Institutional pressures in home and host country : the case of Chinese state-owned enterprises

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Institutional Pressures in Home and Host Country:

The Case of Chinese State-Owned Enterprises

Master Thesis

MSc. Business Studies – International Management

Supervisor:

Dr Johan Lindeque

Second reader:

Dr Ilir Haxhi

Student:

Matthijs Vos

Student ID:

6056679

Word count:

18.630

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1

Abstract

This study tries to find the strategic responses of state-owned enterprises to institutional pressures originating from both home and host countries. The goal is to analyze these institutional pressures over time to see how they change and how the strategic responses of the state-owned enterprises are adapted to these changes. By using the concepts of liability of origin and asset of origin in combination with the national business system framework the institutional pressures in both home and host countries can be analyzed. This study then uses the concepts of institutional avoidance, adaption, co-evolution and resistance to analyze the strategic responses of the state-owned enterprises. These results are compared to the strategic responses of a privately owned enterprise to see if there are considerable differences between these types of firms. A multiple case study was conducted to see how institutional pressures in home and host country affect the internationalization strategies of Chinese shipping firms. The results show that as expected according to the national business system framework state-owned enterprises encounter harsher institutional pressures in some of their host countries compared to their privately owned counterparts. Further more proof was found for the use of institutional avoidance, adaption and co-evolution as internationalization strategies. For institutional resistance no convincing evidence was found in this study. The results in this study also indicate that privately owned and state-owned enterprises use different internationalization strategies in their host countries.

Keywords: Comparative Capitalism; Institutional theory; Internationalization strategies;

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2 Statement of Originality

This document is written by student Matthijs Vos who declares to take full responsibility

for the contents of this document.

I declare that the text and the work presented in this document is original and that no

sources other than those mentioned in the text and its references have been used in

creating it.

The Faculty of Economics and Business is responsible solely for the supervision of

completion of the work, not for the contents.

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3

Acknowledgements

First I would like to thank my supervisor Dr. Johan Lindeque for his guidance during the process. His expertise, enthusiasm and constructive feedback have been a crucial part of my process in conducting and completing this research. Throughout my master International Business Management his teachings have been a source of inspiration. I would like to thank Dr. Ilir Haxhi in advance for taking his time to assess this thesis as the second reader. Second, I would like to thank my parents for their seemingly endless support for my academic endeavors, which has not always been easy I can imagine. Their listening and feedback have made it possible for me to stay motivated in my seven years at the UvA. Finally, I would like to thank my fellow students. Without them it would be impossible to push through those long days in the library.

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Index of Tables and Figures

Table 1, Problems and opportunities regarding home and host country interaction ... 16

Table 2, Types of business systems and their institutional features ... 20

Table 3, different national modes of economic governance ... 21

Table 4 Case Selection ... 32

Table 5 Data Sources and Number of articles used for coding ... 33

Table 6, Coding Scheme ... 34

Table 7 COSCO's position vis-à-vis its host countries ... 37

Table 8, Case analysis results for COSCO ... 39

Table 9, CSG's position vis-à-vis its host countries ... 43

Table 10 Case analysis results for CSG ... 46

Table 11 Sinotrans' position vis-à-vis its host countries... 49

Table 12 Case analysis rsults for Sinotrans ... 51

Table 13 CIMC's position vis-à-vis its host countries ... 55

Table 14 Case analysis results for CIMC ... 56

Table 15, OOIL's position vis-à-vis its host countries ... 60

Table 16, Case analysis results for OOIL ... 61

Table 17, Overview LoO per NBS cell and firm ... 64

Table 18, Overview AoO per NBS cell and firm ... 65

Table 19, Overview Institutional Avoidance per NBS and firm ... 66

Table 20, Overview Institutional Adaption per NBS cell and firm ... 67

Table 21, Overview Insitutional Co-Evolution per NBS and firm ... 68

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1. Introduction

With the continuing economic growth in emerging economies, state-owned enterprises (SOEs) have emerged as multinational enterprises (MNEs)(Kowalski et al, 2013; Ming et al, 2014). In the literature SOEs have been reported as ineffective, and as exponents of economic and foreign policies of their governmental owners (Megginson and Netter, 2001; Luo and Tung, 2007; Bremmer, 2009), observations essential for understanding how multinational SOEs are perceived in host countries and the resulting institutional pressures that SOEs face as foreign investors.

In 2005 the Chinese oil company China National Offshore Oil Corporation (CNOOC) tried to acquirer Unocal a oil firm from the United States (US) (Wan and Wong, 2009), but the US government eventually blocked the deal due to national security reasons. This aggressive stand, that foreign SOEs should not be allowed to acquire national strategic interest of the US, was unprecedented and shows the hostile institutional environment that SOEs can face in host countries (Meyer et al., 2014).

Resource security issues are not the only investments that lead to institutional pressures. Among scholars and policy makers there is strong belief that the Chinese government is working on a, so-called, “string of pearls” a long the coastlines of the Indian Ocean (The Economist, 2013; Dixon, 2014; Hankwon, 2013). The string of pearls concept is an American coined phrase to help clarify the creation of a network of Chinese built, owned or influenced ports in the Indian Ocean, the Red Sea and even in the Mediterranean.

There are some problems with the string of pearls policy. First, it is not even clear the policy exist (the Economist, 2013). Second, the scope of Chinese influence in foreign ports is much larger than the Indian Ocean. Third, Hankwon (2013) argues that China is increasing its influence in foreign ports just to stabilize and increase its trading patterns. Finally, Dixon (2014) makes a similar argument by saying that China is not looking to create a number of Gibraltars so far away from home.

Meyer et al. (2014) find that SOEs face harsher institutional pressures compared to privately owned enterprises (POE). The literature that deals with the institutional environment and the pressures that it creates for SOEs does not, however, sufficiently explain the effects of institutional change, and how it affects the possible strategies of SOEs when entering and operating in host countries (Meyer et al, 2014; Ming et al., 2014; Pan et al 2014; Liang et al., 2015; Cui and Jiang, 2012).

To determine what the sources are of these institutional pressures and how SOEs deal with these pressures strategically two theoretical frameworks will be used. To analyze the sources of institutional pressures Whitley’s (1992, 1999, 2000) national business system (NBS) framework will

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8 be used to categorize the different host countries within a multiple case analysis. This is done to give a clear image of why certain institutional pressures might arise when SOEs try to invest abroad.

