be, they ensure that the game will continue to be played. The pressures that institutions pose on firms, are the forces which ensure the continuance of economic life and the resulting structure is at the very least the structure upon which economic action is based.
While the role of institutions has been stressed throughout the years by many authors (eg. Meyer and Rowan, 1977; North, 1991) and there is a general consensus that institutions pose pressures on firms and in a sense influence their behavior and performance, its managerial implications are mostly addressed to multinational enterprises (MNEs). Namely, Rugman and Verbeke (2003) studied institutional pressures expressed as environmental regulations and how the latter affects corporate strategic decisions. The link between MNEs’ political strategies and institutional environments has also been investigated by Rizopoulos and Sergakis (2010) in their effort to develop a framework on how MNEs influence political decisions and how their strategies regarding host countries are influenced by political forces in their home country. In addition, Cantwell et al. (2010) suggested that historical changes on the character of MNE activities are linked to the changes in the institutional environment and by using this co-evolutionary analysis they tried to understand the interrelationships between MNE activities and public policy. Cantwell (2009) also studied the firm-location interactions and how this affects its knowledge sourcing. He suggested that the greater institutional distance between the host region and the headquarters of the MNE, the harder it will be for the latter to engage in local contexts, concluding that this explains why most of MNEs are regionalized rather than globalized. Murtha and Lenway (1994) studied institutional arrangements from a strategic
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standpoint, suggesting that they can contribute to state strategic capabilities and presented a framework to help us analyze how these interact with MNEs and affect their strategies. However, in all these studies, authors address the implications that institutional embeddedness can have on MNEs performance vis-à-vis their embedded competitors as well as what practices they should adopt in order to enter national markets. They do not study institutional embeddedness per se, nor the firms actually embedded in their local context. Thus, there is a gap in our knowledge with regards to highly embedded firms and their strategic decisions. All these studies have applied and extended the concept of institutional embeddedness trying to figure out how it can be of managerial use to MNEs. Descriptive in nature, all these studies, gave us great insight on how MNEs have addressed the “problem of embeddedness” as described by Granovetter (1975) and provided suggestions on how they should act in the future. Nevertheless, studying an actually institutional embedded firm would unarguably add to our pool of knowledge and we could then apply this knowledge both upon local and foreign firms.
State Ownership
Not all firms are subject to the same level of institutional embeddedness since different degrees of relationships with their institutional actors define the extent to which firms are embedded in, and attend to, their institutional environments (Oliver, 1997; Hung, 2005). Furthermore, there is a large number of studies which suggest that governments intervene in the economy coercing firms into pursuing political strategies and developing ties with state in order to achieve competitive advantage (Shaffer, 1995; Hung, 2005). Nevertheless, not all firms share the same relations with the state, hence the degree to which they attend to governmental expectations and comply to institutional pressures also might differ (Hillman and Hitt, 1999; Hung, 2005).
As discussed in the previous section, there is no consensus among researchers regarding the type of impact of institutional embeddedness on organizations; however, it is agreed that
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institutions do affect and shape the behavior and eventually the performance of firms. The most salient actor, in the institutional environment of a firm, is the government.
This study will follow Spencer et al. (2005) in distinguishing between the state and the government. States make the laws and incorporate all these institutions that defend and enforce these laws (courts, police and armed forces) while governments come and go and are formed by those elected to hold state power for a certain tenure in order to develop and administer all these laws and policies (Spencer et al., 2005; Benjamin & Duvall, 1985; Goldstein & Lenway, 1989; Skocpol, 1979, Pearce et al, 2009)
Governmental actions create or moderate the uncertainties that organizations must manage, and therefore governments are able to shape organizations in powerful and important ways (Pearce et al., 2009). The leading role of the government in economic life is undeniable since they provide the infrastructure as well as the regulatory framework that rules economic activities (Fligstein, 2001; Pearce et al., 2009). Certain industries, such as the electric sector, are particularly subject to government interventions since private objectives, like profit maximization, have to be balanced with public policy and non-commercial objectives, like country-wide economic growth for example (Henisz, 2003) or equal access to services. For these sectors, a key form of government intervention is state-ownership. By definition, state-owned firms are those in which the majority of stocks is held by the state meaning that state has the ultimate control over the enterprise and the management is executed by a dependent agent (Yarrow and Jasinski, 1996).
