Ghemewat & Hout: Globalization, Capabilities, and Distance: Theory and a Case Study (of China)

ABSTRACT:

This article examines how firm-level capabilities relate to competitive outcomes between multinational firms from advanced economies (MNCs) and challengers from emerging economies. It presents John Sutton’s theory of the “capability window” with new empirical evidence on competition between MNCs and Chinese firms inside China, in particular. Market share leadership by MNCs in China is found to be positively related to industry R&D and advertising-intensities, and where leadership varies by segment, MNCs tend to lead in high-end segments and Chinese firms in low-end segments. The empirical research provides support for Sutton’s model but also suggests a set of extensions to it—most significantly the incorporation of horizontal distance alongside the vertical distance emphasized in the baseline model.

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Beatson: Foreign Investment, Corporate Governance & Performance in the Chinese Listed A Share Companies

ABSTRACT:

We present a novel lens on the presence and impact of qualified foreign institutional investors (QFII) in the top shareholdings of the non-financial domestically listed Chinese ‘A’ share firms. Unlike prior cross sectional studies which use only annual data, this research runs a robust panel fixed effects model employing quarterly data, thereby capturing the presence of a foreign investor in these firms for the first time and with greater precision, since relying on Q4 shareholdings would be misleading due to changes in ownership configurations intra annum. The initial results suggest that the presence of a QFII as a top shareholder in these companies is associated with their better performance, using both Tobin’s Q and ROA as the performance measures. We control for internal/external corporate governance mechanisms of Bai et al. (2003), ultimate ownership variables as suggested by Chen et al. (2009), foreign legal person shares, a proxy for international affiliations and a number of time variant firm characteristics (e.g. size, leverage, age etc). The exhaustive specification was reduced using principal component analysis and meted with similar results.

Economically, the coefficient of impact on the market measure is the more significant, while the effect of having a QFII in top shareholdings on both is empirically significant. Previously, studies have often ignored the potential for reverse causality beyond using lagged regressors. This is problematic. Therefore, we follow up with a 2SLS instrumental variables model to further mitigate this potential and surprisingly find the empirical relationship holds. Contrary to the only work on QFIIs and governance post-implementation, the findings from our models suggest that in spite of their very low percentage holdings, we can tentatively interpret the presence of a QFII top shareholder could have acted to augment performance over and above existing corporate governance mechanisms.

Therefore, foreign investors could contribute towards the mitigation of agency problems in non-financial Chinese listed companies. Our interpretation is that the effect of a QFII in top shareholdings results in herding behaviour by the market more broadly, but that there may also be a managerial impact. Following up with twenty five interviews with industry practitioners, we found thematic evidence to suggest the interactions foreign investors insist upon with management in their invested companies could lend them a ‘foreign ownership leverage’ – an influence whereby their voting rights are incommensurate to their influence. Moreover, we identify an indirect governance mechanism by which even passive foreign investors could pressure Chinese management who do not want to see their share price and reputation erode, i.e. exiting the trade in addition to the ability to spread the bad news about the company’s governance issues – thus adding to pressure sensitive and insensitive/resistant categories of institutional investors with a third passive-reactive category.

 

Available for download here.

Berkowitz, Ma & Nishioka: Recasting the Iron Rice Bowl – The Evolution of China’s State Owned Enterprises

ABSTRACT:

China’s state owned enterprises (SOEs) became profitable following the enactment of reforms to “grasp the big and let go of the small” in the mid-1990s. However, profitability is not necessarily indicative of restructuring because SOEs may receive preferential treatment from the state including bailouts, access to cheap inputs, and product market protections (Kornai, 1990; and 1992, Part III). Did China’s SOEs become profitable because of their connections to the state or because they operated more productively? This paper shows that SOEs in the manufacturing sector became more profitable for two reasons. First, because the elasticity of substitution between capital and labor exceeds unity and the SOEs’ cost of capital fell over time, SOEs earned profits by both drastically cutting labor and replacing labor with capital. Second, SOEs were under less political pressure to hire excess labor. While SOEs became more profitable, their productivity was lower than in private and foreign firms.

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Kuang: Determinants of Internal and External Corporate Governance Predictors of Operational Risk of Fraud of China's State Owned Enterprises

ABSTRACT:

This paper attempts to estimate the impact of four factors on corporate fraud rate using panel data of China’s State Owned Enterprises. The sample period is 2010-2012. We extract company information from annual reports of 60 State Owned Enterprises. We found strong evidence that independence of board members is negatively correlated to the number of fraudulent cases. The other three variables – Relation Base ,Executive Board and Educational level – are positively correlated.

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Gunasekar & Sarkar: Does Autonomy Matter in State Owned Enterprises? Evidence from Performance Contracts in India

ABSTRACT:

The empirical effect of enterprise autonomy on the performance of state-owned enterprises is surprisingly scant despite autonomy being a preferred reform instrument in many countries, and often chosen over privatization. Using longitudinal data on performance contracts for state-owned enterprises in India, this paper empirically examines whether granting increased autonomy to state-owned enterprises through such contracts positively impacts enterprise profitability. Further, using the unique reform experience of India as a natural experiment, whereby enterprise autonomy has been simultaneously pursued with partial privatization for a sub-set of enterprises, a unique contribution of the study lies in investigating whether ownership divestiture through partial privatization has any effect once enterprises are imparted managerial autonomy, or whether ownership per se matters. Classifying state owned enterprises into three types, namely those that have been granted autonomy, those with autonomy and partially divested ownership, and those with neither, the study finds robust evidence of a positive impact of managerial autonomy on enterprise profitability. Additionally, once autonomy is controlled for, the study finds at best a weak effect of partial privatization. These results raise doubt on earlier findings of a robust positive effect of partial privatization in India in studies that did not explicitly control for enterprise autonomy thereby raising the possibility that the positive privatization effect that showed up was in actuality, an autonomy effect.

