Master Thesis International Economics and Business
State ownership in Eastern European emerging countries.Name: Mart Sijtsema (s2058170)
MSc International Economics and Business Supervisor: S. Choi
2 Abstract
This thesis investigates if firms owned by the state differ in their performance, internalization and innovation level compared to private owned firms. The motivation behind setting up this investigation was given by Bruton et al. (2015) who showed that state owned firms have important contribution to the world economy but literature on this type of ownership is lacking. Moreover, research focused on state owned firms was mainly executed in the case of China. China is a good example because it is an upcoming economy with a high amount of state owned firms. However, it is important to investigate if state owned firms in other parts of the world show similar results.
This thesis will take Eastern European emerging countries as object of research. The hypotheses in this thesis will be tested with data collected by the Business Environmental Enterprise Performance Survey (BEEPS) between 2012-2014. This study covers 85 state owned firms in 30 Eastern European emerging countries while the reference group exist of more than 10.000 private owned firms. This thesis finds that state owned firms in Eastern European emerging countries perform significantly less well compared to private owned firms in terms of return on sales. Moreover, state owned firms in Eastern European emerging countries are less likely to search for opportunities abroad in terms of export while once state owned firms engage in exporting this will be in the same intensity as private owned firms do. Finally, this research finds that there is no difference in innovation level between state owned firms and private owned firms in Eastern European emerging countries.
Compared to private owned firms, state ownership in Eastern European emerging countries can form a disadvantage regarding their level of performance and internalization, while their level of innovation is similar.
3 TABLE OF CONTENTS
Abstract ... 2
CHAPTER 1: INTRODUCTION... 4
CHAPTER 2: LITERATURE REVIEW ... 7
2.1. Performance of state owned firms in Eastern European emerging countries ... 7
2.2. Internalization of state owned firms in Eastern European emerging countries ... 10
2.3. Innovation of state owned firms in Eastern European emerging countries ... 12
CHAPTER 3: METHODOLOGY ... 15
3.1. Sample ... 15
3.2. Variables ... 16
3.3. Model specification ... 19
CHAPTER 4: ECONOMETRIC ISSUES AND DESCRIPTIVE STATISTICS ... 21
4.1. Econometric issues ... 21
4.2. Descriptive statistics ... 22
CHAPTER 5: EMPIRICAL RESULTS ... 25
5.1 Results ... 25
5.2 Discussion ... 31
CHAPTER 6 CONCLUSION AND LIMITATIONS ... 33
6.1. Conclusion ... 33
6.2. Limitations & Future research ... 34
REFERENCES ... 35
4 CHAPTER 1: INTRODUCTION
Although private ownership is the most dominant ownership structure in market-based societies, there are also many firms who are governed by the state (Goldeng et al., 2008). These firms are called; state owned firms. State owned firms could be totally owned by the government but could also be a hybrid organization which is partly owned by the government and partly owned by a private organization (Bruton et al., 2015). In most countries state owned firms supply goods and services which are important for a country. These goods and services could for example be water, electricity, a smooth transportation network and oil. Because of the high entry barrier, the government is responsible for providing these goods and raise welfare within the country (Patel et al., 2009; Bruton et al., 2015; Peng et al., 2016). Researchers predicted decades ago that state owned firms would diminish globally but these predictions have to be grounded as unfounded (Spicer et al., 2000; Peng et al., 2016). On average one tenth of the gross domestic product (GDP) within a country is generated by state owned firms worldwide and state owned firms represent more or less twenty percent of the equity market value worldwide (Economist, 2010; Bruton et al., 2015; Peng et al., 2016). However, this contribution to GDP could vary between regions. State owned firms contribute in Latin America, Asia and Africa more to the GDP than in other regions (Budiman et al., 2009). Moreover, approximately 10% of the biggest firms in the world, listed in the Forbes global 2000, are owned by states and these state owned firms had a total revenue in 2011 of 3,6 trillion dollar (Kowalski et al., 2013). In most parts of the world state owned firms play an important role in the economy (Budiman et al., 2009). However, while state owned firms are an important contribution to the world economy, there are only a few studies on these firms (Carney & Child., 2013; Young et al., 2014; Bruton et al., 2015). As meaningful as firm theory nowadays is, theories about firms fail in comprehensiveness (Peng et al., 2016). Therefore, literature on state owned firms is less influential compared to literature on non-state owned firms (Peng et al., 2016). Whittington (2012) and Peng et al. (2016) distinct two kind of literature streams according to the types of firm ownership. One stream is focused on the private owned firm and the other stream is focused on the state owned firms, which have developed parallel. However, according to Whittington (2012) and Peng et al. (2016) there was relatively not much comparison and interaction between these two streams of literature. While Carney and Child (2013) conclude in their research on East Asian corporations that state ownership has become more important nowadays. Peng et al. (2016) and Dewenter & Malatesta (2001) argue that the lack of research on state owned firms is due to their ideological nature (of state owned firms) which makes it difficult to conduct research. According to Peng et al. (2016) and Dewenter & Malatesta (2013) the discussion on state owned firms is as socialism versus capitalism, therefore it is difficult for Western researchers to elaborate on the merits of state owned firms.
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Nevertheless, scholars have taken state owned firms as subject of research. Collecting information from the journals of the Financial times, which includes for example the ‘Academy of Management Perspectives’ and ‘Academy of Management Journal’, from 2000 to 2014 Bruton et al. (2015) found 57 articles in a time span of 15 years on state ownership. A part of these 57 articles was mainly focused on privatization while 39 articles were focused on management of state owned firms. When searching for literature on state owned firms, it could be discovered that most of the literature is biased towards China. Bruton et al. (2015) find that 30 of the 39 articles, specialized on state owned firms, have a focus on China. The other articles take Russia, Brazil, India and Norway as subject of research. China is an interesting case because China is an upcoming economy with many state owned firms. However, it is important to investigate if the research results regarding to state owned firms in China also apply for state owned firms in countries with other institutional, cultural and economic settings (Chen et al., 2009; Bruton et al., 2015). Researches on state owned firms in China do not often address if their results also apply for state owned firms elsewhere in the world (Bruton et al., 2015). Sjoholm (2007) shows that in countries, other than China, state owned firms are also important employers, for example in Russia and Norway. However, empirical results regarding differences between state owned firms and private owned firms in countries other than China are lacking. Therefore this research will take other countries into consideration, to be specific; Eastern European emerging countries.