When governments are involved actively in firms’ activities through ownership, this results in highly institutionally embedded companies since the distance between the firm and the main institutional actor in its environment, the state, is annihilated. As discussed previously, institutional embeddedness can decisively affect firms’ behavior and performance in a positive
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or negative way, therefore ties with the government can be advantageous or disadvantageous for a company. Thus, examining institutional embeddedness in the case of state-owned firms is particularly relevant, yet this type of institutional embeddedness has not been studied thoroughly. The studies that did use state-owned firms as their unit of analysis mostly focused on performance differentials juxtapositioning private-owned enterprises (POEs) and SOEs (e.g. Goldeng et al, 2008; La Porta et al., 2002). The latter seems to lose the battle since most findings tip the balance in favor of private firms and a consensus is relatively near to be reached. The majority of research has concluded that state-owned enterprises are less efficient than their private-owned rivals (Goldeng et al, 2008; Child & Yuan, 1996; Qi et al., 2000; La Porta et al., 2002; Dewenter and Malatesta, 2001). Namely, Shirley and Walsh (2000, cited in Goldeng et al., 2008) mention that among the 52 studies they surveyed, only five indicate that SOEs outperform POEs, verifying that private ownership is more effective compared to state ownership.
Nevertheless, state ownership was considered the best option with regards to satisfying societal demands for economic growth (Henisz and Zelner, 2005). Vining and Boardman (1992) have argued that in cases where there are massive economies of scale and scope, high entry barriers, or externalities, public ownership may be preferred. In line with their suggestion is the work of Kwoka (2005) who used evidence from U.S. Electric Utilities and demonstrated that public enterprise may have an advantage in producing goods and services whose quality attributes are difficult to specify a priori. Nevertheless, Caves and Christensen (1980) implied that most of the studies assessing the efficiency of public and private firms is usually compared in industries which have heavy regulation and limited competition. Yet, they too, in their study of the Canadian Railway industry concluded that any tendency toward inefficiency resulting from public ownership has been overcome by the benefits of competition suggesting the SOEs can be efficient when they perform in competitive markets.
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Chen et al. (2009), and Vining and Boardman (1992) have argued that POEs don't always perform better. Consistent with their arguments are also those by Martin and Parker (1995), who suggest that it is difficult to sustain the hypothesis that private ownership is unequivocally more efficient than nationalization. Kole and Mulherin (1997) studied a sample of U.S. corporations in which the federal government held 35 to 100 percent of the outstanding common stock for between 1 and 23 years, during and following World War II, and found that the performance of the government-owned companies was not significantly different than that of private-sector firms in the same industry.
Nevertheless, despite the benefits that might accrue when a firm’s shares are owned by the state, there are certain constrains related to SOEs. The most salient argument against state-ownership is that SOEs do not act as profit maximizers but they pursue socio-economic goals (Nombela, 2001) and this is a potential cause of bias in the way they assess their efficiency as they are regarded as an instrument for the attainment of non-economic goals such as the need for public control over natural resources, regional policies, employment or social issues (Grout and Stevens, 2003; Goldeng, 2008).
Moreover, public ownership typically results in larger firms (Nombela, 2001) and despite the fact that they are more labor intensive than their private-owned competitors, they fail to attract managerial talent (Goldeng, 2008) and as a result government ownership is associated with lower governance quality (Borisova et al., 2012). This is explained by the fact that SOEs, trying to meet government’s objectives for higher employment rates, they will hire more workers and without providing any further incentives, SOEs tend to have lower labor productivity (Xu and Wang, 1999; Boycko et al, 1996, Dewenter and Malatesta, 2001).
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Authors have related this drawback to less effective monitor mechanisms and correlated SOEs’ inefficiency with the agency problem1. It is suggested that managers of SOEs have weaker
incentives to perform and to pursue firm’s objectives, and that their principals have less efficient means of monitoring the managers, since they are less exposed to the disciplining and learning forces of markets (Goldeng, 2008). Yet, Caves and Christensen (1980) stated that the problem of SOEs is not ownership, but rather a lack of explicit goals and objectives, and an absence of organization cultures and systems that support and encourage the fulfillment of those goals and objectives. This is exactly what Boycko et al. (1996) claimed: that the agency problem can explain the inefficiency of public firms but it is not caused by managers, as it would be expected, but by politicians.
Nevertheless, the study of state-owned enterprises should be expanded to include, if not focus on, mixed enterprises (MEs), which are firms that the state along with private investors jointly own the company. Delios et al. (2006) in their study of ownership identity in China's listed enterprises, suggested that to better understand performance implications of state ownership, researchers need to distinguish between different forms of state ownership. Thus, SOEs and MEs bear different characteristics which might lead to relevant differences in performance and behavior.
Yet, extant literature focuses mainly on comparing wholly state-owned enterprises with privately owned enterprises, with limited investigation of firms which have a mixed ownership, both private and public, and have arisen, mostly, as a result of partial privatization by governments. In addition, considering the fact that states have in some cases gained control
1 The agency problem has two facets. Firstly, it arises when there is a conflict between the goals and desires of
the principal and the agent, and when it is difficult or expensive for the former to verify whether agent is behaving appropriately. Secondly, the agent and the principal might prefer different actions because of their different risk preferences.
