Victor Zitian Chen

Ownership Structure and Innovation: An Emerging Market Perspective

Considerable attention has been focused on the ways in which emerging market firms can obtain and mobilize the knowledge and resources required for innovation. Innovation is a particular challenge in emerging markets because of inadequate external institutions. In this study, we focus on the importance of ownership structure, and in particular on ownership type diversity and ownership concentration. Using transaction cost and agency theories embedded in an emerging market context, we argue that ownership structure provides an important mechanism by which firms can assemble and direct the resources necessary for innovation in the context of inadequate external institutions. Specifically, we hypothesize that ownership type diversity improves innovation performance and that increasing ownership concentration has the same effect, but only up to a point. Using a self-tailed panel data of 487 and 475 Chinese listed companies during 2004-2005 and 2005-2006 respectively, we find supportive empirical evidence for our hypotheses. Our findings also suggest ownership type diversity has a more significant statistical effect on innovation performance than does ownership concentration, although most of the extant literature focuses on the latter.

China’s regulatory framework for outward foreign direct investment

China has become the world’s third largest outward investor, behind the United States and Japan. A growing body of literature suggests that China’s regulatory framework for outward foreign direct investment (OFDI) is a determinant of the country’s rising OFDI. This article presents a holistic review of that framework, including some possibilities for its improvement. Overall, China’s framework serves two objectives: to help Chinese firms become more competitive internationally and to assist the country in its development effort. In pursuing these objectives, the regulatory framework has moved from restricting, to facilitating, to supporting, to encouraging OFDI, but there are still strong elements of administrative control that make it cumbersome. State-owned enterprises (SOEs) seem to benefit particularly from the current framework when internationalizing through FDI.

Subnational institutions and outward FDI by Chinese firms

Purpose – The purpose of this study is to extend the classic country-specific advantage (CSA) – firm-specific advantage (FSA) framework by integrating an institution-based view of CSAs into the discussion of FSAs. In his classic CSA – FSA framework, Rugman suggests that successful multi-national enterprises (MNEs) are often built on the interaction between strong FSAs and strong CSAs at home. In the case of emerging market multi-nationals (EMNEs), he argued that strong CSAs were of particular importance in allowing EMNEs to develop FSAs. In particular, we examine CSAs at the sub-national level. Design/methodology/approach – The authors suggest that sub-national heterogeneity in market-supporting institutions is an important feature of emerging market economies, and that consideration of such heterogeneity contributes to our understanding of firm capabilities and overseas investment behavior of emerging market firms. The authors also identify explicitly the mechanisms through which sub-national institution...

Subnational Institutions and Outward FDI by Chinese Firms: The Mediating Role of Firm-Specific Advantages

Purpose – The purpose of this study is to extend the classic country-specific advantage (CSA) – firm-specific advantage (FSA) framework by integrating an institution-based view of CSAs into the discussion of FSAs. In his classic CSA-FSA framework, Rugman suggests that successful multi-national enterprises (MNEs) are often built on the interaction between strong FSAs and strong CSAs at home. In the case of emerging market multi-nationals (EMNEs), he argued that strong CSAs were of particular importance in allowing EMNEs to develop FSAs. In particular, we examine CSAs at the sub-national level. Design/methodology/approach – The authors suggest that sub-national heterogeneity in market-supporting institutions is an important feature of emerging market economies, and that consideration of such heterogeneity contributes to our understanding of firm capabilities and overseas investment behavior of emerging market firms. The authors also identify explicitly the mechanisms through which sub-national institutions at home affect FSAs and, subsequently, the ability of emerging market firms’ entry into developed markets. Specifically, the authors argue that strong local institutions that support effective and well-functioning markets create the conditions that induce firms in that location to develop market-related capabilities in R&D and marketing, which, in turn, enable them to expand into developed countries. Findings – Using a unique dataset on overseas investment by Chinese firms and causal mediation analysis, the authors find strong evidence in support of the view that strong sub-national institutions help emerging market firms develop the capabilities to enter developed country markets.

A Principals-Principals Perspective of Hybrid Leviathans: Cross-Border Acquisitions by State-Owned MNEs:

We propose a private-government principals-principals approach to understand corporate governance of state-owned multinationals. We explain how the conflicts between large government and private blockholders may affect managerial decisions in the propensity of completing a cross-border acquisition and its dollar value. We argue that conflicts among different blockholders make it difficult to pursue large-scale, cross-border deals because such conflicts may lead to a less coherent objective function and to a rejection of deals that do not satisfy these groups’ conflicting objectives. Finally, we show that such blockholder conflicts are moderated by the salience of the government’s “dual influence” on the firm in question, related to a state’s soft budget constraint and/or diplomatic advantages in countries where the host and the home markets do not enjoy a bilateral investment treaty. Empirically, we found highly supportive evidence based on a global sample of 7,564 cross-border acquisitions between 2004 and 2013.

