A Geopolitical Perspective into the Opposition to Globalizing State‐Owned Enterprises in Target States

• DOI: http://doi.org/10.1002/gsj.1105
• Published date: 01 February 2016
• Date: 01 February 2016

A GEOPOLITICAL PERSPECTIVE INTO THE

OPPOSITION TO GLOBALIZING STATE-OWNED

ENTERPRISES IN TARGET STATES

WEI SHI*, ROBERT E. HOSKISSON, YAN ANTHEA ZHANG

Jesse H. Jones Graduate School of Business, Rice University, Houston,

Texas, U.S.A.

Plain language summary:Geopolitical concerns are one of the important factors influencing

multinational enterprise (MNE) location choices. This is particularly true for globalizing

state-owned enterprises (SOEs) because of their direct ties with governments. Because of

geopolitical concerns, SOEs may face a strong level of opposition in foreign countries which

neighbor SOEs’ home countries, have different religious beliefs and political regimes from

SOEs’ home countries or countries do not lack resources that SOEs can provide. Such oppo-

sition is particularly strong in countries where domestic politicians find it in their interests

to

arouse nationalistic feelings and oppose foreign SOEs’ investments.This study highlights the

importance of considering geopolitical factors in MNE location choices.

Technical summary: The emergence of globalizing state-owned enterprises (SOEs) requires

revisiting the assumption that multinational enterprises (MNEs) are focused on economic not

political objectives because SOEs tend to be perceived as political entities as well. We develop

a geopolitical perspectiveinto how geographic distance, religious similarity, and political regime

similarity between two nation states, as well as resource complementarity between globalizing

SOEs and target states, explain the levelof opposition that globalizing SOEs face in target states.

We also investigate how the salience of nationalist politics moderatesthe influence of

these

geopolitical factors on the level of opposition that globalizing SOEs face.This theoretical model

developed in this study sheds new light on understanding the role of geopolitics in affecting

MNEs’ location choices. Copyright © 2016 Stra tegic Mana gement Society.

INTRODUCTION

A large body of research in international business

draws on theories of comparative advantage and

agglomeration economies (Dunning and Lundan,

2008; Head, Ries and Swenson, 1995) and the

resource-based view (Chung and Alcacer, 2002;

Shaver and Flyer, 2000) to investigate factors that

influence multinational enterprises’ (MNEs) location

choices. Such research is generally predicated on the

assumption that MNEs pursue economic, not politi-

cal, objectives, and the accompanying focus on eco-

nomic rent generation drives MNEs’ location

choices. Another stream of research focuses on

unpacking political risks that MNEs face in target

states and how MNEs should cope with such politi-

cal risks (Delios and Henisz, 2003; Henisz,

Mansfield, and Von Glinow, 2010). Yet, this stream

of research has not given much attention to how

interstate political relations between home and target

states influence MNEs’ location choices.

Keywords: Location strategy; state-owned enterprises; geopoli-

tics; multinational enterprises; international business; interna-

tional politics

*Correspondence to: Wei Shi, Jesse H. Jones Graduate

School of Business, Rice University

6100 Main Street, MS 531, Houston, TX 77005, U.S.A.

E-mail: ws9@rice.edu

Global Strategy Journal

Global Strat. J.,

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1105

Copyright © 2016 Strategic Management Society

6: 13 30 (2016)