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The property right theory and the agency theory are the most important theories who define the differences between state owned firms and private owned firms which result in performance, internalization and innovation differences between these types of firms. The property right theory and the agency theory will be more in depth discussed in the literature review.
Given these differences between state owned firms and private owned firms, this thesis sets three kind of aims. First of all, this thesis will investigate whether state owned firms in Eastern European emerging countries perform better in terms of return on sales and employment growth compared to private owned firms. The second aim of this thesis is to investigate if state owned firms from Eastern European emerging countries are more likely to internationalize, in terms of export, than private owned firms. Finally, an answer will be given to the question if state owned firms face higher levels of innovation compared to private owned firms from Eastern European emerging countries.
This thesis may contribute to the literature on state owned firms. As this study covers a sample of both state owned firms and private owned firms located in Eastern European emerging countries it is possible to investigate the performance, internalization and innovation level of these firms relative to private owned firms. To the best of my knowledge, there has no research been executed before on state owned firms in Eastern European emerging countries with a focus on performance, internalization and innovation. It is important to investigate if results in other countries, mainly China, show similar or different results as this thesis does. Therefore, the main research questions will be:
How does state ownership in Eastern European emerging countries effect firm performance, internalization and innovation?
7 CHAPTER 2: LITERATURE REVIEW
The following chapter will be divided in three different sections based on the variables that will be examined in this paper. First, an overview of current literature on state owned firms performance relative to private owned firms will be given. Secondly, an overview of the current literature on internalization will be given, specifically, on export of state owned firms and private owned firms. Finally, this study will zoom in on the difference in innovation level between both types of ownership.
2.1. Performance of state owned firms in Eastern European emerging countries
According to the property right theory, performance between state owned firms and private owned firms differ because ownership matters (Cheung, 1983). The property right theory focuses on the ownership of goods and resources. These goods and resources can be owned by individuals, governments and associations (Peng et al., 2016). Karl Marx, who was a forerunner of the property right theory, described that private owned firms act in a capitalist way and exploit workers to be more beneficial. A solution towards this problem would be the introduction of state ownership over private property to solve the problem of exploitation (Marx, 1967). Performance of firms is the simple result of property rights (Ma et al., 2006). Because property rights between privately owned firms and state owned firms differ, performance will be different. State owned firms receive support from the government (Peng & Heath., 1996; Goldeng et al., 2008; Patel et al., 2009; li et al., 2014). This support could be in the form of subsidies and funding (Peng & Heath, 1996; Patel et al., 2009; Li et al., 2014). Moreover, advantages could be obtained in the form of low interest loans, monopoly rights, low- priced materials, tax breaks, cheap land and licensing (Li et al., 2014). These advantages that state owned firms receive could lead to better performance because financial support could be an investment in the firm and lead to higher revenues (Goldeng et al., 2008; Bhasa, 2015).
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of capital. Also Ralston et al. (2006) found that in China, state owned firms perform better compared to privately owned firms.
On the other hand, some studies have argued that shareholding by the government in firms could also lead to disadvantages (Chen et al., 2009). As discussed in the beginning of this section, according to the property right theory performance of state owned firms and private owned firms differ. Kornai et al. (2003), who fall among the property right theorists, did research towards the disadvantages of being owned by the government and named this problem ‘the soft- budget constraint’. All firms face a budget constraint; the revenues have to be higher than the cost the firms make. If a firm is not able to meet the budget constraint, the firm faces a problem, intervention from other organizations is needed or the firm will go bankrupt. According to Kornai et al. (2003 and Bhasa (2015), state owned firms receive protection from the government in multiple ways. As a consequence state owned firms are not fully dependent on making their own revenues and profits to survive. Because state owned firms do not take all the risk on their own, but also on part of the government, moral hazard for these firms is high and these firms become lax. This will be reflected for example in a lax way of controlling their cost and promoting their product in a certain market. The soft-budget constraint for state owned firms has the consequence that managers in state owned firms do not feel the need to work as hard as managers of private owned firms which results in relatively lower performance(Kornai, et al., 2003; Chen et al.,2009; Li et al., 2014; Bhasa,2015).
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private owned firms. These differences between state owned principals and private owned principals will strengthen the principal-agent problem for state owned firms even more and lower the performance of state owned firms (Wang & Judge, 2012; Peng et al., 2016).
Moreover, reduced performance for state owned firms is not only related to their inefficiency but could also be subscribed to the fact that the state has often multiple objectives which are not only focused on raising profits or revenues (Gosh & Whally, 2008; Liang et al., 2014; Bhasa, 2015; Peng et al, 2016), which is called the policy burden (Lin & Li, 2008). These goals could be economic oriented but also non-economic oriented. Non-economic oriented goals for state owned firms are for example the increase in employment or the supply of certain goods such as oil, highways and electricity which are not supplied by other firms. If these goals are more important than raising profits, it cannot be assumed that state owned firms perform in the same way as private owned firms do (Lin& Li, 2008; Liang et al., 2014). In this case, state owned firms perform less well compared to private owned firms which could be subscribed to the fact that state owned firms have other goals instead of lower efficiency. Also other constraints could be held responsible for the relatively weaker performance of state owned firms. Bhasa (2015) divides these constraint into economic constraints and market related constraints. As an extra to the financial constraints already mentioned in this thesis for state owned firms, Bhasa (2015) also identifies continuity of binding commitments as an economic constraint for state owned firms. Continuity of binding commitments imply that future government(s) cannot change the decisions made by previous and current governments. Changing these path dependent decisions made in the past would involve high cost, which governments try to prevent unless their political survival is in danger. Also market-related constraints are important to pressure the performance of state owned firms in a negative way. Market-related constraints are lack of market for corporate control, lack of managerial markets and lack of marketing signaling power (Bhasa, 2015).
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Peng et al. (2016) found no single outcome on the performance discussion between state owned firms and private owned firms. Peng et al. (2016) elaborate on this discussion that when performance is long term based and not economically orientated, when it is not necessary to keep cost very low and innovation is less important, state owned firms have a higher performance rate than private owned firms. Also Bilsen (1998) and Arocena & Oliveros (2012) found no single answer on the performance difference between state owned firms and private owned firms. Measuring firm performance in terms of return on asset, sales and employment growth gave no significant different results for ownership type.
Concluding, there is growing literature on the performance of state owned firms (Ding, 2007; Chen et al., 2009; Li et al, 2014). However, no clear result is found on the relation between ownership type and firm performance. Although results found in the literature are not straightforward, there is a small bias towards the result that state owned firms in emerging countries perform less well compared to private owned firms. For this reason the following hypothesis is constructed:
Hypothesis 1: Being owned by the state, in Eastern European emerging countries, has a significant negative effect on firm performance.