The second framework draws on the work of Cantwell et al (2010) and Oliver (1991) concerning the strategic responses of MNEs to the institutional environment of their host countries. As SOEs increasingly operate like regular POEs (Zhang, 2004) this framework can also be applied to the strategic choices of SOEs. According to Cantwell et al (2010) firms can respond in three different ways to institutional pressures in their respective host countries: avoid, adapt or co-evolve with the institutional environment of the host country. Oliver (1991) argues that firms can also resist the institutional environment of the host countries. How these concepts work will be explained within the literature review of this thesis.

This study aims to contribute to debate around SOEs and institutional pressures in host and home countries by focusing on changes in the institutional environment. First, recent literature does not spend much attention on the effects of changes in the institutional environments of home and host countries on the internationalization strategies of SOEs. Second, focusing on both home and host country institutional pressures this study tries to combine our knowledge on both to explain the internationalization strategies of SOEs. Finally, this thesis will use a multiple case study to include both SOEs and POEs. To meet these goals, the research question is formulated as follows:

How do changes in home and host country institutional environments affect internationalization strategies of SO-MNEs?

The case selected to answer this research question is the Chinese shipping industry and especially the expansion of the companies involved into foreign ports. In general ports influence trade and trade patterns, and can be used for military goals. This means that ports are of vital strategic importance to nations and, would be, world powers. The increasing influence of China in foreign ports is therefore not surprising (the Economist, 2013). The internationalization of the Chinese shipping industry, therefore, represents the coming together of both economic and strategic interest that both can be driven by either economic or political motivation.

There still is the problem of creating a data set that consist of both POEs and SOEs that are more or less equal in size and could, therefore, pack the same punch internationally. Luckily the Chinese shipping industry has been going through a privatization process over the past two decades and some of these privately owned enterprises are challenging the still existing SOEs (the Economist, 2013; Dixon, 2014). The gathered data for this study set allows for the comparison of the internationalization strategies of POEs and SOEs regarding institutional pressures in their host countries.

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9 This thesis is structured in the following way. The second section deals with the new role of SOEs from emerging economies and will further explain why institutional environments differ from country to country because of their NBS. The third section explains the research method used within this study and the dynamics of the within-case and the cross-case analysis. The fourth section shows the results of the within-case and cross-case analysis. The fifth section discusses the results of this study within the broader field of internationalizing SOEs. The sixth section concludes this thesis and summarizes the key findings and discusses the limitations of this study. Moreover recommendations for future research will be presented.

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2. Literature Review

2.1 State-Owned Enterprises an Introduction

Traces of SOEs or some kind of mixture of public and private ownership can be found throughout history, from ancient Greece up until the present the creation of a governmental body goes hand in hand with state-ownership (Sobel, 1999). With the Depression of the 1930s and the aftermath of the Second World War governments were pushed in a more active role throughout much of the world. These activities included ownership of production and the provision of all types of goods and services that the governments did not seem fit in the hands of the private sector (Megginson and Netter, 2001).

The privatization programs of Thatcher were not the first, but they have been the most important historically. The goals of these policies where to raise revenue for the state, promote economic efficiency, integrate SOEs in formal markets, introduce competition, decrease economic interference by the state, and promote wider share ownership (Megginson and Netter, 2001). The successful privatization of British SOEs urged governments around the world to do the same (Bremmer, 2009). It should be noted that privatization of SOEs is a policy that a state can only use once. After the SOE is privatized the state is not able to sell it again (Megginson and Netter, 2001)

The wave of privatization varied in speed in different regions around the world. The Chinese government, since Deng Xiaoping, has been experimenting with numerous small waves of reform, but has stated many times that strategically important SOEs will not be privatized (Zhang, 2004). In other emerging economies, like Brazil, India, Russia etc., SOEs have been vital to the economic development programs created by their governments (The Economist, 2012). Even though privatizations policies are attractive due to the revenues from the sales of SOEs many governments use SOEs out of ideological or strategic motives (Megginson and Netter, 2001). It is therefore essential for the field of international business to know how SOEs operate, what their motives are, and how government ownership affects their strategies.

2.2 The Return of the State-Owned Enterprise

SOEs have been playing an increasingly important role in the world economy over the past decades. SOEs from developing countries, such as Brazil, China, India, and Russia, and developed economies, such as France, Norway and South Korea, have extended their international reach within the world economy (The Economist, 2012). According to Bremmer (2009), Rickards (2011) and the Economist (2012) state capitalism drives the strategies of these countries to strengthen the control of states over economic pressures. Bremmer (2010) describes the essence of state capitalism as follows:

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11 “governments use various kinds of state-owned companies to manage the exploitation of resources that they consider the state’s crown jewels and to create and maintain large numbers of jobs ….. the state is using markets to create wealth that can be directed as political officials see fit …. [and] the ultimate motive is not economic (profit maximization), but political (maximizing the state’s power and the leaderships chances of survival)”

Bremmer, (2010: 11)

Bremmer’s (2009; 2010) explanation is focused on the political aspects of internationalization strategies of SOEs, but it is a representation of how SOEs are viewed by other companies and other home country governments. There are problems with Bremmer’s (2010) view on the danger that SOEs seem to pose on any form of free market economics. Bremmer (2009; 2010) makes no distinction between SOEs from different types of home countries and is purely focused on ownership instead of the strategies, and his point of view is static and ignores the restructuring processes of Chinese SOEs.

In the literature SOEs have often been framed around the dimensions of efficiency, productivity and administrative bureaucracy, which stem from the conflicting operational, financial and social objectives of these firms (Cuervo-Cazurra et al, 2014). Thus, operating beyond the boundaries of effective free market allocation, SOEs are described in the literature as inefficient bureaucratic entities that are under poor management and are, therefore, less efficient than in POEs (Megginson and Netter, 2001).

However, Cuervo-Cazurra et al (2014) argue that with all the changes that SOEs have experienced over the past decades it is time to revise this classic view: a new type of SOE has come to light, which has overcome some of the shortcomings of their predecessors due to their international orientation. Because of their international focus the SOEs face the harsh competitive pressures of international rivals. In China this has led to major reforms with respect to markets, industry and business structures, technological know-how, and business strategies (Zhang, 2004). The SOE is no longer just a bureaucratic monster that is controlled and used by governments to achieve political goals; in their own way SOEs are starting to operate according to a semi-competitive business model.

