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Balancing private and state ownership in emerging markets' telecommunications infrastructure: country, industry, and firm influences

An Erratum to this article was published on 01 September 2004

Abstract

Bargaining between host states and investors over the terms of investment in sensitive sectors of the economy generates political and economic tensions. In this study, we investigate the factors that contribute to the outcomes of those negotiations as measured by the private (vs state-owned) share of newly consummated telecommunications infrastructure projects. We find that private ownership is positively associated with overall economic development and investment liberalization in the host country and with greenfield (vs divestiture) and joint venture (vs wholly owned) projects. Private ownership is negatively associated with existing telecommunications infrastructure, higher levels of state ownership of foreign investing firms, and the technological sophistication of the projects. Our analysis also shows a curvilinear (inverted U-shaped) relationship between investment policy hazards and private ownership. This finding supports the insight from transaction cost economics that potential gains from internalization are greatest at intermediate levels of uncertainty.

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Acknowledgements

We acknowledge the financial support of George Washington, Temple, and Villanova Universities. We thank JIBS Departmental Editors Stefanie Lenway and Tom Murtha for their guidance and suggestions, and two anonymous reviewers for comments on earlier drafts of the paper.

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Correspondence to Jonathan P Doh.

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Accepted by Tom Murtha and Stefanie Lenway, Departmental Editors, 20 February 2004. This paper has been with the author for three revisions.

An erratum to this article is available at http://dx.doi.org/10.1057/palgrave.jibs.8400105.

Appendix: Description of PPI database

Appendix: Description of PPI database

Database coverage

Projects that have reached financial closure and directly or indirectly serve the public. Projects in water, transport, electricity, telecommunications, and natural gas. The telecommunications sector includes local, national, and international phone services and mobile phone services. Other services (Internet, paging, trunking, and value-added services) and private networks are excluded. Low- and middle-income developing countries, as defined and classified by the World Bank.

Definition of private participation

The private company must assume operating risk during the operating period or development and operating risk during the contract period. A foreign state-owned firm is considered a private entity.

Definition of a project unit

A corporate entity created to operate infrastructure facilities is considered a project. When two or more physical facilities are operated by the corporate entity, all are considered as one project.

Project types

  1. 1)

    Operations and management contract: A private entity takes over the management of a SOE for a given period. This category includes management contracts and leases.

  2. 2)

    Greenfield project: A private entity or a public–private JV builds and operates a new facility. This category includes build–own–transfer and build–own–operate contracts.

  3. 3)

    Divestiture: A private consortium buys an equity stake in a SOE. The private stake may or may not imply private management of the company.

Definition of financial closure

For greenfield projects, and for operations and management contracts with major capital expenditure, financial closure is defined as the existence of a legally binding commitment of equity holders or debt financiers to provide or mobilize funding for the project. The funding must account for a significant part of the project cost, securing the construction of the facility. For operations and management contracts, a lease agreement or a contract authorizing the commencement of management or lease service must exist. For divestitures, equity holders must have a legally binding commitment to acquire the facility assets.

Recording of investments

Investments and privatization revenues generally have been recorded on a commitment basis in the year of financial closure (for which data are typically readily available). Actual disbursements have not been tracked. Where privatizations and new investments are phased and data were available at financial closure, they are recorded in phases.

State ownership of principal project investor (added to PPI database by authors)

We identified the parent name of the principal project investor and used this to determine the level of (home) state ownership of the investor. As most projects include three or fewer investors, and the investors are listed according to their ownership share in the investment, we focused first on the initial investor in identifying the level of state ownership of the investor. We gathered data from a range of sources to determine the relative state ownership of the project investors. These data sources include the International Telecommunications Union, the Telegeography New International Operators report (2000), the WTO (1999), company annual reports, web sites, SEC 10-K and 10-Q filings, and the Lexis–Nexis and ABI/INFORM databases. We chose 1998 as the relevant year for measuring state ownership in order to match the other data sources. Although using more recent data may result in an underestimation of the impact of state ownership, owing to the continued privatization of large state-owned investors such as Deutsche Telecom, this conservative approach will limit the potential of a Type I error in which variation is attributed to investor state ownership when firms are actually moving toward private governance.

State ownership and percent private

The calculation of the percentage of the project that is state owned does not incorporate the state ownership of the investor, but only the residual (non-private) percentage still in the hands of the host state. Although the variable ‘investor state ownership’ may appear to overlap with the measure of non-private (government) ownership of the project, the percentage of the project that is ‘private’ can include investors that themselves are state owned. Hence there is no risk of ‘double counting’ or tautological model formulation. See ‘definition of private participation’ above (e.g., ‘A foreign state-owned company is considered a private entity’).

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Doh, J., Teegen, H. & Mudambi, R. Balancing private and state ownership in emerging markets' telecommunications infrastructure: country, industry, and firm influences. J Int Bus Stud 35, 233–250 (2004). https://doi.org/10.1057/palgrave.jibs.8400082

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Keywords

  • emerging markets
  • telecommunications
  • infrastructure