Also in section 2.2 and 2.3, the agency theory and the property right theory are important theories to explain the difference in export levels and innovation levels according to ownership. Because section 2.1 explained the agency theory and property right theory thoroughly sections 2.2 and 2.2 will draw less attention towards these theories.
2.2. Internalization of state owned firms in Eastern European emerging countries
The rise of emerging countries led governments within emerging countries realize that to enhance economic growth even more, firms within these countries have to expand their business abroad (Alon et al., 2014). China, for example, launched the ‘go global’ strategy to support local firms to expand their business abroad. Receiving support in terms of finance from the government led the number of firms in China going global increasing and therefore the necessity to understand these firms (Amighini et al., 2013). Several researchers who investigated the relation between ownership type and internalization level have emphasized that ownership does matter, however no clear answer is found (Song et al., 2011; Amighini et al., 2013; Liang et al., 2015).
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mode of foreign market participation, this research will focus on export as main strategy of internalization. Also Alon et al. (2014) state that firms from emerging countries are in the beginning stage of the internalization process and found that only 4% of the Chinese firms generate half of their sales revenues abroad from activities such as export, offshore manufacturing and sales (global integration).
According to the property right theory, state owned firms often receive political support in the form of resources, such as capital, to accomplish firm goals as well as to fulfill government goals (Sutherland & Ning, 2011; Alon et al., 2015; Peng et al, 2016). Because starting exporting involve high cost for firms, for example the cost of administration, changing the product to adjust the product to specific local preferences and marketing; financial support is important (Peng & Yu, 2014; Hu& Tan, 2016). Therefore state owned firms are more likely to start exporting compared to private owned firms because state owned firm have easy access to financial resources (Li et al., 2010; Song et al., 2011; Amighini et al., 2013; Alon et al., 2015; Li et al., 2016; Hu & Tan, 2016).
Moreover, state owned firms do have a broader set of reason to go abroad. State owned firms do not only go to foreign countries for economic reasons but also political reasons play an important role (Hu &Tan, 2016). Managers of state owned firms use export to demonstrate their ability to manage international business, and claim credit for themselves and their firms for undertaking activities that serve national interest’’(Song et al, 2011: 39).
Luo et al. (2010) found in their research on Chinese firms empirical results and observed remarkably differences in the international strategy of private owned firms and state owned firms. The amount of multinationals going abroad is biased towards state owned firms, despite the ‘Go global strategy’ and reforms in the public sector (Song et al., 2011). Also Duanmu (2012) found in his empirical research on firm heterogeneity and location choice of Chinese firms that state owned firms are more likely to go abroad. As main reason for this difference in level of internalization between state owned firms and private owned firms, Duanmu (2012) found that state owned firms have easier access to capital to overcome the cost of starting exporting. Alon et al. (2014) found similar results that although the government is supporting both state owned firms and private owned firms in China to ‘go global’, this support is stronger for state owned firms. Therefore state owned firms are more likely to export.
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Zhao& Zou (2002) show in their empirical research that private owned firms are more likely to start exporting compared to state owned firms. State owned firms are inefficient who depend strongly on governmental finance. Zhao & Zou (2002) argue that this governmental support results in state owned firms who face little pressure to become efficient and risk-taking. For this reason state owned firms in China are more risk averse in export markets and have limited capabilities to become successful in export markets and do not feel the pressure to export. Zhao & Zou (2002) argue that state owned firms are less likely to export (export propensity) and once state owned firms export, state owned firms export in lower amounts compared to private owned firms (export intensity).
As theory shows there are contradictory results on the effect of different ownership types on export level. Agency theory predicts state owned firms to have higher levels of export because state owned firms receive political support, often in the form of capital which can be used as investment to overcome the high export cost. However, according to Zhao & Zou (2012) government support could also lead to lower export numbers because state owned firms become lax and risk averse. Private firms on the other hand like to explore market opportunities abroad and raise their revenues. Although results found in the literature are ambiguous, there is a small bias towards private owned firms. Therefore, this research will follow the argument of Zhao & Zou (2002) and Aulakh et al. (2000) who found that private owned firms are more likely to export than state owned firms. On basis of this argument the following hypothesis is constructed:
Hypothesis 2: Being owned by the state, in Eastern European emerging countries, has a significant negative effect on export.
2.3. Innovation of state owned firms in Eastern European emerging countries
Innovation is an important strategy for firms to support knowledge transfer within the firm by combining internal and external sources (Jiang et al., 2013). However, state owned firms and private owned firms differ in their performance of innovation (Hoskisson et al., 2002; Li et al., 2010; Guariglia& Lui, 2014). Several researches (Weerawardena,2003; Santamaria et al., 2010; Jiang et al., 2013) divide innovation into two types: process innovation and product innovation. Process innovation relates to changes in the firms marketing, production or managerial processes, while product innovation relates to changes in the final product or when the firm develops a new product.
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innovation (Mascarenhas, 1989; Li et al., 2010; Guariglia & Liu, 2014), while private owned firms are more proactive and fear less about the unpredictability of benefits.
Peng& Health (1996) give another reason why state owned firms are less innovative compared to private owned firms. State owned firms have little incentive to receive resources beyond what is necessary to reach their goals. Therefore, state owned firms have very limited capabilities in acquiring developed innovation and technologies and are often reluctant to introduce innovation. Government investment is usually the only source of technological investment for these firms (Mascarenhas, 1989). Besides these arguments of lower innovation levels by state owned firms Peng & Health (1996) and Choi et al. (2011) argue that managers in state owned firms become agents of the government, who execute orders given by the government, while innovation is not valued. Most often these managers, picked by the government, were chosen because of political loyalty and were not able to work in markets because of their lack in skills, experience and knowledge which results in lower innovation levels .
Private owned firms, on the other hand, try to maximize profits as far as they are able to in order to survive (Chen et al., 2009; Li et al., 2010). Therefore private owned firms would like to explore market chances and take risk which, as opposed to state owned firms, is a more prospector strategy (Peng et al, 2004). To explore these market opportunities and to survive, innovation is needed to be more competitive (Song et al, 2015). Therefore, compared to state owned firms private owned firms are more innovative, future oriented, and constantly looking for environmental opportunities (Tan, 2002; Peng et al., 2004).