The question remains, if, according to classic literature, SOEs are less effective than privately owned enterprises why do SOEs exist in the first place? Megginson and Netter (2001) find that one explanation for the existence of SOEs comes from the fact that market imperfections exist. When markets fail or are unable to reallocate products or resources efficiently, state-officials might be

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12 compelled to intervene and address these inefficiencies by direct ownership and thus creating a SOE (Megginson and Netter, 2001).

The second explanation stems from a political strategy perspective, which explains that different political economic choices lead to different varieties of capitalism (Jackson and Deeg, 2008b). The problem is that in most of the SOE literature there is an ideological twist added to the existence of SOEs. Cuervo-Cazurra et al (2014) mention four types of economic ideologies and political strategies that, despite their differences, can result in creating SOEs: communism, nationalism, social and strategic. Brenner (2009) and Rickards (2011) use this ideological twist to their full advantage, but forget to explain how different forms of capitalism lead to different kinds of ownership. They argue that SOEs stem from political ideologies and strategies and that their internationalization strategies are motivated as such. This line of reasoning does not lead to a meaningful contribution to the scientific debate around the existence and function of the SOE. A much more useful explanation can be found within the varieties of capitalism literature.

2.3 Institutional Pressures

International business scholars have been using institutional theory to explain both the external and the internal environment that enterprises have to deal with in conducting their business (Kostova et al., 2008). Douglas C. North’s (1991: 97) argues that “Institutions are the humanly devised constraints that structure political, economic, and social interaction”. Institutions are created to deal with uncertainty and create order regarding human interaction. North (1991) adds to the explanation of institutions that they consist of both formal rules (constitutions, laws, property rights) and informal constraints (sanctions, taboos, customs, traditions and codes of conduct).

Nelson and Sampat (2001) state that institutions function as patterns of human interaction that are related to the division of labor and the coordination mode of human activity. The mechanism that drives this human interaction is what Nelson and Sampat (2001) call social technology. Social technologies become institutions if these are incorporated within a society and become standardized. Within this mechanism lies the potential of institutional change, it implies that actors who contribute to the creation of new social technologies can influence the institutional make-up and change “the rules of the game.”

2.3.1. Classifications of Emerging Market SO-MNEs

The literature on SOEs suggest that when these firm internationalize from emerging markets the firms are set out with different goals and can be categorized accordingly, but this categorization remains under developed by Bremmer (2009). Luo and Tung (2007) on the other hand do, their article is concerned with all MNEs from emerging markets and with regard to SOEs they mention two

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13 categories: the transnational agent and the commissioned specialist. The transnational agent has a broad international diversification, which allows it to be extensively invested abroad for their business expansion, while at the same time still being subject to some form of home government instructions or influences. Transnational agents often operate in sectors of strategic importance to their home countries. These firms not only go abroad because it is good for business, but also to support economic development at home (Luo and Tung, 2007).

The commissioned specialist focuses it outwards investments on only a few foreign markets. Within these markets they leverage their competitive strengths and at the same time fulfill initiatives mandated by their governmental owners. This is to make sure these firms reap the benefits of international expansion as a legitimate business, and complete their state-assigned mandates (Luo and Tung, 2007).

The question remains how internationalizing SOEs are perceived in their host countries. The goals of either a transnational agent or a commissioned specialist might cause problems in the targeted host countries. By developing the concept of liabilities of origin within this thesis the institutional pressures that internationalizing SOEs can face in host countries become identifiable.

2.3.2. Liabilities of Origin

Where do institutional pressures in the host country come from and why SOEs facing harsher pressures than POEs? In general, MNEs face multiple institutional pressures on both the national and international level. MNEs have to adapt to institutional pressures in their host countries, while at the same time aligning the accommodation of these pressures with the MNE’s global values and practices (Meyer et al., 2014). Creating a fit between the MNE’s global values and practices and conforming to the institutional environment in its host countries is essential to create legitimacy in those countries (Kostova, 1999). MNEs can enhance their legitimacy in three ways: 1) by aligning organizational practices with local norms and regulation, 2) by imitating incumbents with respect to their organizational structures, or 3) by cooperating with local actors that enjoy high level of legitimacy in the host country through a join venture (Meyer et al., 2014).

Institutional pressures on foreign investors differ in every country but also differ between enterprises, due to ownership types, respective industries, reputation of the enterprise, and perceived threats of national security. According to Meyer et al. (2014) especially SOEs may have less legitimacy and face harsher institutional pressures as a foreign investor. These pressures develop as an outcome of social and political processes in the relevant organizational fields, which are built on historically developed sets of cognitive, normative and regulatory institutions in a country (Hoffman, 1999; Kostova, 1999). An SOE may not fit within the institutional environment of a host country. This fit is based on the principles at the cognitive level that have been translated into normative and

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14 regulatory pressures and put into the question the legitimacy of state-ownership. Meyer et al. (2014) identify five perceptions that give way to these pressures. First, the involvement of foreign governments operating businesses in a country might be perceived as unwanted within certain institutional environments. Second, SOEs can be perceived in the host country as political agents. Third, SOEs tend to have preferential access to resources in their home country, which is often perceived as an unfair competitive advantage. Fourth, SOE are often regarded as less efficient and should therefore generate less spillover benefits compared to POEs. Finally, SOEs have a reputation of being more bureaucratic and less transparent, which creates suspicions with stakeholders in host countries.

The concept of liability of foreignness (LoF) was first purposed by Hymer (1976) and can be defined as: “the impact of various forms of distance (cultural, economic, institutional and geographic), explains why MNEs have difficulties operating in foreign markets, especially when facing rivals not hindered by such distance” (Rugman et al. 2011: 757). It is therefore all about the “the costs of doing business abroad that result in a competitive disadvantage for an MNE subunit” (Zaheer, 1995: 342). These costs arise from the unfamiliarity of the host country (institutional) environment, from cultural, political, and economic distances, and from coordination problems due to geographical distance (Zaheer, 1995).