K. M. Eisenhardt, Agency Theory: An Assessment and Review, The Academy of Management Review, Vol. 14, No. 1 (Jan., 1989), pp. 57-74
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over firms as a response to the crisis, ME is the dominant model since most of those firms are only partly rather than wholly controlled by governments.
Although, as regards the SOEs, a relative consensus on their drawbacks has arisen among scholars, research on firms with mixed ownership is limited and consensus is absent. Namely, Schmitz (2000) argued that partial privatization could well be the optimal ownership structure since it mitigates the disadvantages of public ownership and of privatization, an option that Peda et al. (2013) also agree with.Eckel and Vining (1985) suggest two cases where MEs may be a preferred organizational form. The first is where dual goals (profitability and social objectives) are pursued; indeed, where the product or service has both private and public facets, it may be more efficient to combine market and political monitoring within a mixed-ownership model. The second arises when capital market imperfections prevent efficient risk-sharing. Partial state ownership provides a means of absorbing risks unacceptable to private shareholders. Sun et al. (2002) found that partial government ownership and firm performance can result in a positive relationship even though this relation is not linear. For their study they used a sample of firms listed in the SHSE and SZSE2, from 1994 to 1997, and they showed firms’ performance is positively impacted by the partial state ownership.
On the contrary, Enderwick (1994) argued that in many ways MEs could “combine the worst of both worlds; the shortcomings of SOEs and of POEs” (p. 142). For example, Vining and Boardman (1992) studied MEs in competitive markets and pointed that they behave differently but not better than SOEs and they might even be worse than POEs and SOEs in profitability. Their results are in line with that of Tian and Estrin (2008) and Tian (2001) who suggested that the state can actually improve corporate value when it holds a large portion of firm’s shares
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but only to a certain threshold beyond which the firm’s value decreases. Hence, it is better for the state to either hold the vast majority of firm’s sharers or to be a minor shareholder.
Xu and Wang (1999) found a negative relationship between state ownership and performance. They claimed that ownership concentration is good but as state shares rise, productivity falls, which adds to the notion that state's involvement results in inefficiency. Additionally, Qi et al. (2000) also showed that there is a negative relationship between state shareholdings and performance after studying listed firms.
Sun and Tong (2003) came up with mixed results in their study of 634 enterprises listed on China's two exchanges upon share issuing privatization (SIP) in the period 1994–1998. They found that SIP is effective in improving SOEs’ earnings ability, real sales, and workers’ productivity but is not successful in improving profit returns and leverage after privatization. Thus, only few studies have used MEs as their unit of analysis (eg. Sun and Tong, 2003; Qi et al., 2000; Vining and Boardman, 1992) and their results were also mixed. Moreover, they neglected an important aspect related to state-owned firms, their level of institutional embeddedness, and as a result even fewer studies have examined issues of embeddedness with regards to the relation between firms and the state (Okhmatovskiy, 2010).
Having presented the main findings of the studies on MEs it is evident that we cannot come to any safe conclusion on whether this type of ownership positively or negatively affects the firm. Nevertheless, all these studies, besides their mixed results, have two features in common. The vast majority of them are conducted within the Eastern-Asia environment and all of them assess the performance of firms. With regards to the former, the differences between East-Asian countries and developed ones lead to argue that the results of these studies cannot be applied in developed markets. Emerging economies have different characteristics and most importantly higher growth rates. China, for example, has an average continuous 7% growth for a quarter
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century (Safadi and Lattimore, 2009), a rate that many countries in developed world cannot achieve anymore. Enterprises in post-industrial economies are faced with fierce competition and have to fight each other just to claim a small share in a mature and fragmented market, while their counterparts in emerging and transition economies enjoy the fruits of economic growth. Inasmuch market characteristics are not alike, so are the strategies implemented. Thus, studies focusing on emerging economies can be only of limited use when our desire is to investigate firms in developed markets.
Hence, there is a gap in our knowledge on how firms with the peculiar characteristic of institutional embeddedness, meaning a mixed-ownership status, respond to their environment especially in cases where the latter suffers from a jolt.
Environmental jolt
According to Hoffman (1999) environmental jolts are “events that can take multiple forms, but irrespective of their form they are disruptive events that create uncertainty and by acting as a trigger they cause a reconfiguration of an organizational field and the institutions that guide behavior” (p. 353). Additionally, Meyer (1982) defines of environmental jolts as a “transient perturbations whose occurrences are difficult to foresee and whose impacts on organizations are disruptive and potentially inimical” (p. 515).
