Skip to main content
Log in

State ownership effect on firms' FDI ownership decisions under institutional pressure: a study of Chinese outward-investing firms

  • Article
  • Published:
Journal of International Business Studies Aims and scope Submit manuscript

Abstract

This study investigates the effect of state ownership on Chinese firms’ foreign direct investment (FDI) ownership decisions. It adopts a political perspective to extend the application of institutional theory in international business research. Specifically, it examines firms’ heterogeneous responses to external institutional processes during foreign market entry, while taking into consideration the political affiliation of firms with the external institutions. We argue that state ownership creates the political affiliation of a firm with its home-country government, which increases the firm's resource dependence on home-country institutions, while at the same time influencing its image as perceived by host-country institutional constituents. Such resource dependence and political perception increase firms’ tendency to conform to, rather than resist, isomorphic institutional pressures. We tested our hypotheses using primary data for 132 FDI entries made by Chinese firms during 2000–2006, and we found that the effects of home regulatory, host regulatory and host normative pressures on a firm to choose a joint ownership structure were stronger when the share of equity held by state entities in the firm was high.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1

Similar content being viewed by others

Notes

  1. A joint ownership structure is the result of either a partial acquisition or a greenfield joint venture. A sole ownership structure is the result of either a full acquisition or a wholly owned greenfield investment.

  2. Official sources consulted:

    • 2004 and 2005 issues of Annual Statistical Bulletin of Chinese Outward FDI published by the Ministry of Commerce (both issues included lists of top 30 Chinese outward-investing firms ranked by their foreign assets and sales figures);

    • lists of approved outward FDI projects by 2005 released by the municipal governments of Beijing and Shanghai, and the provincial governments of Fujian, Shandong, Jiangsu, and Zhejiang; and

    • 2005 reports of outward FDI inspection released by the provincial governments of Guangdong and Heilongjiang.

    All of these sources were publicly accessible in printed material or on government websites at the time of the survey.

  3. We also collected foreign affiliate ownership information from Bureau van Dijk's ORBIS database. Data were collected from ORBIS backup DVDs for the year of entry, to ensure that the data reflect the firms’ ownership decision at the time of entry. We did not find major inconsistency between our survey data and ORBIS data that would change the dichotomous coding of our dependent variable.

  4. Most so-called “industry companies” in China were central or local government ministries before China's economic reform initiated in 1978. They are fully state owned, and typically are run by former government officials.

References

  • Agarwal, S., & Ramaswami, S. N. 1992. Choice of foreign market entry mode: Impact of ownership, location and internalization factors. Journal of International Business Studies, 23 (1): 1–27.

    Article  Google Scholar 

  • Ahmed, Z. U., Mohamad, O., Tan, B., & Johnson, J. P. 2002. International risk perceptions and mode of entry: A case study of Malaysian multinational firms. Journal of Business Research, 55 (10): 805–813.

    Article  Google Scholar 

  • Anderson, E., & Coughlan, A. T. 1987. International market entry and expansion via independent or integrated channels of distribution. Journal of Marketing, 51 (1): 71–82.

    Article  Google Scholar 

  • Anderson, E., & Gatignon, H. 1986. Modes of foreign entry: A transaction cost analysis and propositions. Journal of International Business Studies, 17 (3): 1–26.

    Article  Google Scholar 

  • Armstrong, J. S., & Overton, T. S. 1977. Estimating nonresponse bias in mail surveys. Journal of Marketing Research, 14 (3): 396–402.

    Article  Google Scholar 

  • Bell, J. H. J. 1996. Single or joint venturing? A comprehensive approach to foreign entry mode choice. Hampshire: Avebury.

    Google Scholar 

  • Brouthers, K. D. 2002. Institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies, 33 (2): 203–221.

    Article  Google Scholar 

  • Brouthers, K. D., & Hennart, J.-F. 2007. Boundaries of the firm: Insights from international entry mode research. Journal of Management, 33 (3): 395–425.