However, there is not just one form of LoF. Sethi and Judge (2009) argue that (SO-)MNE’s can suffer from incidental and discriminatory LoF. Incidental LoF can be defined as “non-discriminatory costs of learning and adaptation to cope with the unfamiliarity and lack of roots in the host-country environment” (Sethi and Judge, 2009: 407). Discriminatory LoF, on the other hand, “comprises explicit regulations exclusively targeting MNE subsidiaries, in order to benefit indigenous firms” (Sethi and Judge, 2009: 407).

Discriminatory LoF is a structural problem and difficult to overcome, it stems from institutional pressures within the host country. As already argued above these institutional pressures can be expected to be even harsher for SOE that invest abroad. This means that SOE’s do not only suffer from LoF but also from a Liability of Origin (LoO), competitive disadvantages that emerge as direct consequence of the origins of the firm (Ramachandran and Pant, 2010). Ramachandran and Pant (2010) see MNEs as social constructs that are build around a specific national context that shape the internationalization strategies of these MNEs. The national origins of MNEs determine their administrative heritage, idiosyncratic asset bundles, how they identify themselves, and how their host country stakeholders regard them. This home country context is therefore key to understanding the possible LoO of MNEs from emerging markets. These MNEs have grown under stress of underdeveloped home country institutional intermediaries, with poor access to well-developed financial markets, and poor access to a flexible, skilled talent base (Ramachandran and Pant, 2010).

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15 LoO can therefore be a serious disadvantage for MNEs in their host country context. Table 1 provides an overview of how LoF and LoO are used in this research on the next page.

LoO occurs when both a SO-MNE and a MNE enter a country at the same time, with the same goals, and the offer of the MNE is seen as preferable due to its ownership structure. This line of reasoning can also be turned around. Most internationalizing SOEs from emerging economies are supported by their governments. Both transnational agents and commissioned specialist internationalize not only to become successful businesses, but also to fulfill the mandates that were given to them by their governments (Luo and Tong, 2007). Government support of SOEs can come in form of bilateral agreements between home and host governments, it can also mean that SOEs are prepared to acquire assets at prices that are not acceptable for privately owned MNEs (Luo and Tung, 2007). In this line of argument state-ownership is not a liability, it is the exact opposite: it functions as a firm specific advantage (FSA), this can be described as an Asset of Origin (AoO). AoO can therefore be defined as unique benefits that are enjoyed by the SO-MNE subsidiary that are not available to rival firms in the host country (Sethi and Judge, 2009). Due to purpose of its existence, developing the economy in the home country by going abroad, an emerging market SO-MNE can go to greater lengths to make sure it is allowed to operate in a host country compared to POEs, which main goal is to be competitive.

To explain how and when both AoO and LoO may occur for a SO-MNE the institutional building blocks of both home and host countries need to be identified. The comparative capitalism (CC) literature can provide a theoretical framework that identifies these building blocks.

2.4 Role of National Business Systems in the Internationalization of SO-MNE’s

The field of international management has been dominated by a narrow set of ideas that stem from neo-institutionalism (Kostova et al, 2008). Multinational organizations are different form domestic organizations and these differences are not only “in degree” but also “in kind” (Westney and Zaheer,2001). The essence of these differences lies in the cross-border conditions of multinational organizations, which lead to diverse, non-monolithic, fragmented and sometimes conflicting sets of external environments (Kostova et al, 2008). Adding to this, multinational organizations have to deal with complex internal environments, several forms of distances (i.e. spatial, cultural and organizational), language barriers, power struggles, inconsistencies and conflict regarding interest, values, practices and routines used in the various parts of the organization (Kostova et al, 2008).

It is therefore necessary to not only look at the concepts of organizational field, legitimacy, and isomorphism as mechanisms of institutional pressures, which are drawn exclusively from neo-institutionalism. Kostova et al (2008) argue that multinational organization have a very different institutional environment, which better fits the conditions of equivocality, ambiguity, and complexity.

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16 Table 1, Problems and opportunities regarding home and host country interaction

Dimension Liability of Foreignness Liability of Origin Assets of Origin

Incidental Discriminatory

Cultural Distance

Could affect

communication costs

Institutional barriers that cause for complications when SOE’s enter a market

Different perceptions of SOE’s could cause distrust in the host country for foreign investments from SOE’s

If both home and host economies are state-guided the investments of foreign SOE’s could be seen as preferable in the host country

Home Country

Home country

institutional environment

Lack of legitimacy of foreign

firms and economic

nationalism

Political pressures on SOE’s to follow government (foreign) policy

Governments which heavily interfere in their economies could use SOE’s as means of control

Host Country

SOE’s face problems adapting to the local institutional environment

Lack of legitimacy of foreign

firms and economic

nationalism

Fear of foreign government interference

Government support of foreign SOE could provides the host country with additional benefits

Home-Host Country Interaction

Could slow foreign investment in the host country due to the learning process of the SOE

Cultural, Political and Economic distances create LoF in the host country for the SOE

Conflicting political systems creates a LoO in the host country.

The use of foreign SOE’s to develop national economies. SOE’s tend to go to further lengths to enter a market

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17 This does not mean that institutionalism should be abandoned. Instead the concepts of neo-institutionalism and “old” neo-institutionalism should be combined to study MNEs (Kostova et al, 2008). Keeping in mind that: “Institutions exist in distinct national configurations or types that generate a particular systemic logic of economic action and competitive advantages related to complementarities among those institutions” (Jackson and Deeg, 2008a: 686).

Jackson and Deeg (2008b) identify four common characteristics in how institutional theory is used in IB literature. First, IB literature points out how regulative, normative or cognitive institutions constrain the strategic choices of MNEs. Second, institutions are studied largely as single variables that have impact on firm strategies rather than being in relation to each other. Third, the competitive advantage of firms regarding the institutional environment stems from the ability of firms to fit in or adapt. Finally, the IB literature does not explicitly deal with institutional change. This makes sure that the perception of institutions in IB remains rather thin, only stressing that institutions constrain strategic choices (Jackson and Deeg, 2008a). The variable-based approach explains institutional diversity only as variations “along discrete parameters at a high level of aggregation” (Jackson and Deeg, 2008b: 545). The narrow view of comparative advantage as fit between firm strategies and institutional environments holds that IB has not developed an explicit theory linking institutions to the coordinating problems facing MNEs across different functional domains and countries. Due to the emphasis on the effects of institutions, the IB literature has little to say about the origin or change of diverse institutional environments (Jackson and Deeg, 2008b).