 

Available for download here.

Cuervo-Cazurra, Inkpen, Musacchio & Ramaswamy: Governments as owners – State-owned multinational companies

ABSTRACT:

The globalization of state-owned multinational companies (SOMNCs) has become an important phenomenon in international business (IB), yet it has received scant attention in the literature. We explain how the analysis of SOMNCs can help advance the literature by extending our understanding of state-owned firms (SOEs) and multinational companies (MNCs) in at least two ways. First, we cross-fertilize the IB and SOEs literatures in their analysis of foreign investment behavior and introduce two arguments: the extraterritoriality argument, which helps explain how the MNC dimension of SOMNCs extends the SOE literature, and the non-business internationalization argument, which helps explain how the SOE dimension of SOMNCs extends the MNC literature. Second, we analyze how the study of SOMNCs can help develop new insights of theories of firm behavior. In this respect, we introduce five arguments: the triple agency conflict argument in agency theory; the owner risk argument in transaction costs economics; the advantage and disadvantage of ownership argument in the resource-based view (RBV); the power escape argument in resource dependence theory; and the illegitimate ownership argument in neo-institutional theory. After our analysis, we introduce the papers in the special issue that, collectively, reflect diverse and sophisticated research interest in the topic of SOMNCs.

 

Available for download here.

Wang, Tu & Liu: The Evolution of State-owned Enterprises in South China – The Choice of Property Right System Perspective

ABSTRACT:

The purpose of this paper is to explore the evolutionary pattern of state-owned enterprises in China. The researchers focused on the three state-owned enterprises of the same industry in south China that experienced diverse property right reform roads in the late 1990s and showed differing outcomes. Combined with the method of business anthropology, this paper asserts that different models of property right can affect different human behavior paths, which would produce the final destiny of the enterprise. The researchers conclude that the property right reform of Chinese state-owned enterprises in the future should be a mixed model that can achieve the governance balance.

 

Available for download here.

Megginson, Ullah & Wei: Holdings – Evidence from China’s Privatized Firms

ABSTRACT:

We study the relation between state ownership and cash holdings in China’s share-issue privatized firms from 2000 to 2012. We find that the level of cash holdings increases as state ownership declines. For the average firm in our sample, a 10 percentage-point decline in state ownership leads to an increase of aboutRMB 55 million in cash holdings. This negative relation can be attributable to the soft-budget constraint (SBC) inherent in state ownership. The Chinese financial system is dominated by the state-owned banks, an environment very conducive for the SBC effect. We further examine and quantify the effect of state ownership on the value of cash and find that the marginal value of cash increases as state ownership declines. The next RMB added to cash reserves of the average firm is valued at RMB 0.96 by the market. The marginal value of cash in firms with zero state ownership is RMB 0.36 higher than in firms with majority state ownership. The SBC effect exacerbates agency problems inherent in state-controlled enterprises, contributing to their lower value of cash.

 

Available for download here.

Dai, Tan, Tang & Xiao: IPOs, Organisational Change, and Management Accounting Change – Evidence from Chinese State-Owned and Non-State-Owned Enterprises

ABSTRACT:

This research aims to contribute to the literature on management accounting and organisational change through the lens of an important corporate event, the initial public offering (IPO). It explores to what extent and how IPOs may trigger management accounting and other organisational changes in two listed state-owned enterprises (SOEs) and one listed non-SOE in China. As informed by the organisational change framework developed by Laughlin (1991), it is found that following IPOs, changes have occurred in the actual management accounting systems deployed, the way in which existing mechanisms are adopted, the personnel involved in exercising control, or the significance attached to certain systems. Following IPOs, management accounting and control has become more formal, tighter, and geared more toward providing accountability to shareholders. However, IPOs tend to take through different organisations differently, and shape management accounting and control practices and other organisational arrangements of the listed firms in different ways.

 

Available for download here.

Mahdavi: Extortion in the Oil States – Nationalization, Regulatory Structure, and Corruption

ABSTRACT:

Does oil breed corruption? If so, what explains corruption in oil-producing countries? Despite a long tradition of scholarly research on the causes of corruption, doubts exist on whether and why oil wealth increases corruption in some states but not others. What makes these questions particularly difficult to answer is the lack of data refined enough to make inferences about the specific mechanisms linking oil and corruption. To this end, I introduce new and sector-specific measures of corruption that capture corrupt practices involving high-level government officials, cases which are often labeled as examples of “grand corruption” (Rose-Ackerman, 1975). These measures are drawn from U.S. government data on violations of the Foreign Corrupt Practices Act (FCPA) in 39 oil-producing countries during the period 1997-2013. Second, using the Department of Justice and Securities and Exchange Commission archives on FCPA violations, I am able to reveal dramatic differences in the levels of corruption across oil-producing countries in a way that is both specific to the oil sector and cross-nationally comparable. Third, I show that this variance is in large part associated with a specific institutional choice. Drawing on a novel collection of data on oil nationalizations around the world, I find the highest corruption levels in oil-producing countries with regulatory structures where the authority to solicit and award concessions is vested in national oil companies (NOCs) instead of in ministries or other regulatory agencies. This pattern is illustrative of corruption arising in contexts where officials have both the opportunities to engage in bad government behavior and the incentives to solicit bribes from would-be contract winners.

Available for download here.

 

Department of Political Science, University of California,