Marketized state ownership and foreign expansion of emerging market multinationals: Leveraging institutional competitive advantages

Abstract

The emergence of marketized shareholders through corporate ownership reform and their impact on the foreign entry of emerging market firms is a critical but understudied issue. Our study investigates the effect of marketized state ownership on emerging market firms’ propensity to engage in foreign direct investment. We argue that firms with marketized state ownership may derive institutional competitive advantages from their dual responsiveness to shifting global market conditions and home government expectations which has a positive impact on their foreign investment decisions. However, such advantages are likely to vary in magnitude for firms with marketized state ownership at central and local levels of government due to different patterns of corporate restructuring. We predict that such ownership effects are contingent on firms’ affiliation to meso-level institutional structures such as state business groups which reallocate resources among members. Using a longitudinal sample of 973 Chinese publicly listed firms, we find empirical support for our arguments. Our research offers new insights on how emerging market multinationals may derive institutional advantages from pro-market reforms for overseas expansion.

Appendices

Appendix 1

Table 3 Shareholder categories of China’s listed companies

Appendix 2: Coding methods for ownership variables of Chinese publicly listed firms

During the first wave of ownership reform, many large SOEs went public to raise minority tradable shares by selling them to private actors while the state retained majority control over non-tradable shares (Liao, Liu, & Wang, 2014). While this initial ownership classification system is nominally demarcated by the share transaction regulations set forth by the China Securities Regulatory Commission, it does not provide a clear link to the actual ownership identities of different shareholders. According to Delios et al. (2006: 325), “we can clearly see that state-owned shares (guoyou gu) consist of two parts: state shares (guojia gu) and state-owned legal person shares (guoyou faren gu). Yet, these two parts rest in two different categories in the official classification. Even this simple description reveals a problem in the content validity as it relates to the identities of shareholders in the official classification scheme.” To verify the shareholding identities of Chinese listed firms, Delios et al. (2006) proposed a new classification system by identifying shareholders based on substantive criteria relating to their functional and strategic characteristics. Reflecting the tangible impact of ownership reforms, the category of marketized state shareholding was established in the new classification system to complement the non-marketized state shareholding category, while newly privatized security companies and investment funds were added to the existing category of private firms.

Given the complexity of ownership classification for Chinese listed firms, we took rigorous steps when coding the independent variable for our study. First, shareholders were assigned into one of the 16 shareholding subcategories as listed in Appendix 1. Then they were sorted into the three broad ownership categories. We separated private shareholders, and re-categorized marketized and non-marketized state shareholders. Marketized state shareholders were identified based on whether they had successfully engaged in shareholding diversification under the joint-stock reform through the introduction of institutional, private, or foreign owners at the holding group level (Li et al., 2006).

Firms which had diversified their shareholding by transferring no less than 5 % of their total shares to individual non-state block shareholders qualified under this requirement (Zhang, 2011). We applied this procedure since block shareholders do not typically hold large blocks of shares for the purposes of trading them in the secondary market. They represent key stakeholders that serve the role of strategic investors with an interest in improving the long-term managerial performance and corporate governance of their invested firms. In practice, firms with diversified corporate ownership often have multiple non-state minority block shareholders and a controlling state majority owner which typifies the vast number of listed SOEs falling under this category.

In our coding process, we found that several industry companies reorganized from former ministries such as ZTE had introduced mixed private ownership by the early 2000s. Meanwhile, military owned companies such as NORINCO (China North Industries Corporation) remained 100 % controlled by the government and were not subject to shareholding diversification. This led us to observe some exceptions to the Delios et al.’s (2006) classification scheme.

Another category of firms which had not received much attention in this classification system were university-run science and technology (S&T) enterprises which are majority owned by a university holding company reporting to the Ministry of Education but are founded by university professors turned entrepreneurs. To encourage their managerial and profit incentives, minority shares in these companies are often allocated to these academic managers. A recent empirical study by Jeffersen, Jiang, and Tortorice (2014) on the restructuring of Chinese research institutes found that university-run S&T firms had substantially augmented their non-government revenues and patent productivity after shifting their reliance away from government grants.

Due to their strong commercial orientation, mixed-ownership and professional management, these firms are distinguished from government research institutes and universities which are categorized as non-marketized state-owned firms by Delios et al. (2006). Lastly we separated marketized state-owned firms into CMSOEs and LMSOEs based on their level of government affiliation. We repeated this coding process for each year of our sample to capture changes in shareholding identities associated with the ongoing process of corporate ownership reform.

In addition to shareholding diversification, marketized SOEs have also undergone significant corporate governance reforms which coincide with their ownership transformation and restructuring. In the vast majority of cases, ownership reform through the introduction of non-state strategic investors has been accompanied by the adoption of new governance practices relating to the appointment of senior managers, operational autonomy, and disclosure which were brought in by those investors. Following a survey of 950 Chinese firms, Zhang (2011) found that after restructuring, the majority of marketized SOEs had adopted shareholding covenants between new strategic investors and the government shareholders which govern the conditions for establishing the shareholding proportion, the distribution of voting rights, the composition of the board of directors, and exit arrangements.

We coded marketized state shareholders based on their shareholding reform history and the corporate governance improvements described above. Due to the transitional nature of ownership reform, some firms which appeared to belong to one shareholding subcategory may also fit into another category, especially when the ownership composition of the holding company changed and state shares were transferred to legal person and private shareholders. Therefore, extensive we made extensive research to investigate available public information on the shareholding structure of these firms to reach clarification.