The main problem is that scholars of IB know that institutions matter, but there is no consensus on how they matter. Economic activity is embedded within an institutional environment, which is present on all levels (national regional and global). Embeddedness, therefore, refers to the degree to which economic activity is constrained by the institutional environment and is used to analyze non-market forms of coordination (Jackson and Deeg, 2008b). Accepting that firms and other economic actors are socially embedded, institutions can be seen as both constraints and resources for dealing with key problems of economic coordination (Granovetter, 1985).

Neo-institutionalist belief that through processes of institutional isomorphism and the organizational field the development of capitalism in different countries should lead to one most effective form of capitalism (Jackson and Deeg, 2008a). However, when looking at the different national markets that exist there does not seem to be one clear form of capitalism. Jackson and Deeg (2006) ask the question how many varieties of capitalism there are and give an overview of how capitalist systems can be compared. Due to the many existing forms of capitalism the belief in institutional isomorphism, like the neo-institutionalist do, does not take hold within the CC literature. The CC literature suggests that economic actions takes place within social contexts and are then

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18 mediated by institutional settings. Furthermore, the CC literature conceptualizes the institutions within the settings, for example national economies, as complementary (Aoki, 2001).

“Complementarity is a particular case of functional interdependence where institutions in different domains positively reinforce outcomes or enhance the utility of institutions in other domains” (Jackson and Deeg, 2008a; 683). Thereby creating specific configurations of institutions that can be associated with distinct comparative institutional advantages and particular kinds of innovations, production strategies, and distributional outcomes (Jackson and Deeg, 2008a).

Taken together the argument provided in the CC literature suggests that social and political variables influence the functioning of economic domains and shape economic performance across countries. This entails that different forms of capitalism will emerge in different countries, because of the different institutional environments that were created overtime. This process is path dependent (Hall and Soskice, 2001; Whitley, 1992, 1999, 2001; Jackson and Deeg, 2008 a & b) and, therefore, will not lead a single most effective form of capitalism.

2.4.1. Different Approaches Towards Comparing Capitalisms

Within the CC literature there are three prominent frameworks: the varieties of capitalism approach, the national business systems approach and approaches that fall in to a governance category (Jackson and Deeg, 2008a). The varieties of capitalism approach was developed by Hall and Soskice (2001) and compares capitalisms as production regimes that are defined by strategic interactions among, firms, employees and shareholders. However, Hall and Soskice (2001) only develop two different types of production regimes, or capitalisms, which are very broad and in reality countries incorporate elements of both approaches into their production regimes (Hall and Soskice, 2001).

Governmental approaches regarding the CC literature focus on institutional diversity as generic coordination mechanisms used in the governance of economic activity. Additional to the common distinction between markets and hierarchies, the governance approach includes communities, the state, networks and associations in to their analysis (Crouch and Streeck, 1997). These six governance mechanisms differ along two underlying dimensions: do actors act according to self-interest or to social obligations, and to which degree is power distributed horizontally or exercised vertically (Hollingsworth and Boyer, 1997). Where Hall and Soskice assume rational and strategic behavior within a set of fixed institutions, the governance literature pays more attention to social norms and “logics of appropriateness” affecting and shaping the behavior of actors and institutional choices (Jackson and Deeg, 2008a). However, Whitley’s (1999) business systems approach provides the clearest description of various forms of capitalism and given that it is build on the literature of East Asian capitalism makes it most suitable for this study.

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2.4.2. National Business Systems

Whitley (1999) defines business systems as “distinctive patterns of economic organization that vary in their degree and mode of authoritative coordination of economic activities, and in the organization of, and interconnections between, owners, managers, experts, and other employees” (Whitley, 1999: 33). Firms operating in a business system are, therefore, not unitary actors. Instead Whitley (1999) explains that interactions among stakeholders lead to the development of diverse firm capacities. Diverse business systems are produced by two general variables: 1) the degree and scope of ownership integration, and 2) the degree and scope of alliance integration among firms (see table 2, below, for a comparison of these dimensions across the business system types).

Whitley (1999) created six ideal types to put the approach into practice and these are based on the two general variables mentioned above. Fragmented systems consist of small firms in highly competitive markets due to very low ownership and alliance coordination. Within these fragmented systems cooperation between firms is minimal and organized coordination between firms is difficult to maintain (Whitley, 2000). Whitley (2000) states that these kinds of business systems can be found in societies where trust in formal institutions is low and the state is remote from private business.

Coordinated Industrial districts are characterized by fairly low ownership coordination, but experience high alliance coordination (Whitley, 1999). This system is characterized by small or medium sized firms with high rates of new-firm creation and firm failure. A system of collective organization is used to access financial resources, standard setting and technical exchanges (Whitley, 2000). Coordinated industrial districts tend to develop in states where national and local government levels help to increase barriers to entry and exit, and, therefore, limit predatory price competition by large firms (Friedman, 1988). The main difference with the remaining four business systems is the size of the firms involved. Small firms dominate the first two systems, while large firms dominate the other four systems.

Within compartmentalized business systems high levels of ownership coordination are combined with low alliance coordination (Whitley, 2000). This means that ownership of the firm is distant from the day-to-day operations of a firm. Standard market contracting is used to coordinate inputs and outputs of firms (Richardson, 1972). This system develops in a “pluralistic, arms’ length institutional context, where strong formal institutions, notably the legal system, enable market contracting between mostly anonymous economic agents to coordinate many transactions effectively” (Whitley, 2000: 861). Large and liquid capital markets dominate the financial system.

State organized business systems exist of firms with high levels of ownership-based coordination and very little alliance integration of economic activities (Whitley, 1999). As expansion in these business systems is subsidized by the state the original owners are able to maintain control

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20 over their fast growing and large businesses. Due to these close connections between the business and state elites, and strong ownership control, business interest and political priorities are often in compliance with each other (Whitley, 2000). Within these systems the state can be seen a powerful and integrated and takes an active role in organizing economic development.

Table 2, Types of business systems and their institutional features

Collaborative systems are characterized by associational organization of competitors within a sector. These activities are managed through authority hierarchies based on unified ownership (Whitley, 2000). Risk sharing between business partners is key for these systems to operate, as are the close interconnections between banks and companies. The state plays a vital role in coordinating businesses and social partners.