Therefore, an economic crisis can be consider as an environmental jolt since it “ (1) threatens high-priority values of the organization, (2) presents a restricted amount of time in which a response can be made, and (3) is unexpected or unanticipated by the organization” (Hermann, 1963, pp. 64). According to Haveman et al. (2001) “such discontinuities disable organizations' routinized responses, plunging decision makers into strange and bewildering new worlds” (pp. 253). Thus, it is not surprising that environmental jolts have been seen as threats for organizations.
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However, extant studies suggest that firms should not address jolts as threats but rather as opportunities and that they should try to build upon them. In particular, Wan and Yiu (2009), considering the Asian economic crisis as an environmental jolt, showed that corporate acquisitions during a jolt would be positively related to firm performance and argued that firms can capitalize on the opportunities created in times of upheaval. Moreover, Sine and David (2003), in their study on US electric power industry, showed that despite the fact that in cases of crisis the rearrangements in firm’s institutional environment might have eroded their existing advantages, they also triggered entrepreneurial action.
In addition, scholars have argued that environmental jolts provide the impetus for entrepreneurial actions since they evoke active cognitive processing (Zellmer-Bruhn, 2003) and there is a positive relation between environmental jolts and entrepreneurial actions (Liu et al., 2007). The ways a firm used to interpret its environment become obsolete and in order for a firm to take advantage of all these changes driven by the environmental jolt it has to re-invent itself. Aggestam (2014) suggested that, in their effort to survive, firms change their performance from “passive conformity to interest-seeking active divergent adaptation to external demands and expectations” (pp. 66).
Meyer (1982), focusing on a doctors’ strike as an environmental jolt, examined how hospitals reacted when they were confronted with this unpredictable crisis. The results showed that despite the severe crisis and the changes that this jolt triggered, hospitals managed to recover and many of them exited the crisis in a better position. Thus, firms can capitalize on jolts and use them as means to address chronic drawbacks by implementing different, but appropriate strategies, and eventually this strengthens their position.
Smart and Vertinsky (1984) divided strategic responses to crises into entrepreneurial and adaptive. The choice depends on the posture the firm takes against its environment, whether it thinks it controls it or not, and the time horizon over which the decisions will take place,
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meaning whether the responses’ objective is to improve long-term or short-term outcomes. All of these strategies can be implemented when the external environment of the firm is undergoing a shift that calls for change. The firm can adapt in the short-term to the environmental pressures or seize the opportunity and implement entrepreneurial strategies that will be beneficial in the long-term. However, according to Smart and Vertinsky (1984) an entrepreneurial response can also be combined with short-term objectives and vice versa. Yet, they claimed that “the degree to which organizations rely upon other organizations in their environment (dependency) for growth and survival is related to the decision horizon in managing a crisis. As environmental dependency increases, tendencies to respond with long term strategies rather than short term ones also increase” (Smart and Vertinsky, 1984, pp. 211).
In conclusion, previous studies suggest that environmental jolts can represent threats but also opportunities depending on how organizations interpret them and on whether they are willing and able to change.
Scholars have considered different antecedents to a firm’s response to an environmental jolt. In particular, Meyer (1982) states that a firm's response to an environmental jolt is affected by its structure, its ideology, its overall strategy and the level of its slack resources. Therefore, the environmental jolt triggers a response, yet this response is a result of all these antecedents. Though, extant literature has overlooked how a firm’s institutional embeddedness affects the response to an environmental jolts.
In extant literature, institutional embeddedness has been seen as an element in firms’ environment and the majority of scholars have tried to explain how firms can address the problems resulting from it and how they can benefit by exploiting their ties with their institutional actors. However, in the case of a highly institutional embedded firm, the actors that rule and decide its actions do not hold a seat in the organization as it normally happens
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with those who are assigned to direct a firm’s actions. Thus, we should consider the cases in which institutional embeddedness is a core element of a firm.
In the previous section it has been illustrated that MEs, even though they are becoming the dominant model of state ownership, have not been studied thoroughly and when they have, mostly with regards to their performance, they gave results that matched their identity, mixed. The aim of this study is to contribute to this debate and will try to add one more aspect to the subject. Considering that most studies focused on MEs performance, this study will focus on what precedes and decisively affects firm performance, its strategy and its strategic responses. Performance is the product of many factors and not the outcome of actions executed in vacuum. Not all firms perform the same, since they do not share the same resources, natural and human, and most importantly they do not operate in the same environment. There are, of course, firms that managed to define their environment and change the rules of the game in their favor, however in most cases, it is the environment within which they perform that defines the scale and scope of their activities. Having discussed how decisively institutions affect economic action and how the degree of embeddedness can mark the degree to which firms have to comply with institutional pressures, it is rather interesting to investigate a highly institutional embedded firm under an environmental jolt. In the end, the answer on whether jolts are positive or negative events depends on how firms react in order to address them. Their actions indicate the outcome of the jolt, yet there is not a firm answer to how a highly institutional embedded firm responds to an environmental jolt.