    Article  Google Scholar 

  • Buckley, P. J., Clegg, L. J., Cross, A. R., Liu, X., Voss, H., & Zheng, P. 2007. The determinants of Chinese outward foreign direct investment. Journal of International Business Studies, 38 (4): 499–518.

    Article  Google Scholar 

  • Buckley, P. J., Cross, A. R., Tan, H., Xin, L., & Voss, H. 2008. Historic and emergent trends in Chinese outward direct investment. Management International Review, 48 (6): 715–747.

    Article  Google Scholar 

  • Cai, K. G. 1999. Outward foreign direct investment: A novel dimension of China's integration into the regional and global economy. The China Quarterly, 160: 856–880.

    Article  Google Scholar 

  • Chan, C. M., & Makino, S. 2007. Legitimacy and multi-level institutional environments: Implications for foreign subsidiary ownership structure. Journal of International Business Studies, 38 (4): 621–638.

    Article  Google Scholar 

  • Chen, G., Firth, M., & Xu, L. 2009. Does the type of ownership control matter? Evidence from China's listed companies. Journal of Banking & Finance, 33 (1): 171–181.

    Article  Google Scholar 

  • Chen, Y., & Young, M. 2010. Cross-border mergers and acquisitions by Chinese listed companies: A principal–principal perspective. Asia Pacific Journal of Management, 27 (3): 523–539.

    Article  Google Scholar 

  • Child, J., & Rodrigues, S. B. 2005. The internationalization of Chinese firms: A case for theoretical extension? Management and Organization Review, 1 (3): 381–410.

    Article  Google Scholar 

  • Collinson, S., & Morgan, G. 2009. Images of the multinational firm. Chichester: John Wiley.

    Google Scholar 

  • Cui, L., & Jiang, F. 2010. Behind ownership decision of Chinese outward FDI: Resources and institutions. Asia Pacific Journal of Management, 27 (4): 751–774.

    Article  Google Scholar 

  • Davis, P. S., Desai, A. B., & Francis, J. D. 2000. Mode of international entry: An isomorphism perspective. Journal of International Business Studies, 31 (2): 239–258.

    Article  Google Scholar 

  • Delios, A., Wu, Z. J., & Zhou, N. 2006. A new perspective on ownership identities in China's listed companies. Management and Organization Review, 2 (3): 319–343.

    Article  Google Scholar 

  • Deng, P. 2004. Outward investment by Chinese MNCs: Motivations and implications. Business Horizons, 47 (3): 8–16.

    Article  Google Scholar 

  • Deng, P. 2009. Why do Chinese firms tend to acquire strategic assets in international expansion? Journal of World Business, 44 (1): 74–84.

    Article  Google Scholar 

  • DiMaggio, P. J. 1988. Interest and agency in institutional theory. In L. G. Zucker (Ed.), Institutional patterns and organizations: Culture and environment: 3–21. Cambridge, MA: Ballinger.

    Google Scholar 

  • DiMaggio, P. J., & Powell, W. W. 1983. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48 (2): 147–160.

    Article  Google Scholar 

  • Ding, Y., Zhang, H., & Zhang, J. X. 2007. Private vs state ownership and earnings management: Evidence from Chinese listed companies. Corporate Governance: An International Review, 15 (2): 223–238.

    Article  Google Scholar 

  • Doz, Y. 2011. Qualitative research for international business. Journal of International Business Studies, 42 (5): 582–590.

    Article  Google Scholar 

  • Ekeledo, I., & Sivakumar, K. 2004. International market entry mode strategies of manufacturing firms and service firms: A resource-based perspective. International Marketing Review, 21 (1): 68–101.

    Article  Google Scholar 

  • Firth, M., Fung, P. M. Y., & Rui, O. M. 2007. How ownership and corporate governance influence chief executive pay in China's listed firms. Journal of Business Research, 60 (7): 776–785.

    Article  Google Scholar 

  • Francis, J., Zheng, C., & Mukherji, A. 2009. An institutional perspective on foreign direct investment. Management International Review, 49 (5): 565–583.

