State ownership and international expansion: The S‐curve relationship

• DOI: http://doi.org/10.1002/gsj.1339
• Published date: 01 May 2020
• Author: Alvaro Cuervo‐Cazurra,Ravi Ramamurti,Kiattichai Kalasin
• Date: 01 May 2020

RESEARCH ARTICLE

State ownership and international expansion:

The S-curve relationship

Kiattichai Kalasin

1

| Alvaro Cuervo-Cazurra

2

| Ravi Ramamurti

2

1

NIDA Business School, National Institute of

Development Administration, Bangkok, Thailand

2

D'Amore-McKim School of Business,

Northeastern University, Boston, Massachusetts

Correspondence

Kiattichai Kalasin, National Institute of

Development Administration, NIDA Business

School, 118 Seri Thai Road, Bangkapi, Bangkok

10240, Thailand.

Email: kiattichai.kal@nida.ac.th

Research Summary: We study how state ownership

affects the international expansion of emerging-market

firms. Building on agency theory and the resource-based

view, we propose an S-curve relationship: Firms with a

low level of state ownership have a limited level of inter-

national expansion, those with a medium level of state

ownership have an increasing level, and those with a high

level of state ownership have a decreasing level. This S-

curve is the outcome of the interaction between the “hin-

dering hand”of state ownership, arising from multilevel

agency problems, and the “helping hand,”arising from

state-ownership advantages. Analyses of 674 publicly

traded firms from 16 emerging markets support these

ideas and reveal that the inflection points in the S-curve

appear at state-ownership levels of 19 and 43%.

Managerial Summary: State ownership of emerging-

market firms results in their international expansion fol-

lowing an S-curve pattern because state ownership has

hindering and helping influences. Firms with low state

ownership have a limited level of international expansion

because they are subject to government interference but

receive limited support. Firms with a medium level of

state ownership have an increasing level of international

expansion because they have greater access to resources

while the negative effects of state control are restrained by

the dominance of private owners. Finally, firms with a

high level of state ownership have a decreasing level of

international expansion because the advantage of resource

provision is offset by tight state controls. We illustrate

these ideas through the analyses of 674 firms from

16 emerging markets.

Received: 16 January 2018 Revised: 12 February 2019 Accepted: 13 February 2019

DOI: 10.1002/gsj.1339

386 © 2019 Strategic Management Society wileyonlinelibrary.com/journal/gsj Global Strategy Journal. 2020;10:386–418.

KEYWORDS

agency theory, emerging-market firms, foreign direct

investment, international expansion, resource-based

view, S-curve relationship, state ownership

1|INTRODUCTION

We analyze the impact of state ownership on the international expansion of emerging-market firms.

State-owned firms are an essential part of the global business landscape (Bruton, Peng, Ahlstrom,

Stan, & Xu, 2015; Musacchio, Lazzarini, & Aguilera, 2015; see a review in Aharoni, 2018), not just

in emerging economies but also in advanced ones (OECD, 2016), despite the wave of privatization in

the 1980s and 1990s (Ramamurti & Vernon, 1991; Vickers & Yarrow, 1988). Early research on the

distinctiveness of internationalization by state-owned firms (Aharoni, 1982; Mazzolini, 1980; Ver-

non, 1979) has witnessed a renaissance in recent times (Bass & Chakrabarty, 2014; Benito, Rygh, &

Lunnan, 2016; Choudhury & Khanna, 2014; Clegg, Voss, & Tardios, 2018; Cuervo-Cazurra, 2018a;

Cui & Jiang, 2012; Hennart, Sheng, & Carrera, 2017; Lazzarini & Musacchio, 2018). Some of these

firms have become global players, challenging some of the assumptions of global strategy as a result

of government's complex influence on their international behavior and strategy (see an overview in

Cuervo-Cazurra, Inkpen, Musacchio, & Ramaswamy, 2014).

However, existing studies offer conflicting views on the impact of state ownership on firms' inter-

nationalization, which we call the “helping hand”and “hindering hand”duality. On the one hand,

what we term the helping-hand view proposes that state-owned firms, especially those from emerging

economies, internationalize more aggressively as a result of their state-ownership advantages, with

governments actively encouraging and supporting internationalization (Bass & Chakrabarty, 2014;

Hong, Wang, & Kafouros, 2015; Luo, Xue, & Han, 2010; Wang, Hong, Kafouros, & Boateng, 2012;

Wang, Hong, Kafouros, & Wright, 2012). On the other hand, what we call the hindering-hand view

argues that state-owned firms internationalize less because they suffer from multilevel agency prob-

lems that lead them to focus on the domestic market and local economic development (Benito,

Lunnan, & Tomassen, 2011; Hobdari, Gregoric, & Sinani, 2011; Majocchi & Strange, 2012; Vernon,

1979), limit their capabilities to address operational complexities (Fisch, 2012; Richter, 2014), strug-

gle to keep up with foreign competitors (Hobdari et al., 2011; Huang, Xie, Li, & Reddy, 2017), and

suffer from discrimination in host countries (Meyer, Ding, Li, & Zhang, 2014; Shi, Hoskisson, &

Zhang, 2016; see an overview in Cuervo-Cazurra, 2018a).

