Bringing corporate governance into internalization theory: State ownership and foreign entry strategies

Abstract

We use internalization theory to analyze the establishment and entry mode decisions of state-owned (SOE) and privately owned (POE) enterprises. We enrich internalization theory by building on insights from economic theory of corporate governance and taking into account particular characteristics of SOEs such as non-economic motivations, long-term orientation, and different risk preferences. We examine foreign entries over a 10-year period in the Canadian oil and gas industry. This single-country and single-industry context features foreign SOEs and POEs from a wide range of home countries, allowing a focused study of the combined influence of state ownership and home-country factors. Compared to POEs, SOEs tend to prefer acquiring stand-alone assets rather than firms, and to take lower ownership shares. We also find that differences between SOEs and POEs diminish when home countries are characterized by high government quality and market orientation and identify differences between types of SOEs, with partially owned SOEs exhibiting behaviors more similar to POEs than fully owned SOEs. We demonstrate how our enrichment of internalization theory strengthens its predictive and explanatory capacity. Our results also show that SOEs from strong and market-oriented institutional environments are similar to POEs and can be studied using the traditional internalization theory.

Applying and advancing internalization theory: The multinational enterprise in the twenty-first century

“…For state-owned enterprises, this might be a long time, as home governments can tap into large capital reserves and raise more capital through taxation. However, as the quality of institutions improves, subsidization possibilities may be circumscribed, consistent with the results of Grøgaard et al (2019). For firms that do not have the advantage of state ownership, but are merely pursuing suboptimal strategies due to psychological biases (Elia et al, 2019a, b), we can speculate that the deviations are likely to be more persistent in industries with weak competition, or possibly when participants enjoy unique and hardto-imitate resources.…”

“…At the same time, there is always a need for prudence and commensurability in developing new theories. First, even though it was originally developed to explain the emergence of large manufacturing MNEs in the post-WWII era, the basic analytical approach of the theory is arguably still applicable to explaining the boundary choices by other types of MNEs in different time periods such as those from emerging economies (Verbeke & Kano, 2015), sponsored by the state (Grøgaard et al, 2019), run by a single family (Hennart et al, 2017), or focusing on digital services (Banalieva & Dhanaraj, 2019;Hennart, 2019). Therefore, a judicious approach to studying a seemingly new type of transaction or firm is perhaps first to assess carefully whether internalization theory still has substantial explanatory power to effectively explain the 'new' governance mode, transaction, or firm.…”

“…This implies that governance mode choices (like location choices; see Buckley, Devinney & Louviere, 2007) may deviate in systematic ways from the predictions of the theory. Grøgaard, Rygh, and Benito (2019) expand the scope of the theory to encompass SOEs. Based on the corporate governance literature, they argue and show that these less-conventional firms indeed make governance mode choices that differ from private firms-but that the differences disappear if their home country institutions are sufficiently developed.…”

Global value chains: A review of the multi-disciplinary literature

“…Of particular interest here is behavior of firms whose international strategy may be driven by non-economic objectives, such as state-owned enterprises (SOEs), government-linked corporations (GLCs) and family firms. The social and political goals of SOEs and GLCs may conflict with efficiency considerations (Grøgaard, Rygh, & Benito, 2019;Rugman, 1983), and may drive idiosyncratic GVC configurations. These idiosyncrasies may be enhanced by lead firms' unique relationships with key macro-level actors, such as the state, regional and local institutions, and trade unions, and their comparatively greater ability to influence economic policies that govern international investment.…”

Competitive Advantages of Cross-Border M&As to Non-Location-Bound Chinese ICT Firms

“…State ownership has also been a topic of research in cross-border M&As of EMNEs [22]. Compared to non-SOEs, characteristics of SOEs such as non-economic motivations, long-term orientation, and different risk preferences influence the foreign entry strategies of SOEs [23]. Some literature suggests that the state can provide stateowned enterprises (SOEs) with monopolist advantages at home by creating and enforcing rules that shape market entry and transactions, and by providing preferential access to financial resources [24].…”