Not many scholars have empirically investigated the relation between type of ownership and innovation (Jiang et al., 2013). Cato (2011) found in his research on the influence of ownership on innovation that state owned firms’ technology is inefficient compared to that of private firms. Additionally, Tan (2002); Peng et al. (2004); confirm that private owned firms are always looking for market opportunities, are more innovative and are more future oriented. Hart et al. (1997) argues that private owned firms are more focused on lowering cost and invest in innovation compared to state owned firms.
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government as well as from state owned banks, which makes it easier for state owned firms to obtain finance (Sun et al, 2002; Keister & Lu, 2004; Li et al, 2010; Choi et al., 2011). This political obstacle sets a problem for private owned firms and prevent them from finance (Huang, 2003). This problem is called the ‘political pecking order’ (Huang, 2003; Guariglia & Lui, 2014).
Choi et al. (2011) expect that the state in emerging countries plays an important role in the development of innovation through interference and by its industrial science & technology (S&T) measures which stimulates learning and innovation activities. According to Motohashi and Yun (2007) state owned firms became more involved in S&T outsourcing activities the last decades, which leaded to an improvement in innovation. Moreover, a wider set of government aims and long term policy choices, as opposed to short term profit maximization, has a positive effect on firms innovation (Chang et al., 2006). Also, according to Chang et al. (2006), state owned firms have access to important infrastructure that will lead to government-initiated innovation.
Jiang et al. (2013) found in their research on the relation between ownership type and innovation in China that there is a negative effect for private owned firms on product innovation while there is no difference in process innovation between private owned firms and state owned firms. As explanation for this finding Jiang et al. (2013) state that private owned firms seek short term profits and seek to imitate other firms innovate products. This draws their focus away from internal R&D for product innovation. State owned firms are more long term focused and are supported by the government to innovate. Therefore, state owned firms are more product innovative compared to private owned firms. Kole and Mulherin (1997), Sun et al. (2002) and Choi et al. (2011) do not distinguish between product and process innovation but find that government ownership has positive effects on the level of innovation of firms both in emerging as well as in developed countries. Guariglia & Liu (2014) did specific research towards the constraint of finance on innovation. Guariglia & Liu (2014) found that private firms suffer most from constraints in finance while state owned firms do not face many problems receiving finance. Moreover, the availability of finance is an important determinant for the level of innovation within a firm. Therefore Guariglia & Liu (2014) conclude that state owned firms are more innovative.
Based on the review of the literature, no clear answer could be found as to which type of ownership faces a higher level of innovation. Because no single answer is obtained in the literature on the level of innovation of different ownership types I composed the following hypothesis:
15 CHAPTER 3: METHODOLOGY
3.1. Sample
The object of research in this thesis will be Eastern European emerging countries. There are several arguments why Eastern European emerging countries are taken as research object. First of all ownership in emerging markets works out differently compared to ownership types in developed markets (Chen et al., 2009). According to the transaction cost theory, market failures exist in both developing as well as developed countries. Private owned firms therefore exist in the first place and take opportunity of these market failures to exploit their business (Williamson, 1985). However, in developing countries, where markets do less complement or where markets do not even exist, market failures are bigger. These market failures are too big for private owned firms to take advantage off. In this case, state owned firms are needed, otherwise this task will not be performed (Rajan, 2010; Peng et al., 2016). Therefore, according to Chen et al. (2009) and Budiman et al. (2008) state owned firms are more likely to be presented in developing and emerging countries than in developed countries. Higher presence of state owned firms in emerging countries also reflects a relative higher contribution to GDP compared to the contribution to GDP of state owned firms in developed countries (Budiman et al., 2009). For this reason, this thesis will take emerging countries as object of research. Moreover, most literature nowadays available on state owned firms is focused on China. China is an interesting case because it is an upcoming economy with many state owned firms. However, it is important to investigate if results regarding to state owned firms in China (or Asia) also apply for state owned firms in countries with other institutional, cultural and economic settings (Chen et al., 2009; Bruton et al., 2015). Therefore, it is really important to pick a set of countries with totally different institutional, cultural and economic settings compared to China. This is important because, as Chen et al. (2009) and Bruton et al. (2015) suggested, these differences could lead to different results. Eastern European countries differ on these aspects (institutional, cultural and economically) compared to China and are therefore a good case.
Finally, to the best of my knowledge, research on ownership type and the effect on performance, internalization and innovation has not been studied before in the case of Eastern European emerging countries.
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Secondly, this thesis will focus on all emerging countries in Eastern Europe and therefore all countries in a other state of development will be removed.
Emerging countries are countries which face rapid economic growth, industrialization and often shift to an open market economy (IMF, 2010; Fatma et al., 2015). Emerging countries are in a different phase of economic development than developed countries (Fatima et al., 2015). Emerging countries are playing a growing role in the world economy and that role is expected to be even greater in the future (OECD, 2011). According to the OECD (2011) examples of emerging countries are; Brazil, Indonesia, China and Russia. There is no ambiguous answer to which countries in Eastern Europe could be classified as emerging countries (WESP, 2014; FTSE, 2016; Dow Jones Index, 2016). On basis of different data sources (WESP, 2014; FTSE, 2016; Dow Jones Index, 2016) I will classify the following countries in Eastern Europe as emerging countries: Poland, Czech Republic, Greece, Hungary, Turkey, Russia, Romania, Bulgaria, Croatia, Cyprus, Estonia, Latvia, Lithuania, Macedonia, Serbia, Slovenia, Slovakia, Albania, Bosnia and Herzegovina, Montenegro, Belarus, Ukraine and Moldova.
Data on basis of firm performance, internalization and innovation for state owned firms and private owned firms in emerging Eastern European countries is provided by the BEEPS website (BEEPS, 2016). I will explain the performance, internalization and innovation variables in more depth in the next section.
3.2. Variables
3.2.1. Independent variable
State owned firms: Most literature so far investigated state owned firms as black or white
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To take into consideration that state owned firms are not always 100% state owned but could also be hybrid organizations in which the firm is partly owned by the government and partly owned by a private organization (Bruton et al, 2015). This thesis will consider a firm as state owned firm if more than 50% of the firm is owned by the state. This is similar to the approach Guariglia & Liu (2014) and Bruton et al. (2015) used in their research on state owned firms.