In this article, we aim to reconcile these conflicting perspectives on the international expansion of

state-owned firms by proposing that these helping- and hindering-hand views implicitly reflect two

theoretical drivers: the resource-based view (Barney, 1991; Wernerfelt, 1984) and the state ownership

advantages of state-owned firms, and agency theory (Fama & Jensen, 1983; Jensen & Meckling,

1976) and the multilevel agency problems of these firms. Building on these two views, we propose

that the relationship between state ownership and international expansion follows an S-curve relation-

ship as the multilevel agency problems and state-ownership advantages offset each other to different

degrees at varying levels of state ownership. Specifically, while firms with a low level of state owner-

ship have limited international expansion, those with a medium level of state ownership have an

KALASIN ET AL.387

increasing level of international expansion, and firms with a high level of state ownership have a

decreasing level of international expansion.

We illustrate these ideas by analyzing 674 publicly traded firms from 16 emerging markets oper-

ating in three manufacturing and technology-based industries (chemicals and pharmaceuticals, indus-

trial machinery, and electronics). We study firms in emerging markets because governments in these

countries tend to be more involved in running state-owned firms than in advanced economies (Luo

et al., 2010; Meyer, Estrin, Bhaumik, & Peng, 2009), such that this context provides an appropriate

laboratory for investigating the interaction between firm strategies and local contexts (Xu & Meyer,

2013). In addition, analyzing companies in manufacturing and technology-based industries avoids

the geopolitical biases of energy-security considerations that drive the internationalization of natural

resources-based firms.

We find that state ownership follows an S-curve relationship with foreign investments: firms with

a low level of state ownership have investments in very few foreign countries, those with a medium

level of state ownership have operations in a large number of foreign countries, and firms with a high

level of state ownership invest in a small number of foreign countries. The analyses also suggest two

inflection points in the S-curve. One appears at 19% of state ownership, implying that the state-

ownership advantages (the helping hand) do not start to kick in before state ownership reaches a criti-

cal mass. Another appears at 43% of state ownership, which indicates that even before the govern-

ment owns a majority stake, the multilevel agency problems of state control (the hindering hand)

appear to stifle international expansion. We also find that state-owned firms invest in fewer countries

than private firms, which is in line with the previous studies (Estrin, Meyer, Nielsen, & Nielsen,

2016; Hobdari et al., 2011; Hu & Cui, 2014).

This study contributes to the literature on state-owned multinationals (Anastassopoulos, Blanc, &

Dussauge, 1987; Cuervo-Cazurra et al., 2014; Martin & Li, 2015; see an overview of key studies in

Cuervo-Cazurra, 2018b) by recognizing that state ownership can provide both a helping hand and a

hindering hand when it comes to internationalization. The state can help internationalization by offer-

ing resources that would otherwise not be available, but it can also hinder it by imposing noneco-

nomic and political goals that hurt a firm's international competitiveness. By studying firms from

16 emerging countries, the findings provide greater external validity than those of studies based on

firms from a single country (Bruton et al., 2015; Clegg et al., 2018). By categorizing state-owned

firms into three types based on the level of state ownership (low, medium, and high), rather than

operationalizing government ownership as a binary variable or as a minority/majority stake in the

firm (Bruton et al., 2015), we provide a more nuanced understanding of the internationalization of

state-owned firms.

This article also contributes to a better understanding of the theories analyzing the behavior

of state-owned firms (Bruton et al., 2015; Cuervo-Cazurra et al., 2014; Musacchio et al., 2015)

by explaining how the resource-based view and agency theory complement each other. Much

of the literature seems theoretically polarized, either highlighting the particular agency problems

that these firms suffer from (which we call multilevel agency problems) and how these prob-

lems negatively affect their strategies (Cuervo-Cazurra et al., 2014; Jia, Huang, & Zhang,

2019) (i.e., the hindering hand), or highlighting the government's supportive role (which we

call state-ownership advantages) and how the state-provided resources facilitate the internation-

alization of firms (Luo et al., 2010) (i.e., the helping hand). We explain how these two

approaches complement each other in the analysis of the impact of state ownership on interna-

tional expansion by arguing that their underlying drivers offset each other at different levels of

state ownership.

388 KALASIN ET AL.