Highly coordinated business systems utilize alliance forms of ownership to coordinate activities across sectors. This vertical integration is achieved through obligational contracting and networks of alliances (Whitley, 2000). Compared to collaborative systems, inter-sectoral alliances and cooperation are more institutionalized and in such a way that cross sectoral activities are more integrated and new developments are coordinated by groups of firms (Gerlach, 1992). The main difference with a collaborative system is the role of the state, the structure and strength of the public

Business System Type

Fragmented Coordinated Industrial District

Compartmentalized Collaborative Highly Coordinated

State Organized

Characteristics of Business Systems

Owner Control Type Direct Direct Market Alliance Alliance Direct

Ownership Coordination

Low Low High Considerable Considerable High

Alliance Coordination Low Medium Low Considerable High Low

Dominant Firm Type Opportunistic Artisanal Isolated hierarchy Cooperative hierarchy

Allied State

dependent

Institutional Features

State Coordination Low Considerable/ locally

Low Considerable High High

Strength of Intermediaries

Low Considerable Limited High High Low

Financial Systems Unpredictable Locally credit based

Capital market Credit Credit State controlled

credit

Trust in formal Institutions

Low Medium High High Considerable Limited

Authority Sharing with Business Partners

Low Medium Low Considerable High Low

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21 training system, and the labor movement. Within this business system the state has taken a direct role regarding economic development (Whitley, 2000).

Table 2 shows the building blocks of the different national business systems, but it does not provide a clear image of different institutional pressures that could arise when a SOE from one country enters a host country. It is therefore necessary to create a simplified model, which would divide the different national business systems of the countries involved and shows where possible pressures would arise. This means that table 2 has to be converted to a table that shows the national modes of economic governance (Zhang and Whitley, 2013). National modes of economic governance depend on two dimensions that originate from the NBS model created by Whitley (Zhang and Whitley, 2013). The first dimension includes the role of the state in steering the direction of an economy. The second dimension displays the role of businesses regarding the coordination of economic action (Zhang and Whitley, 2013). Table 3 shows how these two dimensions interact and to what types of capitalism it can lead.

Table 3, different national modes of economic governance

By creating a clear two-dimension contradiction between the different NBS’s, it becomes easier to show when SO-MNE’s might experience LoO or AoO when their respective home and host countries have a contradicting NBS. The two dimension of table 3 combined with the LoO and AoO literature lead to the following propositions:

Proposition 1a: (SO-)MNE’s from states with extensive government interference in its economy will experience LoO in host countries where this is not the case and the coordinating role of businesses is much more important.

Proposition 1b: The effect of LoO will be greatest for (SO-)MNEs from home countries located in cell II seeking to invest in host countries located in cell III.

Business coordination of economic action

State direction of the economy Strong Weak Extensive I 1. Collaborative 2. Coordinated Industrial District II 1. State Organized 2. Highly Coordinated Modest III 1. Compartmentalized IV 1. Fragmented

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22 Proposition 2a: (SO-)MNE’s from states with extensive government interference in its economy will experience AoO in host countries where both the state and business coordination is weak.

Proposition 2b: The effect of AoO will be greatest for (SO-)MNE’s from home countries located in cell II seeking to invest in host countries located in cell IV.

To overcome LoO the Chinese SO-MNE’s can respond in different ways to the institutional pressures of the host country, SO-MNEs can avoid, adapt, resist or co-evolve with the institutional environment of the host countries (Cantwell et al, 2010; Oliver, 1991). The next section will explain these strategic choices further.

2.5 SO-MNE’s Strategic Responses to NBS Influences

The make-up of a NBS creates the institutional pressures to which MNEs have to strategically respond. Although the possible institutional pressures that a SO-MNEs might face are different compared to POEs, the way the SO-MNEs respond to these pressures is probably quite similar compered to the strategic responses of POEs. Zhang (2004) argues that, as SOEs are catching-up with POEs, SOEs are starting to operate similar to those POEs. This means that the strategic responses of SOEs should be similar to those of regular MNEs.

Cantwell et al. (2010) provide a framework for strategic responses to institutional pressures in the host country of an MNE. According to this framework MNEs can avoid, adapt or co-evolve with the present institutional environment within their respective host countries. Using the text of Oliver (1991) this thesis will add resistance as a strategic response of MNE’s to the Cantwell et al. (2010) framework. This is to show that in some cases MNE’s have the ability to directly influence and change the institutional environment of a host country (Oliver, 1991).

Institutional avoidance occurs when MNEs take the external institutional environment as given, but there is the option of choosing between different institutional environments. There are three key characteristics for Institutional avoidance. First, the institutional environment is exogenous to firms. This environment is weak and characterized by lack of accountability, political instability, and inefficient enforcement of rule of law (Cantwell et al., 2010). Second, firms can choose between different institutional environments, which provide firms with a possible “exit” option (Cantwell et al, 2010). Third, due to the poor institutional quality firms adjust their entry mode. The model of Cantwell et al. (2010) is focused on the strategies of MNE’s. For SO-MNE’s this could be less of a problem due to the support of their government owners, but regarding weak institutions the reasons for SOE’s to avoid institutional environments can be similar. The opposite can also be true LoO in a

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23 host country could make sure that the SO-MNE uses institutional avoidance even if the institutional environment is stable. However, the SO-MNE can have other motivations to invest regardless of institutional environment in a host country. Investments that include natural resources or certain infrastructure projects limit the number of alternative investment locations and leaves the SO-MNE with no other choice than to invest (Dunning and Lundan, 2008).

The effect of institutional avoidance is not equal among al countries. The interaction between home and host country institutional environment is key. Countries with a strong business coordination of the economy will have difficulties with SOE’s from countries with strong state coordination of the economy (Whitley, 1999). Using table 3 the propositions can be developed to predict when the effect of institutional avoidance might be strongest.

Proposition 3a: (SO-)MNE’s that experience LoO in their host countries will try to avoid the institutional pressures if the economic coordinating functions of businesses are strong in the host country.

Proposition 3b: The effect of institutional avoidance will be strongest for (SO-)MNE’s from home countries located in cell II seeking to enter host countries located in cell I and III.