Strategic Response
As said by Dacin et al. (1999, pp.324) “as the institutional features of market shift, this impacts what strategies are available and adopted”. That is, during times of upheaval, selection is restricted and firms must employ alternative practices in order to survive and subsequently succeed. It has already been stressed how an environmental jolt can affect all instructional
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actors and how important it is for firm’s survival to appropriately respond to that exogenous event so as to exit the crisis with limited casualties and hopefully at a better position. Thus, in this section, we have to consider how it will respond to the crisis considering also the degree of its institutional embeddedness.
A firm’s strategy must be tailored to its needs and it will be shaped by its embeddedness (Baum and Dutton, 1996). Hence, we can assume that a highly embedded firm will respond in a different way to the environmental jolt. While a firm's response to the jolt is influenced by its structure, ideology and strategy (Meyer, 1982), in our case all of these antecedents are influenced by its institutional embeddedness, thus our concern is how the latter influences the former.
Under an environmental jolt existing firm strategies might become obsolete and thus ineffective (Meyer et al., 1990). The threats and opportunities that arise during a jolt trigger responses against the new dynamics that transform the environment. As Baron (1995) claims “the environment of business is composed of market and nonmarket components, any approach to strategy formulation must integrate both market and nonmarket considerations” (pp. 47). In other words, a firm’s strategy cannot be considered complete if it does not include both market and nonmarket actions.
A firm’s market strategy defines how it will develop its resources in order to create value (Becerra, 1964) nevertheless, according to Baron (1995) non-market strategies can complement market strategies and increase overall firm performance. Thus, a firm cannot design its strategy without considering its nonmarket environment which, together with the market environment, affects the outcome of its actions. The market environment consists of all these parties with whom the firm is engaged in economic transactions while the social, political and legal principles which govern firm’s interactions constitute its nonmarket environment (Baron, 1995). The concept of integrated strategy hence posits that the firm's performance is
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affected both by market and nonmarket powers and a complete strategic plan should address both of these forces in order to be successful.
From a strategic stand point, scholars have argued that a firm, in order to outperform its competitors and gain a competitive advantage, should create more value than its competitors by implementing generic strategies (cost leadership, differentiation, or focus strategy) as Porter (1979) dictated and by having superior resources (Peteraf, 1993; Barney, 1991). In times of upheaval though, a firm must at least respond to the changes triggered by the environmental jolt. According to Smart and Vertinsky (1984) a firm’s strategic responses to a crisis are to great extent related with the way it used to interpret its environment prior to the crisis, that is whether it operated in a dynamic or static environment, and the time horizon within which the firm has to develop its response. The latter, determines whether a firm will attempt to exert control and try to modify its environment by employing entrepreneurial strategies or whether it will just adjust to the present situation trying to maintain the status quo with adaptive responses (Smart and Vertinsky, 1984). Consequently, a high institutionally embedded firm operating in a rather stable environment, favored by the previous situation is more likely to react defensively and allocate its resources towards the returning to the previous status quo. Moreover, Smart and Vertinsky (1984) note that in stable market environments where firms are expected to “make heavy investments in standard operating procedures” (p. 202), this increases the cost of long-term change “hence the emphasis on incremental remedial responses” (p. 203). Hence, a firm that has heavily invested in a market and has developed certain efficient and effective routines is less likely to relinquish its practices in order to respond to an ephemeral event; it will only try to retain the losses in the short-term and remain faithful to its long-term strategic plan. Also considering that an institutional embedded firm is less able to adjust to radical changes and path-breaking steps are excluded (Cantwell et al., 2010; Sydow et al., 2009) leads us to the following proposition:
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Proposition 1. A highly institutional embedded firm due to its path-dependent behavior it is
more likely to employ an adaptive strategy and allocate its resources towards retuning to or maintaining the favorable status quo rather than adopt an entrepreneurial strategy in order to capitalize on the environmental jolt.
Nevertheless, when the whole environment is in flux, and the salient actors in addressing the crisis emanate from its nonmarket environment, nonmarket strategies might prove more important (Baron, 1995). Hence, firms must adopt political behavior in order to influence the current and future arrangements that will configure firm’s interactions (Smart and Vertinsky, 1984) and due to the significance of the nonmarket forces this political behavior can be used as a means to achieve strategic objectives (Boddewyn and Brewer, 1994).