    Article  Google Scholar 

  • Gatignon, H., & Anderson, E. 1988. The multinational corporation's degree of control over foreign subsidiaries: An empirical test of a transaction cost explanation. Journal of Law, Economics, and Organization, 4 (2): 305–336.

    Google Scholar 

  • Ghemawat, P. 2001. Distance still matters: The hard reality of global expansion. Harvard Business Review, 79 (8): 137–147.

    Google Scholar 

  • Globerman, S., & Shapiro, D. 2009. Economic and strategic considerations surrounding Chinese FDI in the United States. Asia Pacific Journal of Management, 26 (1): 163–183.

    Article  Google Scholar 

  • Gomes-Casseres, B. 1990. Firm ownership preferences and host government restrictions: An integrated approach. Journal of International Business Studies, 21 (1): 1–22.

    Article  Google Scholar 

  • Goodrick, E., & Salancik, G. R. 1996. Organizational discretion in responding to institutional practices: Hospitals and cesarean birth. Administrative Science Quarterly, 41 (1): 1–28.

    Article  Google Scholar 

  • He, W., & Lyles, M. A. 2008. China's outward foreign direct investment. Business Horizons, 51 (6): 485–491.

    Article  Google Scholar 

  • Henisz, W. J. 2000. The institutional environment for economic growth. Economics and Politics, 12 (1): 1–31.

    Article  Google Scholar 

  • Hennart, J.-F. 1991. The transaction costs theory of joint ventures: An empirical study of Japanese subsidiaries in the United States. Management Science, 37 (4): 483–497.

    Article  Google Scholar 

  • Hennart, J.-F., & Larimo, J. 1998. The impact of culture on the strategy of multinational enterprises: Does national origin affect ownership decisions? Journal of International Business Studies, 29 (3): 515–538.

    Article  Google Scholar 

  • Hope, O. K., Thomas, W., & Vyas, D. 2011. The cost of pride: Why do firms from developing countries bid higher? Journal of International Business Studies, 42 (1): 128–151.

    Article  Google Scholar 

  • Kim, W. C., & Hwang, P. 1992. Global strategy and multinationals’ entry mode choice. Journal of International Business Studies, 23 (1): 29–53.

    Article  Google Scholar 

  • Kogut, B. 1991. Joint ventures and the option to expand and acquire. Management Science, 37 (1): 19–33.

    Article  Google Scholar 

  • Kogut, B., & Singh, H. 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19 (3): 411–432.

    Article  Google Scholar 

  • Kostova, T., & Roth, K. 2002. Adoption of an organizational practice by subsidiaries of multinational corporations: Institutional and relational effects. Academy of Management Journal, 45 (1): 215–233.

    Article  Google Scholar 

  • Kostova, T., & Zaheer, S. 1999. Organizational legitimacy under conditions of complexity: The case of the multinational enterprise. Academy of Management Review, 24 (1): 64–81.

    Google Scholar 

  • Kostova, T., Roth, K., & Dacin, M. T. 2008. Institutional theory in the study of multinational corporations: A critique and new directions. Academy of Management Review, 33 (4): 994–1006.

    Article  Google Scholar 

  • Li, J., & Rugman, A. M. 2007. Real options and the theory of foreign direct investment. International Business Review, 16 (6): 687–712.

    Article  Google Scholar 

  • Liu, X., Buck, T., & Shu, C. 2005. Chinese economic development, the next stage: Outward FDI? International Business Review, 14 (1): 97–115.

    Article  Google Scholar 

  • Lu, J. W. 2002. Intra- and inter-organizational imitative behavior: Institutional influences on Japanese firms’ entry mode choice. Journal of International Business Studies, 33 (1): 19–37.

    Article  Google Scholar 

  • Luo, Y., & Rui, H. 2009. An ambidexterity perspective toward multinational enterprises from emerging economies. Academy of Management Perspectives, 23 (4): 49–70.