3.2.2. Dependent variables 3.2.2.1. firm Performance
There are multiple ways to measure firm performance (Neely et al., 2000; Omran, 2004; Goldeng et al., 2008; Cato, 2008; Chen et al., 2009; Li et al., 2014). According to Neely et al. (2000) two clear distinctions can be made between performance types. First of all performance can be related to outcomes, which could for example be profitability and productivity. On the other hand firm performance relates to determinants which are important for good outcomes. Determinants are for example the quality of products and flexibility. Performance in this thesis will focus on the outcomes of performance. First of all performance results could be measured on basis of profitability. In the literature different ways to measure profitability are used: Return on Assets (ROA), Return on Equity (ROE), Cash Flow Return On Assets (CFOA) and Return on Sales (ROS). Performance could also be measured on basis of productivity; employment growth, net sales per employee (SEMP) and assets per employee (AEMP). Finally, Tobins Q is a possible measurement of firm performance. Omran (2004), Chen et al. (2009) and Li et al. (2014) measure firm performance on basis of various variables. While Goldeng et al. (2008) limit their research to just one variable of performance; return on assets (ROA). This thesis suggests that firm performance need to be measured on basis of multiple performance variables. If these different performance variables have the same result, results will be stronger.
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Because most firms from developing and emerging countries are in the first stage of the internalization process, in which export is the main mode of foreign market participation, this research will focus on export as main strategy of internalization (Aulakh et al., 2000; Zhao & Zou, 2002). To measure export levels of state owned firms and private owned firms the following procedure will be followed as Zhao & Zou (2001) did in their research on Chinese manufacturing firms. First of all firms have to decide whether they want to export or not
(export propensity). If a firm decides to export it is important to know what proportion of
output is exported (export intensity). The export intensity is measured as direct export as a % of total annual sales.
3.2.2.3. Innovation
There are several ways to measure innovation performance of a firm. First of all, innovation performance of firms could be measured as the amount of sales revenue contributed by new products (product innovation) to the total sales revenue generated by all products for each firm. The new products contribution to the overall sales revenue captures the actual outcomes of firm innovation (Wei & Atuahene-Gima., 2009; Zhou & Li., 2008).
However, innovation is not only about the output. Innovation could also play an important role in processes within the firm which is called process innovation (D’Aveni et al., 2010; Garud et al., 2013). Therefore also a measure for process innovation will be implemented (Production/process innovation). Process innovation will be measured as new logistical or business support processes introduced over the last three years.
Finally innovation will be measured by new management/organizational practices introduced over the last three years in firms in Eastern European emerging countries. 3.2.3. Control variables
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Third, a control variable is implemented for countries. Different countries have a different legal system and could therefore influence results. Finally, according to Goldeng et al. (2008) performance differs from industry to industry. Therefore, nature and type of assets varies per industry, and will turn out in different performances, internalization level and innovation level. A control variable is implemented for type of industry. To account for different countries and sectors in this research this thesis makes use of fixed effects. Fixed effects could be used when there is an assumption that there is something within the thesis which has an influence or bias the predictor variable. When using fixed effects, for these biases will be controlled (Harrigan, 1996). In this research different countries with different location, business environment and development could have different influence on the outcomes. This implies also for sectors, because within some sectors revenues and gains is higher than in other sectors. Fixed effects are included for countries and sector to control for these differences.
Specific for internalization and innovation a control variable for performance, both in terms of return on sales and employment growth is added. Firms who perform better have more capital to overcome the cost of exporting and have higher levels of innovation.
It also seems that capital support is an important requirement for internalization and innovation (Li et al., 2010; Song et al., 2011; Guariglia &Liu, 2014). This thesis also adds a control variable for capital borrowed from the bank as well as a control variable for capital borrowed from other institutions to measure if capital support is as important as literature suggests. Finally, for innovation a control variable is added for R&D expenditure. Adding a variable for R&D expenditure makes it possible to measure if an increase in R&D expenditure turns out in an increase in innovation activities within the firm.
3.3. Model specification 3.3.1 Firm performance
Hypothesis 1 will be tested on the basis of two variables: Return on Sales (ROS) and employment growth. Because the outcome for both the variables is expected to be the same, the following regression is constructed:
Performance = β0 + β1(state owned firms dummy) + β2(firm size in total sales) + β3 (firm size
in employment) + β4(firm age) + β4(countries) + β5 (type of industry)
20 3.3.2. Internalization
Internalization, which is measured in terms of exports, expects that higher levels of state ownership, in Eastern European emerging countries firms, has a significant negative effect on export.
First, it is important to observe which state owned firms and private owned firms do export and which do not export (export propensity). This is measured by including a dummy variable for export (=1) and for non-export (=0).
Export propensity = β0 + β1(state owned firms dummy) + β2(firm size in total sales) + β3
(firm size in employment) + β4(Firm age) + β5(Capital borrowed from the bank) +β6 (capital borrowed from other institutions+ β7 (Efficiency; return on sales)+ β8(countries) + β9(type of industry)
If a distinction is made on basis of export firms and non-export firms this thesis will investigate if those state owned firms that export, are less or more export intensive than private owned firms who export. Because the second hypothesis expects that state owned firms export less than private owned firms, the outcome of the following model is expected to be significant and negative:
Export Intensity = β0 + β1(state owned firms dummy) + β2(firm size in total sales) + β3 (firm
size in employment) + β4(Firm age) + β5(Capital borrowed from the bank) +β6 (capital borrowed from other institutions+ β7 (Efficiency; return on sales)+ β8(countries) + β9(type of industry)
3.3.3. Innovation
The level of Innovation is measured according three different variables: new products and services introduced over the last three years (product innovation), new production/supply chain methods introduced over last three years (Production/process innovation) and new management/organizational practices or structures introduced over the last three years (management innovation). All three variables are measured according to a dummy variable. If firms introduced new product, new processes within the firm or new
management/organizational practices; innovation is equal to 1., while it scores 0 if there was no remarkably change over the last three years.
As stated in the hypothesis 3 this thesis does not expect any significant differences between state owned firms and private owned firms in Eastern European emerging countries regarding their level of innovation. Therefore, the outcome of the following model is not expected to be significant:
Innovation = β0 + β1(state owned firms dummy) + β2(firm size in total sales) + β3 (firm size in
employment)+ β4 (firm age) +β5 (capital borrowed from the bank) + β6 (capital borrowed from other institutions + β7 (efficiency; return on sales)+ β8 (R&D expenditure)+ β9(countries) + β10 (type of industry)
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CHAPTER 4: ECONOMETRIC ISSUES AND DESCRIPTIVE STATISTICS 4.1. Econometric issues
In this section the econometric issues regarding the analysis of the model will be discussed. To test the trustworthiness of the data four different tests will be performed, which will be; a test for outliers, normality, heteroscedasticity and multicollinearity. All these test will be performed after the regression for each variable is run.