With regard to institutional avoidance the MNE, or the SO-MNE in this case, has to deal with a rather weak and sometimes instable institutional environment that can typically be found in transition economies (Dunning, 2005). FDI attraction of host countries is an important factor as these countries try to lure (SO-) MNEs to invest in their economies. Also corruption might play an important role as corrupt government officials could allow for bypassing the institutional environment of the host country (Meyer and Peng, 2005). The developing host countries often lack the skills and technological know-how to effectively exploit their natural resources or develop the infrastructure to export these natural resources. So when a SO-MNE’s uses one of these tactics when making an investment in a host country it can be classified as institutional avoidance.

With institutional adaption the external environment is still treated as exogenous to the firm, but instead of avoiding the institutional environment firms seeks to adjust their own structure and policies to achieve a better fit (Cantwell et al., 2010). The key characteristics are an exogenous institutional environment, firms try to influence local institutions, firms seek legitimacy by adapting to local isomorphic pressures, firms gain strategic options due to local learning and adaption, and embeddedness in an institutional context (Cantwell et al, 2010). Following this strategy the SO-MNE tries to become an acceptable investment partner for the host country. Regarding the LoO of an SO-MNE in a certain host country this can be vital for the success of the investment.

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24 As with the third proposition the interaction between the institutional environments of both the home and the host countries will increase or decrease the effect of institutional adaption for the SO-MNE. Especially SO-MNE’s that invest in host countries where the business coordination of the economy is strong the need to adapt to the present institutional environment will be the strongest (Zhang and Whitley, 2013).

Proposition 4a: (SO-)MNE’s that experience LoO in their host country will try to adapt the institutional environment if the investments are vital to securing future resources, projects and learning processes (catching-up).

Proposition 4b: The effect of institutional adaption will be strongest for (SO-)MNE’s from countries located in cell II seeking to enter host countries in cell I and the strongest in host countries located in cell III.

Institutional adaption can be done in different ways. Cantwell et al (2010) focus on the use of political influence and bribery, but also on building legitimacy through institutional isomorphism, and imitation and learning strategies by foreign (SO-) MNEs in host countries. Looking at these possibilities for institutional adaption, part of the first option, using bribery, has more resemblance with institutional avoidance and less with institutional adaption. For the purpose of this thesis bribery will therefore be classified as institutional avoidance. Isomorphism is easier to detect. Of the three biggest Chinese shipping firms the parent companies are completely state-owned. However, their subsidiaries are hybrid firms, which are owned by both the state-owned parent company and private investors (The Economist, 2012). These subsidiaries have therefore the possibility to use private shares, instead of government funds, to finance major investments in host countries. Showing more resemblance with POEs to ease possible institutional frictions in the host countries. Their respective parent companies can also sell assets to their subsidiaries to further stimulate overseas investment. However, the SO-MNE can also directly adapt its day-to-day practices directly to regulation in a host country, environmental laws are a good example.

Another way for an SOE to adapt to the host country institutional environment is their choice of entry mode. Normally an MNE makes the decision using the dimensions of control, commitment and risk to see how it will invest in a host country (Brouther and Hennart, 2007). An MNE can choose either between contracts, joints ventures (JV) and wholly owned subsidiaries as an entry mode (Pan and Tse, 2000). Besides the three entry modes an MNE can also choose between greenfield ventures, on the one hand, and acquisitions on the other (Meyer et al, 2014). In the traditional entry mode theory the MNE modifies it entry mode according to the perceived economic risks of the investment.

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25 For SOEs and POEs the grounds for choosing a certain entry mode can be different. The role of the government and the institutional responses to investments by foreign SOE’s are much more important.

When the firm has the goal to affect change in the institutional environment of the host country Cantwell et al. (2010) speak of institutional co-evolution. Co-evolution goes beyond adaption as it can involve the introduction of new organizational routines and best practices into the host country (Cantwell et al, 2010.). Co-evolution also includes the transfer of home-country institutional practices to the host country, or even affecting institutional practices on a supranational level (Cantwell et al, 2010).

Again the interaction between the institutional environments of the home and host countries is important. Zhang and Whiteley (2013) argue that MNE’s are most likely to try and influence the institutional environment of their host countries, if the host country is less developed than its home country. Even though co-evolution goes beyond just influencing the institutional environment of a host country (Cantewell et al., 2010) the prediction made by Zhang and Whitley (2013) can be used in this study to predict when and how institutional co-evolution might occur.

Proposition 5a: (SO-)MNE’s that experience LoO in their host countries will try to co-evolve with the institutional environment to show goodwill and contribute to the development of the host country.

Proposition 5b: The effect of institutional co-evolution will be the strongest for (SO-)MNE’s for home countries located in cell II seeking to enter host countries located in cell IV.

Institutional co-evolution deals with the transfer of organizational forms, routines, and best practices. As China is in many ways still a developing country co-evolution will probably not happen when Chinese firms invest in developed countries, but in other less developed host countries this might occur.

Based on the co-evolution theory of Cantwell et al (2010), Oliver (1991) and Westney and Zaheer (2001) the co-evolution strategy can be divided in three different approaches: mutual gain for both SOE and host country, self-regulation of the SOE to overcome biases against the investments of the company, and the creation of new institutions (new business standards for example) in the host country with contributions of the SOE. Between these three different strategies of co-evolution the creation of new institutions is the most difficult and requires high rates of acceptance (Cantwell et al, 2010; Oliver, 1991). Mutual gain is much easier to achieve as investments in less developed parts of a

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26 country and are accepted with more ease compared to those in economic strategic regions, for example.

Institutional avoidance, adaption and co-evolution are not mutually exclusive (Cantwell et al., 2010). In the same country the (SO-)MNE could use either three at different locations, different points in time, and in different host countries. Cantwell et al. (2010) also mention the importance of different industrial sectors regarding the use of institutional strategies. As this study only deals with the shipping industry the innovative nature of industries is not taken into account.

The overall premise regarding the institutional perspective is that for an organization to survive it has to conform to social norms of acceptable behavior (Oliver, 1991). However, Oliver (1991) argues that it is necessary for organizations to adapt to the environmental uncertainty, of which problematic interdependencies are the main drivers, in order to survive. These interdependencies become problematic when they contradict the institutional environment, which could lead to the organization to resist institutional pressures. With regard to (SO-)MNE’s, economic gain is the most important factor influencing the enterprise to resist the institutional pressures within a host country or not (Westney and Zaheer, 2001).