The nonmarket environment constitutes another arena in which firms compete to outperform and isolate their competitors and according to Boddewyn and Brewer (1994) firm’s political behavior can take two forms: bargaining and non-bargaining. Their framework is addressed to multinational enterprises, yet as the authors claimed: “a political emphasis is not limited to international business as there is a sovereign ruling (state, government) over domestic business as well as business-government relations within all market-based political economies” (p. 125), so it is also applicable for firms operating only in one country.
With respect to the non-bargaining political behavior, it can take the form of compliance, avoidance and circumvention while the bargaining political behavior can be further analyzed as conflict, partnership and intensity (Boddewyn and Brewer, 1994). Whether a firm will employ bargaining or non-bargaining political behavior depends on firm’s and industry’s characteristics and on its nonmarket environment and the relative power each actor holds
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(Boddewyn and Brewer, 1994). Additionally, since firm’s conformity with the institutional environment directly affects not only their success but most importantly their survival, institutionally embedded firms are more likely to shape their activities in alignment with the preferences of their most salient institutional actors (Meyer and Rowan, 1977). Furthermore, when institutional changes are of limited strategic importance and the firm might even be favored by the rearrangements, then it is most likely that it will employ non-bargaining political behaviors by complying with the newly-imposed conditions (Boddewyn and Brewer, 1994). A non-bargaining behavior is aligned with a highly institutional embedded firm’s character since its survival and success is directly affected by its compliance with the laws and decisions imposed by the institutional actors.
Nevertheless, a highly institutional embedded firm it’s more likely to leverage its close ties with the environment and to lobby institutional actors in order to shape in its favour the policy changes and acquire better access to resources (Dieleman and Sachs, 2008; Henisz, 2003; Boddewyn and Brewer, 1994). When a firm has the power to directly affect the evolution of the non-market environment which interprets as hostile, is rather possible to fight over reclaiming institutional support (Boddewyn and Brewer, 1994). A highly institutional firm has better access to both resources and information (Zaheer, 2002; Dieleman and Sachs, 2008; Henisz, 2003; Boddewyn and Brewer, 1994) which suggests that it can leverage that resources in order to manipulate the rearrangements and claim further gains. Considering also the fact that the whole environment is disrupt, and especially during an economic crisis, the institutional actors are also seeking -for legitimate reasons- to set economy in motion and are expected to facilitate economic activities, an incumbent firm has the power to affect their decisions and shape the environment in its favour. A firm’s political behaviour has to be in accordance with its market strategy; a highly institutional embedded firm is mainly interested in retaining its power and its overall strategy cannot deflect from that route. Hence, it will not withdraw from
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its right to sustain its power and it will use its pivotal role in the society so as to control and influence the environment. All these leads us to the following proposition:
Proposition 2. A highly institutional embedded firm is expected to leverage the power
accumulated during the times of its dominance and bargain with the salient institutional actors in order to retain its power and benefit from the rearrangements resulting from the environmental jolt.
Considering the above, the next section illustrates the results of the research. In addition, Table 1 summarizes the main concepts discussed in the literature review, lists the main definitions as accrued by the study and furthermore, it includes the propositions the study aims to verify.
Methodology
Research design
This paper aimed to research how institutional embeddedness affects the responses of a mix-owned firm to an environmental jolt. In order to provide an answer to this question this study employed a longitudinal single case study design. According to Yin (2009) the case study is the ideal method of research when ““how” questions are posed, when the investigator has little control over the events and the focus is on a contemporary phenomenon within a real-life context” (pp. 2). An environmental jolt is a phenomenon that has to be studied over a period of time for its effects are not immediately apparent, thus a longitudinal study is pertinent to explore the firm’s responses to the jolt and how they changed over time since it allows to research “the same single case at different points in time” (Yin, 2009, pp. 49).
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Institutional embeddedness: It refers to the interrelationships between an organization and
its institutional environment and represents the degree to which firms have to comply with the forces executed by the institutional actors placed in the environment within which they
operate (Granovetter, 1985; DiMaggio and Powell, 1983; Baum and Oliver, 1992).
Environmental Jolt: An upheaval caused in the environment that regardless of the various
forms it can take, disrupts organizational routines and practices and erodes existing advantages (Hoffman, 1999; Haveman et al., 2001; Sine and David, 2003).
Strategic Responses: The actions employed by a firm in order to address changes in its
environment which have to address both market and non-market issues and can be either entrepreneurial or adaptive. (Baron, 1995; Smart and Vertinsky, 1984).