First of all, this thesis will test for outliers in the dataset. Outliers are values which are not in line with the rest of the data. If these outliers influence the results in an extraordinary way, these values could be removed from the dataset. To test for outliers, the standard deviation is multiplied with two and subtracted and added from the mean. If this outcome falls in between the interval, showed in the table 2, then there are no outliers. If this number does not fall within the interval then it is an outlier (Osborne,2016). As can be seen in table 2 most of the variables have an outlier. The outliers are removed from the dataset and the results are compared to the dataset with outliers. There are no differences in outcomes, therefore the outliers are included in this thesis.
Regarding normality of the variables the natural logarithm is taken of the continuous variables to deal with a non-normal distribution of the variables. The skewness of the distribution can be measured by subtracting the median from the mean. The more the mean deviates from the median, the more skewness exist in the distribution and the more it is skewed in the direction to the maximum or the minimum.
The continuous variables in this thesis are; return on sales (ROS), employment growth, firm size estimated in sales, firm size estimated in employees, and firm age in years. Taking into account a non-normal distribution of the continuous variables the natural logarithm is taken from these variables. All the other variables are non-continuous variables in the form of dummy variables, which are either 0 or 1, or variables which are measured in percentage ranging from 0 to 100%. To test if the continuous variables do indeed show a non-normal distribution a skewness test is performed. Table 1 in the Appendix shows that all variables show a low skewness and kurtosis value of 0 and therefore the H0 hypothesis can be rejected and non-normality is present. The natural logarithm for these continuous variables will be included.
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The fourth step is to check for heteroscedasticity. Heteroscedasticity exist if the variance of all observations for the standard deviation are not equal, and that the error term fluctuates more for certain observation than for other (Carter et al., 2008). Ignoring the fact of heteroscedasticity could lead to biased results, which is a problem. To deal with the problem of heteroscedasticity, the Breusch-Pagan test is used to check if the problem of heteroscedasticity is actually present in the model. If the outcome of the Breusch-Pagan test is significant, the H0 hypothesis is rejected and heteroscedasticity is a problem. To prevent the model for heteroscedasticity robust standard errors are included for all models.
4.2. Descriptive statistics
Table 2 provides descriptive statistics for all the variables used in this research. Each variable is described in terms of number of observations, mean, standard deviation and finally for the minimum and maximum value found per variable. Table 2 shows descriptive statistics for all firms, while in the appendix descriptive statistics for state owned firms (table 3) and private owned firms (table 4) are presented. The state owned independent variable shows that In total 10879 firms, which are located in Eastern European countries, are taken into account. This total number of 10879 firms could be divided into 10794 private owned firms and 85 state owned firms. This thesis includes dummy variables as well as continuous variables. The dummy variables have a value of either 0 or 1.
Performance, which is the first dependent variable described in this thesis, will be measured by return on sales (ROS) and employment growth. The return on sales variable has a mean of 66.8%, which implies that 66,8% of total sales is converted into profits. There is a minimum of -288% and a maximum of 250%. Zooming in on state owned firms and private owned firms, the mean of private owned firms is higher (66,97%) compared to state owned firms (44,13%), which signify that private owned firms are more efficient than state owned firms in converting sales into profits. The second performance measure, employment growth over the last three years in Eastern European emerging countries, has a mean of -2.01%. This number implies that firms in Eastern European emerging countries faced a decline in terms of employment. Regarding the descriptive statistics, this employment decline is approximately the same for private owned firms (-2.09%) as for state owned firms (-2,54%).
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The last dependent variable, innovation, is measured by 3 different innovation variables; product innovation, production/process innovation and management/organizational innovation. All the innovation variables have a minimum of 0 and a maximum of 1. If a firm did not show any innovation in the last three years in their products, in the firm production/processes or on management/organizational, the firm noted a 0. If there was any innovation in the last three years the firm noted a 1. Product innovation, production innovation and management/organizational innovation all show a mean between 0.7 and 0.8, which implies that on average more firms in Europe faced innovation than not. Regarding the statistics, state owned firms showed more product innovation(0,81) and production innovation(0,83) than private owned firm’s product innovation(0,73) and production innovation(0,79) while management/organizational innovation is approximately the same for state owned firms (0,78) and private owned firms (0,77).
Finally, this thesis will take into account the following control variables; firm size measured as total sales, firm size measured in total number of employees, working capital borrowed from national banks, working capital from other institutions, firms age and R&D spending. Firms
size in total employees: there is a big difference in firms size between state owned firms (259
employees) and private owned firms (60 employees). In general state owned firms are large firms who provide a service which would not be provided by private owned firms. Therefore it is more likely that state owned firms are big firms while private owned firms could range from a start-up, with a few employees to a large multinational firms. Working capital borrowed from the bank ranges from 0% to 100%. In general 22,6% of capital is borrowed from the bank while only 6,9% is borrowed from other institutions. Private owned firms borrow 22,6% of their capital from bank and 6,9% from other institutions, while this is different for state owned firms who borrow 21,6% of their capital from banks but 11,1% from other institutions. Firm age: the average firm age is 18 years. However, there is a big
difference in age between state owned firms and private owned firms on average. Private owned firms have an average age of 18 years, while this is 28 years for state owned firms. R%D
spending; analyzing R&D spending for all firms, it is remarkable that almost all firms spend
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(1) (2) (3) (4) (5)
VARIABLES N mean sd min max
Stateowned 10,879 0.00781 0.0881 0 1 exportpropensity 10,879 0.225 0.418 0 1 Exportintensity 10,879 9.492 24.08 0 100 newproductservicesintroduced 10,879 0.739 0.439 0 1 newproductionsupplymethodsint 10,879 0.793 0.405 0 1 neworganizationalmanagementpr 10,879 0.777 0.417 0 1 workingcapitalborrowedfromban 10,879 11.57 22.62 0 100 workingcapitalborrowedfromoth 10,879 0.948 6.858 0 100 RDSpending 10,879 0.887 0.316 0 1 lnROSin 10,601 4.064 0.787 -13.82 5.521 lnemploymentgrowthoverthreeyear 4,420 3.333 1.004 -0.916 5.991 lnFirmssizesales 10,880 16.06 2.860 2.773 29.71 lnFirmsizeemployment 10,879 2.986 1.233 0 9.306
25 CHAPTER 5: EMPIRICAL RESULTS
5.1 Results
In this section the results will be presented. Each specific variable has its own section. First the performance results will be presented in section 5.1.1. after which in section 5.1.2. the results regarding internalization will be given. Finally, innovation results will be displayed in section 5.1.3. In section 5.2 the results will be discussed and related to previous found results by other researchers.