    Article  Google Scholar 

  • Luo, Y., Xue, Q., & Han, B. 2010. How emerging market governments promote outward FDI: Experience from China. Journal of World Business, 45 (1): 68–79.

    Article  Google Scholar 

  • Makino, S., & Neupert, K. E. 2000. National culture, transaction costs, and the choice between joint venture and wholly owned subsidiary. Journal of International Business Studies, 31 (4): 705–713.

    Article  Google Scholar 

  • Meyer, K. E. 2001. Institutions, transaction costs, and entry mode choice in Eastern Europe. Journal of International Business Studies, 32 (2): 357–367.

    Article  Google Scholar 

  • Meyer, K. E., Estrin, S., Bhaumik, S. K., & Peng, M. W. 2009. Institutions, resources, and entry strategies in emerging economies. Strategic Management Journal, 30 (1): 61–80.

    Article  Google Scholar 

  • Mezias, S. J., Chen, Y.-R., Murphy, P., Biaggio, A., Chuawanlee, W., Hui, H., Okumura, T., & Starr, S. 2002. National cultural distance as liability of foreignness: the issue of level of analysis. Journal of International Management, 8 (4): 407–421.

    Article  Google Scholar 

  • MOFCOM. 2006. Statistical Bulletin of China's Outward Foreign Direct Investment. Beijing: Ministry of Commerce and National Bureau of Statistics.

  • MOFCOM. 2009. Statistical Bulletin of China's Outward Foreign Direct Investment. Beijing: Ministry of Commerce and National Bureau of Statistics.

  • Morck, R., Yeung, B., & Zhao, M. 2008. Perspectives on China's outward foreign direct investment. Journal of International Business Studies, 39 (3): 337–350.

    Article  Google Scholar 

  • North, D. C. 1990. Institutions, institutional change, and economic performance. Cambridge, MA: Harvard University Press.

    Book  Google Scholar 

  • Oliver, C. 1991. Strategic responses to institutional processes. Academy of Management Review, 16 (1): 145–179.

    Article  Google Scholar 

  • Padmanabhan, P., & Cho, K. R. 1996. Ownership strategy for a foreign affiliate: An empirical investigation of Japanese firms. Management International Review, 36 (1): 45–65.

    Google Scholar 

  • Peng, M. W., Tan, J., & Tong, T. W. 2004. Ownership types and strategic groups in an emerging economy. Journal of Management Studies, 41 (7): 1105–1129.

    Article  Google Scholar 

  • Peng, M. W., Wang, D. Y., & Jiang, Y. 2008. An institution-based view of international business strategy: A focus on emerging economies. Journal of International Business Studies, 39 (5): 920–936.

    Article  Google Scholar 

  • Pfeffer, J., & Salancik, G. R. 1978. The external control of organizations. New York: Harper & Row.

    Google Scholar 

  • Rosenzweig, P. M., & Singh, J. V. 1991. Organizational environments and the multinational enterprise. Academy of Management Review, 16 (2): 340–361.

    Google Scholar 

  • Rugman, A. M., & Li, J. 2007. Will China's multinationals succeed globally or regionally? European Management Journal, 25 (5): 333–343.

    Article  Google Scholar 

  • Rui, H., & Yip, G. S. 2008. Foreign acquisitions by Chinese firms: A strategic intent perspective. Journal of World Business, 43 (2): 213–226.

    Article  Google Scholar 

  • Santangelo, G. D., & Meyer, K. E. 2011. Extending the internationalization process model: Increases and decreases of MNE commitment in emerging economies. Journal of International Business Studies, 42 (7): 894–909.

    Article  Google Scholar 

  • Scott, W. R. 1995. Institutions and organizations. London: Sage.

    Google Scholar 

  • Scott, W. R. 2002. The changing world of Chinese enterprises: An institutional perspective. In A. S. Tsui & C. M. Lau (Eds), Management of enterprises in the People's Republic of China: 59–78. Boston: Kluwer Academic Press.