Table 1. Definitions of the main theoretical concepts & Propositions
Proposition 1. A highly institutional embedded
firm due to its path-dependent behaviour it is more likely to employ an adaptive strategy and
allocate its resources towards retuning to or maintaining the favourable status quo rather than adopt an entrepreneurial strategy in order
to capitalize on the environmental jolt.
Proposition 2. A highly institutional
embedded firm is expected to leverage the power accumulated during the times of its dominance and bargain with the salient
institutional actors in order to retain its power and benefit from the rearrangements
resulting from the environmental jolt.
In general, qualitative research can add to our knowledge base since its results can generate propositions and hypotheses that can be tested in larger-scale studies (Ryan et al., 2002) which subsequently can lead to theory building (Eisenhardt and Graebner, 2007). Thus, the rationale behind the choice of a single case is that the unit of analysis is ‘representative or typical’ (Yin, 2009, pp. 48) and the conclusions of this study will be informative about all those mixed-owned firms.
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In addition, theory developed from case studies can “have important strengths like novelty, testability, and empirical validity, which arise from the intimate linkage with empirical evidence” (Eisenhardt, 1989, p. 548). The problem of breadth (Flyvbjerg, 2006) was moderated by the depth of the research, and results provided a firm answer to the research question as we were able to investigate a firm's reactions “in depth and within its real-life context” (Yin, 2009, p. 18).
Case Selection
The unit of analysis of this study is the Public Power Corporation S.A. (PPC), the main electric company in Greece and among the largest industrial enterprises in Greece in terms of assets. In 2009, PPC generated approximately 91% of the electricity produced in the whole state (Eurostat, 20133) and its sales at the end of the same year reached Euro 5,507 million (PPC, Annual Report, 2010).
Until January 2001, PPC was wholly owned by the Greek state and under the Liberalization Law (2773/1999) was incorporated as a Societe Anonyme. Through offerings over the next two years, the Hellenic Republic further reduced its stake in PPC and, at the time of this study, it holds 51.12% of the company share capital.
PPC’s mixed ownership signals its high institutional embeddedness and it represents an ideal until of analysis. Besides the fact the PPC is partly owned by the state, it also operates in a quasi-deregulated market and it has to comply with decisions and laws imposed by the government and the authorities that monitor the energy market. Also, and most importantly, PPC operates in an environment severely hit by an economic crisis.
3http://ec.europa.eu/eurostat/statistics-explained/index.php/Electricity_market_indicators, , last accessed
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The Greek economy found itself in midst of the global crisis, triggered by the collapse of Lehman Brothers in September 2008, which “amplified the cumulated negative effects of chronic weakness and accelerated the downturn of the economy” (Bank of Greece, 2009). Subsequently, the newly elected Greek government admitted that the fiscal problems the country was facing were underestimated (The Economist, December 2009) and sought help in its European counterparts. On May, 2010 the Greek government reached an agreement with the International Monetary Fund (IMF), the European Commission (EC), and the European Central Bank (ECB) on a focused program to stabilize Greek economy and regain investors’ trust (IMF Country Report No. 13/156).
Nevertheless, and besides the billions of euros provided to Greece, the implementation of austerity measures, that were essential terms in the whole agreement, the Greek Economy is far from recovered, the Greek program is the least successful one and in 2011 its public debt was at 170.3 percent of GDP (Eurostat)4. Between 2009 and 2014, Greece has seen its real domestic demand drop by around 30 percent, real GDP fell more than 20% while the unemployment rate rose to over 15% (Economic and Monetary Affairs Committee Study, 2014).
All in all, the severe economic crisis that hit Greece along with the highly institutionalized profile of PPC represented the ideal context of study. Additionally, the fact that the researcher is from Greece allowed an in depth insight on the case, given the possibility to use national sources.
Data collection
The global financial crisis that sparked after the bubble burst in 2008 in the United States eventually revealed the pathologies of the Greek economy which led to a severe economic
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crisis. This fact sets the time boundaries of my research. The economic crisis in Greece started in 2009, reached a pick during 2010 and it is going till today, yet the study examined PPC's responses during a three year period, from 2009 to 2011. The rationale behind choosing this period of time, was that the research should capture the beginning of the crisis, investigate the immediate responses of PPC and then examine the potential changes in its long-term strategy for a sufficient amount of time. For this period of time, archival data were derived from multiple sources; media sources, corporate documentation as well as government documentation Regarding the media sources, the main ones were the newspapers “Ta Nea” (TA NEA in Greek) as well as the newspaper “Elefterotupia” (Ελευθεροτυπία in Greek). These particular newspapers have been chosen for two reasons; they represent the newspapers with the highest circulation in Greece according to the biggest distribution agency in Greece Argos S.A. and their archives are easily accessible, covering the actions of the firm during the whole period of the study. Using “PPC” as a keyword the research yielded 647 relevant articles in total. Every available documentation provided by the firm like press releases and annual reports which were all accessible online in PPC's website (ww.dei.gr) and already archived in chronological order, were also used as sources. As far as the government is concerned, I gained data from its press releases as well as from the decisions being published in the Government Gazette of the Hellenic Republic. Additional information was also derived from the website of the Greek Regulatory Authority for Energy (www.rae.gr).