Both Oliver (1991) and Westney and Zaheer (2001) do not make a distinction between different capitalisms in their studies. However, as overcoming environmental uncertainty is a key component of institutional resistance, one could assume that within a weak institutional environment the effect of resistance would be greatest. It is therefore assumed, that (SO-)MNE’s from countries positioned in cell III will show the greatest potential of resistance when entering host countries located in cell II and IV.

Proposition 6a: (SO-)MNE’s that experience LoO in their host country will resist the institutional pressures if the perceived outcome of conforming to those pressures will harm their economic gains.

Proposition 6b: The effect of institutional resistance will be strongest for (SO-)MNE’s from home countries located in cell III seeking to enter host countries located in cell II and IV.

Institutional resistance, as already discussed above, will occur when the institutional environment of the host country compromises the economic gain of the SO-MNE (Oliver, 1991). The SO-MNE can dismiss these institutional pressures by ignoring explicit norms and values. The SO-MNE can also challenge these institutional pressures by contesting rules and requirements. It is also possible for the SO-MNE to openly attack the institutional pressures in a host country by assaulting the sources of these pressures (Oliver, 1991). However, institutional resistance might be an option for regular

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27 MNEs, but for Chinese firms this might not be the case. For the past decades the main goal of the Chinese government is to trade with other countries without compromising the national sovereignty of the trading partner (Hu Jintao, 2007). This means that for Chinese firms to openly resist the institutional pressures in their respective host countries would harm the position of the Chinese state as a whole and this is will not be acceptable for the Chinese government.

2.6 Conclusion

The six propositions will be used to answer the research question of this thesis. By using the analysis from the NBS framework the (SO-)MNE institutional strategic responses can be classified using the models of Oliver (1991) and Cantwell et al (2010). In short, (SO-)MNEs will probably respond in three different ways to the institutional pressures in their respective host countries: adapt, co-evolve or avoid institutional pressures in the host country (Cantwell et all, 2010). The next chapter will operationalize these propositions to find out how SO-MNEs deal with the institutional environments of their respective host countries.

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3. Methodology

This chapter will provide the framework to conduct the evaluation of the working propositions created above. First, the overall research philosophy of this thesis will be debated. Second, the research design will be explained. Furthermore, this chapter will deal with the theoretical case sampling and the analytical approach.

3.1 Research Philosophy

Academic research takes on lots of shapes as different academics try to find answers to their research questions. How one positions their research with respect to the philosophical aspects of doing research has important consequences for the actual research. Ontology concerns the nature of entities and if these entities should be considered as having a reality that is external to the observer (Bryman, 2008). There are two broad positions concerning ontology. First, the objectivist position argues that entities ‘confront us as external facts that are beyond our reach or influence’ (Bryman, 2008: 18). Second, the subjectivist position asserts that ‘social phenomena …. are not only produced through social interaction but that they are in a constant state of revision’ (Bryman, 2008: 19). This means that researchers always provide a specific version of reality and can, therefore, never be regarded as a definitive version of reality. As this thesis deals with the perception of SOE’s regarding investments in the host country a more subjectivist approach is suitable.

Epistemology deals with the question: ‘what should be regarded as acceptable knowledge in a discipline?’ (Bryman, 2008: 13). Within this thesis a critical realistic approach is taken. Critical realists argue that the way in which a researcher conceptualizes social phenomena is just a way of knowing that reality (Bryman, 2008). As a consequence ‘we will only be able to understand-and so change-the social world if we identify the structures at work that generate those events and discourses …. These structures are not spontaneously apparent in the observable pattern of events; they can only be identified though the practical and theoretical work of the social sciences’ (Bhaskar, 1989: 2). This means there is a distinction between the objects that are being studied and the concepts that are used to study and understand them.

3.2 Multiple-Case Study Design

To answer the research question a longitudinal multiple case study with embedded units of analysis (Yin, 2003a) will be conducted. Multiple case studies, as they are based in real life events, can provide a more elaborative story compared to regular quantitative research (Gephart, 2004).

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29 Eisenhardt (1989) and Yin (1994) argue that multiple cases studies usually provide a broader and more stable base for generating theory, but also allow for broader exploration of the research question and theoretical elaboration. The use of multiple cases allows for comparing emergent findings to other cases to see if they are idiosyncratic to a single case or consistently replicated in other cases (Eisenhardt, 1991). This is in line with the aim of this thesis. Within the existing literature the SOE as an internationalizing firm is still a poorly understood phenomena. For this thesis to shine more theoretical light on this MNE type would allow for a better understanding of SOE’s and how host countries respond to their investments.

Eisenhardt and Greabner (2007) state that a frequently encountered challenge of case studies is the selection of cases. As the purpose of this study is to develop theory, not to test it, theoretical sampling is a most useful technique to select the cases (Eisenhardt and Greabner, 2007). Theoretical sampling means ‘that cases are selected because they are particularly suitable for illuminating and extending relationships and logic among constructs’ (Eisenhardt and Greabner, 2007: 27). However, this does mean that the choice of selecting a case is less based on how unique it is, but more on the contribution of the case to the theory development within the study (Yin, 1994). The existing theory regarding the internationalization of SOE’s shows that most of the SOE’s originate from developing countries. The SOE’s are also part of strategically important sectors to continue the development of the economy of the home country (Megginson and Netter, 2001; Luo and Tung, 2007; Bremmer, 2009). For this study the cases will be selected from an industry that is strategically important to the further development of the home emerging economy country and to make comparison possible from within the same industry.

Developing a case study also has a number of drawback concerning the validity and reliability of the study itself (Yin, 2014). First, it is difficult to expand the results of a case study to make a statistical generalization, for example the sample sizes are too small, but Yin (2014) argues that analytic generalization, defined as ‘the logic whereby case study findings can extend to situations outside of the original case study, based on the relevance of similar theoretical concepts or principles’ (Yin, 2014: 237), can be used to expand the results of a multiple case study to a larger population. Second, the use of multiple cases increases the validity of the study, as each case that is added the generalizability of the study increases (Eisenhardt, 1989).

Construct validity is particularly difficult for a case study research. “People who have been critical of case studies often point to the fact that a case study researcher fails to develop a sufficiently operational set of measure and that ‘subjective’ judgments …. are used to collect the data” (Yin, 2014: 46). The use of specific theoretical concepts related to the original objectives of the study can be used to increase the construct validity of the study. By showing that similar studies have

Institutional pressures in home and host country : the case of Chinese state-owned enterprises