    Chapter  Google Scholar 

  • Scott, W. R. 2005. Institutional theory: Contributing to a theoretical research program. In K. G. Smith & M. A. Hitt (Eds), Great minds in management: The process of theory development: 460–484. New York: Oxford University Press.

    Google Scholar 

  • Tan, J., & Li, M. 1996. Effects of ownership types on environment–strategy configuration in China's emerging transitional economy. Advances in International Comparative Management, 11: 217–250.

    Google Scholar 

  • Tan, J., & Tan, D. 2005. Environment-strategy co-evolution and co-alignment: A staged model of Chinese SOEs under transition. Strategic Management Journal, 26 (2): 141–157.

    Article  Google Scholar 

  • Taylor, R. 2002. Globalization strategies of Chinese companies: Current developments and future prospects. Asian Business & Management, 1 (2): 209–225.

    Article  Google Scholar 

  • UNCTAD. 2005. Prospects for foreign direct investment and the strategies of transnational corporations, 2005–2008. New York: United Nations.

  • Wang, M. Y. 2002. The motivations behind China's government-initiated industrial investments overseas. Pacific Affairs, 75 (2): 187–206.

    Article  Google Scholar 

  • Westney, D. E. 1993. Institutionalization theory and the multinational corporation. In S. Ghoshal & E. Westney (Eds), Organizational theory and the multinational corporations: 53–75. New York: St Martin's Press.

    Chapter  Google Scholar 

  • Wright, M., Filatotchev, I., Hoskisson, R. E., & Peng, M. W. 2005. Strategy research in emerging economies: Challenging the conventional wisdom. Journal of Management Studies, 42 (1): 1–33.

    Article  Google Scholar 

  • Xu, D., & Shenkar, O. 2002. Institutional distance and the multinational enterprise. Academy of Management Review, 27 (4): 608–618.

    Google Scholar 

  • Xu, E., & Zhang, H. 2008. The impact of state shares on corporate innovation strategy and performance in China. Asia Pacific Journal of Management, 25 (3): 473–487.

    Article  Google Scholar 

  • Yamakawa, Y., Peng, M. W., & Deeds, D. L. 2008. What drives new ventures to internationalize from emerging to developed economies? Entrepreneurship Theory and Practice, 32 (1): 59–82.

    Article  Google Scholar 

  • Yiu, D., & Makino, S. 2002. The choice between joint venture and wholly owned subsidiary: An institutional perspective. Organization Science, 13 (6): 667–683.

    Article  Google Scholar 

  • Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. 2008. Corporate governance in emerging economies: A review of the principal-principal perspective. Journal of Management Studies, 45 (1): 196–220.

    Article  Google Scholar 

  • Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38 (2): 341–363.

    Article  Google Scholar 

  • Zhan, J. X. 1995. Transnationalization of outward investment: The case of Chinese firms. Transnational Corporations, 4 (3): 61–93.

    Google Scholar 

  • Zhang, J., Zhou, C., & Ebbers, H. 2011. Completion of Chinese overseas acquisitions: Institutional perspectives and evidence. International Business Review, 20 (2): 226–238.

    Article  Google Scholar 

  • Zou, H., & Adams, M. B. 2008. Corporate ownership, equity risk and returns in the People's Republic of China. Journal of International Business Studies, 39 (7): 1149–1168.

    Article  Google Scholar 

Download references

Acknowledgements

We are grateful for insightful comments and suggestions received from the editor Ishtiaq Mahmood and three anonymous reviewers.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Fuming Jiang.

Additional information

Accepted by Ishtiaq Mahmood, Area Editor, 19 December 2011. This paper has been with the authors for three revisions.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Cui, L., Jiang, F. State ownership effect on firms' FDI ownership decisions under institutional pressure: a study of Chinese outward-investing firms. J Int Bus Stud 43, 264–284 (2012). https://doi.org/10.1057/jibs.2012.1

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/jibs.2012.1

Keywords

Navigation