Additionally, in order to better illustrate the environment within which PPC operates and to understand the changes that occurred in its market environment, data regarding PPC’s main competitors were also collected. The exact amount of data used in the research are listed in Table 2.
The present study revolved around two main actors; the firm and the government. Their interactions which result in the firm's high embeddedness dictated its actions. Thus, in order to
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examine the research question this elaborate set of data derived from all the above mentioned sources should have been identified and classified before being analysed. A chronology of the major events that occurred during the years of the study was developed and all events in PPC’s environment were classified either as institutional or market related. The arrangements in the institutional environment in terms of changes in regulations, tariffs, decisions and laws imposed by the government and all the institutional actors were coded under the “institutional environment” while all the events related to PPC’s competitors, the effects of the crisis in the market and in the customers were classified in PPC’s “market environment”. Subsequently, using the concept of integrated strategy developed by Baron (1995), firm's strategies were coded as market and non-market and the study addressed how these responses were affected by the firm’s institutional embeddedness.
Results
PPC’s Background
PPC was founded in 1950 and the company’s task was to develop and implement a national strategy plan so as every Greek citizen would have access to electricity. The state was in need of an organization which would invest throughout the country and provide energy to the entire territory, exploiting Greece’s rich lignite reserves and balancing the costs through economies of scale.
Electricity was formally introduced in Greece by Thomson-Houston in 1889, when it bought the first plant that was built in Greece and along with the National Bank of Greece, founded Compagnie Hellénique D'électricité (Hausman et al., 2008). During the following years, however, the market got remarkably segmented and by 1950, almost 400 companies were operating in the Greek energy market. Considering the geography and the morphology of the country and the low margin profit, many remote areas were depending to small-scale power
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plants for their electrification since major companies found it unprofitable to invest in power plants.
Table 2. Overview of Resources
PPC’s official website: 322 documents including: annual reports, media
www.dei.gr announcements, press releases, financial reports
Newspaper “Ta Nea” 227 articles and interviews of the relevant actors
www.tanea.gr
Newspaper “Elefterotupia” 405 articles and interviews of the relevant actors www.enet.gr
Regulatory Authority for Energy 15 documents with decisions and regulations www.rae.gr
Information regarding PPC’s competitors was derived from their official websites: www.terna.gr
www.energa.gr www.protergia.gr www.elpedison.gr
Consequently, PPC acquired all private and municipal power generation companies, bundled all these companies under a central management and integrated all networks into a national energy interconnected system. PPC has been a main pillar in Greece’s growth endeavour and played a huge role in country’s development, not only by providing energy, which is the
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driving force of every economy, but also through its investments throughout the country and by providing employment to thousands of people.
Until January 2001, PPC was wholly owned by the Greek state and under the Liberalization Law (2773/1999) was incorporated as a Societe Anonyme. Through offerings over the next two years, the Hellenic Republic further reduced its stake in PPC and at the time of the study participated in 51.12% of company’s capital stock. Pursuant to the above mentioned law, the Greek state cannot hold any less than 51% of PPC’s shares. Additionally, even if a shareholder, other than Hellenic Republic, acquires more than 5% of PPC’s share, his/her voting rights would be limited to 5%.
According to article 9 of the Articles of Incorporation of the Company, the Board of Directors (BoD) consists of 11 members elected for a three-year term: a) eight members, including the Chief Executive Officer, elected by the General Assembly of the shareholders of the company. b) Two members representing the employees of the company and c) One member designated by the Economic and Social Committee.
PPC is a vertically integrated company and operates in mining, generation, transmission, distribution and supply services. It is the sole owner of transmission and distribution network but it only manages the latter. The distribution network is managed by the Hellenic Transmission System Operator (HTSO), which is 51% owned by the state, and it is obliged to compensate PPC for the usage of its network. Additionally, PPC is the exclusive wholesale supplier and buyer for the non-interconnected islands and since it supplies energy at the same rates per category as those of the interconnected system, is compensated for these Public Service Operations (PSOs) and the amount of this compensation is approved by a Decision of the Minister of Development, after a relevant opinion by the Regulatory Authority for Energy (RAE), an independent administrative authority responsible to monitor the operation of all sectors of the energy market.