5.1.1. FIRM PEFORMANCE
Results regarding performance can be observed in table 5. Model 1 represents results on basis of return on sales, while model 2 shows the results for firm performance measured in employment growth. Both models include fixed effect dummies for countries, sectors and robust standard errors. There is a small difference in the R-squared between both models but this difference is negligible. The R-squared in model 1 is 0.208 and in model 2 0.207, which means that approximately 20% of the model is explained by the variables used. A higher explanation of the model by the variables used would be better but there is plenty of literature with lower explanation power.
The significance of the results is measured according a 1%, 5% and 10% level. As can be observed in table 5 in the first row the dummy variable for state owned firms shows a significant negative result at a 1% significance level. This result supports hypothesis 1 in which states that firms, owned by the state in Eastern European emerging countries, face a negative effect on firm performance.
Also firm size, measured in total sales and employment in Eastern European emerging countries, has a significant effect on return on sales at a 1% significance level . This significant effect for firm size measured in total sales is positive, which entails that an increase in firm sales will increase return on sales. Larger firms in terms of total sales are more efficient. On the other hand firm size, measured in employment, has a negative effect on return on sales which means that an increase in employees will negatively influence return on sales. Firms in Eastern European emerging countries with more employees are less efficient.
26 Table 5: Firm performance results
5.1.2. INTERNALIZATION
Internalization will be divided into two parts. First, results regarding export propensity will be discussed. The second part of this section will focus on the export intensity.
5.1.2.1. Export propensity
First the export propensity is measured. The export propensity shows whether a firm decides to export or not. The export propensity is a dummy variable and therefore a probit regression is run. The results can be observed in table 6.
As table 6 shows, the dummy variable for state owned firms is significant and negative at a 5% significance level. This result supports hypothesis 2 in which is stated that firms, which are owned by the state in Eastern European emerging countries, face a negative effect on the export of the firms.
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In model 2 and model 3 capital borrowed from the bank and capital borrowed from other institutions is added to the model. Both control variables are significant and positive, which implies that those firms who borrow money from the bank or other institutions are more likely to export. Model 4 and 5 show similar outcomes as the previous models except for the fact that the addition of return on sales and employment growth, lead to a change in the state owned firm dummy. When return on sales is added to the model (model 4), the state owned firm dummy shifts from a 5% significance level to a 10% significance level. When employment growth is added to the model (model 5), the state owned firm dummy changes from significant to insignificant.
28 5.1.2.2. Export intensity
Table 7: Export intensity
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Also for export intensity, firm size measured in total number of employees is significant. As mentioned in the export propensity section, those firms who are larger in numbers of employees are more export intensive. In case of export intensity, firm age is significant and negative. More experienced firms have a lower export intensity.
In model 2 and model 3, capital borrowed from the bank and capital borrowed from other institutions is added to the model. These two variables are significant and positive at a 1% significance level. An increase in capital borrowed from banks or other institutions, led to an increase in the export intensity of firms. In model 4 and 5, respectively, return on sales and employment growth are added. An increase in return on sales results in a decrease in export intensity, this result is significant at a 5% significance level.
5.1.3. Innovation
Firm innovation is measured according to three different variables; product innovation, production/process innovation and management/organizational innovation. For each specific variable is measured if the specific variable faced any innovation over the last three years. If there was innovation in the last three years the variable got value 1 and if there was no innovation the variable got the value 0. Because the dependent variable is a dummy variable a probit model is run. The results of the model can be observed in table 8 (product innovation),9 (production/process innovation) and 10 (management/organizational innovation).
Regarding product innovation, no significant result is found for state owned firms which corroborates with hypothesis 3. Hypothesis 3 states that there is no significant difference between state owned firms and private owned firms in Eastern European emerging countries regarding their level of innovation. Observing the control variables we can determine that firm size, both in terms of sales and employment, is significant and negative. An increase in firm size, in terms of sales or employees, implies a decrease in product innovation. In model 2, capital borrowed from the bank is added and shows a significant negative effect. When more capital is borrowed from the bank, firms show lower product innovation. In model 5 R&D expenditure is added and is significant and positive at a 1% significance level. An increase in R&D expenditure results in an increase in product innovation. Those firms that spend more on R&D are more innovative. In model 5 and 6 respectively, employment growth over the last three years and R&D spending are added as control variables. When controlling for these variables, the dummy variable for state owned firms turns significant and positive. This result implies that when controlling for firm size, firm age, capital borrowed from banks or other institutions, return on sales, employment growth and R&D spending firms owned by the state are more innovative compared to private owned firms.
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First of all, table 9 model 4 shows a significant negative effect for employment growth over three years. Employment growth within Eastern European firms lead to a decline in production/process innovation; smaller firms show more production/process innovation. Also firm age is significant negative in table 10. Firms with lower experience face more management/organizational innovation.
31 5.2 Discussion
Being owned by the state has a significant negative effect on performance measured in return on sales. State owned firms are less efficient in transforming their total revenues into profits compared to private owned firms. This result supports hypothesis 1 and is in line with Dewenter & Malatesta (2001); Wei et al. (2002); Chang & Wong (2004) Goldeng et al. (2008); Dougherty et al. (2008); Zhang et al. (2012) and Li et al. (2014) who also found that state owned firms perform less well compared to private owned firms. Researchers give several reasons why state owned firms perform less well compared to private owned firms. First of all, according to Kornai et al. (2003); Chen et al. (2009); Li et al. (2014) state owned firms face a ‘soft budget constraint’. State owned firms can always rely on the government when financial problems occur. Therefore, state owned firms become lax and less efficient compared to firms who are not able to rely on financials support in bad times, which influences performance in a negative way. Moreover, results found in this thesis also support the theory by Gosh& Whally (2008) and Liang et al. (2014) which state that state owned firms have other goals than raising profits and therefore state owned firms perform less well. Finally, results found in this research are in line with Wang& Judge (2012) and Peng et al. (2016) who state that according to the principal-agent theory, state owned firms perform less well compared to private owned firms because the top managers within these firms make decisions on behalf of someone else. However, this thesis did not test the relation for each separate assumption and the effect on firm performance. Therefore, this thesis only confirms that East European state owned firms perform less well on return on sales compared to private owned firms, while no direct link can be made to the different causes.