–

and

State-owned enterprises (SOEs) accounted for

around 11 percent of global foreign direct investment

(FDI) flows in 2011 (The Economist, 2012). It is

important to examine how international political

relations between states influence SOEs’ location

strategies because SOEs are often perceived as

political entities instead of economic entities. In this

article, we define globalizing SOEs as MNEs with

state control rights. The distinction between control

rights and cash flow rights is critical. For some

MNEs, despite low levels of cash flow rights owned

by states, states are in decision control of these

MNEs through ‘golden shares’ that allow the state

owner to outvote other shareholders in specified cir-

cumstances. Although the level of state control

rights can influence SOEs’ strategic choices (Inoue,

Lazzarini, and Musacchio, 2013; Musacchio and

Lazzarini, 2012, 2014), the geopolitical model we

intend to develop can be applicable to SOEs with

majority as well as minority state control rights

because key stakeholders in target states may be

more attentive to whether or not an MNE has state

control rights rather than to the level of state control

rights in an MNE. In other words, target states’ per-

ceptions and attitudes toward an MNE hinge more

on whether an MNE is an ‘SOE’ or a ‘non-SOE.’ For

instance, Huawei—a Chinese telecommunication

giant—encounters strong opposition in the U.S.

because U.S. politicians perceive that Huawei has

political connections with the Chinese government,

which actually does not have direct ownership in the

firm.

Globalizing SOEs are subject to various levels of

state intervention, and the pursuit of national inter-

ests and political and social missions may supersede

the primacy of maximizing economic profits

(Contractor, 2013; Knutsen, Rygh, and Hveem,

2011; Zif, 1983). If we consider SOEs as represen-

tations of sovereign states, the presence of globaliz-

ing SOEs may challenge the national sovereignty of

target states and affect international relations

between their home states and target states. In this

sense, relative to private MNEs, globalizing SOEs

may face higher levels of scrutiny in foreign target

states and even be barred by governments of target

states in the name of defending the inviolability of

national sovereignty.

However, extant research on MNE location strat-

egy mostly assumes that MNEs have the discretion

of choosing where to locate their business activi-

ties, but neglects that MNEs’ foreign investments,

particularly if they are perceived as politically

driven, may be obstructed by governments of target

states. In this article, we adopt a geopolitical per-

spective to investigate what factors may influence

the level of opposition faced by globalizing SOEs

in target states which, in turn, may affect these

SOEs’ abilities to seek locational advantages glob-

ally. We argue that the level of scrutiny and

obstruction that globalizing SOEs are subject to in

foreign target states varies dependent upon geopo-

litical relations between the SOEs’ home and target

states. We aim to develop a geopolitical theoretical

model with a focus on globalizing SOEs (or MNEs

with state control rights) because the influence of

geopolitics on MNEs’ location choices is more

salient among globalizing SOEs than among

private MNEs.

Geopolitics as a field of study traces its roots back

to the emerging geopolitical conditions of the world

order at the end of the nineteenth century (Toal,

1996) and concerns the practice of states controlling

and competing for territory and power (Flint, 2006).

The geopolitical perspective suggests that SOEs can

be important agents of geopolitics because state

ownership dictates that SOEs symbolize national

interests and represent strategic orientations of the

controlling states (Zukin and DiMaggio, 1990).

Thus, how globalizing SOEs are perceived in target

states shall depend on geopolitical relations between

the SOEs’ home and target states. To gain a deeper

view of the spatial distribution of SOEs’ global

activities requires us to focus on state-level dyadic

geopolitical factors1and to examine how interstate

threat perceptions and power dynamics influence the

level of opposition faced by globalizing SOEs in

target states. In particular, we focus on four geopo-

litical factors: geographic distance, religion, political

regime, and resource endowment (the detailed

reasons for choosing these factors will be discussed

in the conceptual model section). These factors have

a direct influence on threat perceptions and power

dynamics between nation states (Flint, 2006) which

can, in turn, influence the level of opposition that

globalizing SOEs encounter in target states and

thereby influence their location choices. We also

contend that political leaders of target states, as

1One of our four independent constructs—resource

complementarity—is a mixed-level construct that concerns the

level of resource compatibility between resources possessed by

globalizing SOEs (firm-level resources) and resources at the

target states (state-level resources). For the ease of argument,

we will not single out resource complementarity as a mixed-

level construct unless explained otherwise.

W. Shi, R. E. Hoskisson, and Y. ZA.

Copyright © 2016 Strategic Management Society Global Strat. J.,

DOI: 10.1002/gsj.1105

6: 13 30 (2016)

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Zhang