This research also found that state owned firms have lower employment growth compared to private owned firms. However, this finding is not significant. This finding has to be interpreted with caution because private owned firms perform better in terms of performance, it is reasonable that better performance results in employment growth. Unfortunately, this assumption is not tested. The findings in this thesis are contradict Ralston et al. (2006), Chen et al. (2009), He et al. (2015) and Bhasa (2015) who found that state owned firms perform better compared to private owned firms.
The export propensity in table 6 shows that state owned firms, in Eastern European emerging countries, are less likely to export compared to private owned firms. This result supports hypothesis 2 constructed in this thesis and is in line with previous scholars Aulakh et al. (2002). Researchers give several reasons why state owned firms are less likely to export compared to state owned firms. First of all, private owned firms want to export to interact with other countries and explore their technologies and enhance more profit, whereas state owned firms are less focused on enabling profits (Aulakh et al., 2000). However, this thesis does not directly test this theory by Aulakh et al (2000). Moreover, this result is in line with Zhao& Zou (2002). According to Zhao & Zou (2002) state owned firms are not efficient and depend strongly on governmental support.
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exporting to foreign markets. Because Zhao & Zou (2002) argue that state owned firms are less efficient, table 6 (model 4) controls for the lack of efficiency with a control variable for return on sales. When a control variable is included for efficiency, the results change from a 5% significant level to a 10% significant level. Therefore, the lack of efficiency in state owned firms indeed play an important role in explaining the difference in export propensity between state owned firms and private owned firms. When a control variable is added for employment growth (model 5), which is a performance measure, results even turn to non-significant. Performance differences (measured in employment growth) between state owned firms and private owned firms is an important indicator to explain the difference in export propensity. Results in table 6 (model 5) imply that there is no difference between state owned firms and private owned firms on basis of export propensity when there are control variables added for ;firm size, firm age, capital borrowed from banks and other institutions, return on sales and employment growth. This finding is against hypothesis 2.
Results in table 6 (model 1-3) are against results found by Luo et al. (2010); Song et al. (2011) ;Duanmu (2012); Alon et al. (2014). The export intensity was pointing in the positive direction, similar to what the export propensity showed. However, opposed to what this thesis expects, the export intensity was not significant. Therefore, this thesis concludes that state owned firms are less likely to start exporting compared to private owned firms, but if state owned firms start exporting, state owned firms export in similar amounts.
Innovation is not significant. This thesis concludes that there is no significant difference between state owned firms and private owned firms regarding their level of innovation. However, there is one exception, when employment growth and a dummy variable for R&D investment are added to the product innovation model, the dummy variable for state owned firms turns significant and positive. In this case, state owned firms are more innovative than private owned firms, which is against hypothesis 3 proposed in this thesis and is in line with Kole& Mulherin (1997) ; Choi et al. (2011) Jiang et al. (2013) and Guariglia& Liu (2014). These scholars found that state owned firms are more innovative than private owned firms because the government is highly involved in the development of innovation within the country and stimulates its firms to become involved. Moreover, according to Guariglia & Liu (2014) government owned firms have more access to finance supplied by the government.
33 CHAPTER 6 CONCLUSION AND LIMITATIONS 6.1. Conclusion
This thesis is one of the first that attempts to model how state ownership differs in their performance, internalization and innovation compared to private owned firms in Eastern European emerging countries. The motivation behind this was given by Bruton et al. (2015), who showed that state owned firms have an important contribution to the world economy but literature on this type of ownership is lacking. Moreover, research focused on state ownership was mainly executed in the case of China. China is a good example because it is an upcoming economy with lots of state owned firms. However, it is important to investigate if state owned firms in other parts of the world show similar results. On basis of the results, multiple conclusions can be determined.
First of all, the performance results show that hypothesis 1 is partly confirmed. While return on sales show a significant and negative result for state owned firms as expected, employment growth over the last three years is negatively related but insignificant. Not all performance measures are significant and negative for state owned firms as hypothesis 1 expected. On basis of Return on sales can be concluded that state owned firms perform less well compared to private owned firms..
Secondly, results regarding internalization which is measured on the basis of export propensity and export intensity, are also partly in line with the hypothesis constructed in this thesis. Export propensity is found to be significant and negative for state owned firms, which confirms hypothesis 2. State owned firms are less likely to start exporting compared to private owned firms. However, when control variables for ; firm size, firm age, capital borrowed from banks and other institutions, return on sales and employment growth are added to the model, there is no significant difference between state owned firms and private owned firms on basis of export propensity. When analyzing the export intensity the results also point in a negative direction but these results are not significant. When state owned firms exceed the high entry cost of exporting, state owned firms export as intensively as private owned firms do. In this case state owned firms are as much internationalized as private owned firms.
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This thesis contributes to the literature on state owned firms. As this study covered a sample of both state owned firms and private owned firms located in Eastern European emerging countries it was possible to investigate the performance, internalization and innovation level of these firms relative to private owned firms. Compared to private owned firms, state ownership in Eastern European emerging countries firms can form a disadvantage regarding their level of performance and internalization while their innovation level is similar.
6.2. Limitations & Future research
One of the main limitations in this thesis is the lack of data. In this research the business environment and enterprise performance survey (BEEP) is used for calculating the results. The BEEP database includes all kinds of variables, however some important variables are missing. First of all, the Business Environment enterprise performance survey included more than 15.000 firms from Eastern European emerging countries, while only 85 state owned firms are found amongst them. According to the literature far more state owned firms are located in Eastern European emerging countries. Although, this number of state owned firms found in the BEEPS database is high enough to conduct reliable research it would be better for the results if the number of state owned firms in the database would be higher to have more accurate results. Secondly, performance is measured according to return on Sales (ROS) and employment growth, while in the literature more performance measures are used. Examples of these performance measures are: return on assets and return on equity. More performance measurements would strengthen the outcome in case similar results are obtained. Finally, in the measurement of internalization data is missing. The best way to measure internalization is according to FDI data (Oh & Rugman, 2012). However, FDI data on firm level for Eastern European emerging countries is not available. Hopefully, this data will be available in the near future and research quality can be improved.
A second limitation in this research is that results are measured at one certain time point, which makes the analysis weak compared to results measured over time. An extension of this research could be to measure the effect of ownership on performance, internalization and innovation over a longer time period (panel data).
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