Hybrid Leviathans Overseas: Government-Private Shareholder Conflicts in Cross-Border Acquisitions

The principal-principal (PP) perspective focuses on the problem that “[large] investors may represent their own interests, which need not coincide with the interests of other investors in the firm” (Shleifer & Vishny, 1997). This type of PP conflicts typically arise because controlling shareholders may use their control power to abuse the rights of other shareholders in order to obtain private benefits of control (Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Studies also show that such conflicts tend to be aggravated when there are other large shareholders with the capacity to contest control and, thus, serve as a balance to the power of the controlling shareholder (Li & Qian, 2013).This traditional view of PP conflicts has primarily focused on one particular PP conflict, in which a controlling shareholder runs the firm to obtain private benefits of control (Young et al., 2008). In contrast, we contribute to this literature by adding another important type of conflict prevalent in thousands of firms worldwide, namely the potential contest between government shareholders and private shareholders. This conflict arises because of the fundamental conflicts between public/political and private interests that separate these two types of investors. More importantly, we do not know how this type-based PP conflicts play out in the context of important strategic decisions of the firm such as cross-border acquisitions.This study, therefore, focuses on PP conflicts between the government- and private shareholders in the context of cross-border acquisitions. In particular, we study whether and how the conflicts between government- and private shareholders affect the size and the premium of such acquisitions. This is an appropriate setting to study PP conflicts because the size and the premium of cross-border acquisitions affect not only the complexity and operational risk of a firm (Mantecon, 2009; Seth, Song, & Pettit, 2002; Tufano, 1996), but can also offer a chance for influential shareholders to manipulate corporate funds to destroy value for other shareholders (Bris & Cabolis, 2008). The controlling shareholder or the controlling group of shareholders of the acquirer firms can obtain pecuniary and non-pecuniary benefits from such cross-border transactions, such as diversifying the assets of their portfolio of firms at the expense of the acquiring firm performance, securing access to resources for related firms, increasing their international reputation, or simply bringing political benefits to these controlling shareholders (Chen & Young, 2010; Young et al., 2008). In contrast with the current literature on PP conflict, which focuses only on the conflicts between large and small shareholders, we argue that there is a potential contest between government and private shareholders as two contestant groups in large-scale, cross-border acquisitions. We examine the role of governments as shareholders because they have, more often than not, interests that clash with those of private investors due to the fundamental conflict between political/public and private interests (Boardman & Vining, 1989; Inoue, Lazzarini, & Musacchio, 2013; Musacchio & Lazzarini, 2014; Vining & Weimer, 2015). The literature on state-owned MNEs (SOMNEs) argues that these firms often internationalize with diplomatic and political objectives in mind (Cuervo-Cazurra, Inkpen, Musacchio, & Ramaswamy, 2014; Cui & Jiang, 2009, 2012; Dau, 2012); frequently overpaying for projects or target firms (Bass & Chakrabarty, 2014); and taking on more risk than their private counterparts (Ramasamy, Yeung, & Laforet, 2012). These works, however, take for granted that the internationalization decisions were made following the whim of governments (as a controlling shareholders), ignoring any tensions or opposition from private shareholders. Furthermore, government ownership varies significantly, from full, to majority, to minority ownership across SOMNEs (Inoue et al., 2013; Musacchio & Lazzarini, 2014), causing different PP conflicts with the private shareholders (Vining & Weimer, 2015).

Barbarians at the Gate of the Middle Kingdom: The International Mobility of Financing Contract and Governance:

Focusing on equity ratchet as a practice, we study how foreign private equity (PE) investors interacted with local agents in the process of legitimation and legalization of foreign financing contract and governance in the Chinese PE industry, while it was underdeveloped. Based on seven cases in China, we propose a three-stage microprocess model of international institutional entrepreneurship in an emerging field with high ambiguity: framing a motivational vision to promote a new practice; early adoption by local nonmainstream agents who gain legitimacy from diverse sources of institutional logic; and dominant mainstream adopters seeking legal protection to sustain their benefits. Our theory extends the emerging discussion on the transfer of corporate governance and institutional entrepreneurship across borders.

Is Springboard FDI Strategy Effective? Evidence from Turkish Acquisitions

Emerging market MNEs often seek to advance their domestic competitive advantage through a springboard FDI strategy, which typically takes the form of an acquisition into a developed market (DM) for knowledge resources. We argue that if this strategy is effective and beneficial, then an emerging market parent firm would seek for higher ownership and control in its later domestic acquisitions. Such benefits would be higher if there are richer knowledge resources in a DM subsidiary or in a DM local network. Such benefits would also increase over time because of the accumulation of new knowledge back home. Using a sample of 1,303 complete domestic acquisitions made by 713 Turkish firms over the period of 1987-2013, including 196 deals involving a springboard FDI strategy, we have found highly supportive empirical evidence. It is found that holding a DM subsidiary by a Turkish parent firm is associated with 33.047% higher ownership in a later domestic acquisition. Both research and practical implications are discussed.

Book Review: Karl P. Sauvant and Geraldine Mcallister, with Wolfgang A. Maschek (eds.) Foreign Direct Investments from Emerging Markets: The Challenges Ahead

Over the last decade a significant amount of interest and, subsequently, a large literature has arisen on the topic of foreign direct investment undertaken by emerging market (EM) multinationals (MNEs). This volume is among the latest contributions to this literature. As stated in the preface, the volume shows that both academic researchers and policy makers are just beginning to come to grips with the most important analytical and policy issues that affect the world economy due to the rise of EM MNEs. The volume consists of contributions at the first Five-Diamond International Conference entitled Thinking Outward: Global Players from Emerging Markets, held in April 2008 at Columbia University, New York. Authors discuss issues relating to outward foreign direct investment (OFDI) from emerging markets such as new theory development, country-specific profiles of, for example, Brazil, Russia, India, China (BRIC), home-market policies, host-market policies, and future challenges, amongst others. Sauvant, K.P. and McAllister, G., with Maschek, W.A. (Eds.). (2010). Foreign direct investments from emerging markets: The challenges ahead. New York, NY: Palgrave MacMillan. (492 pages. ISBN #, 0-230-10021-X. US

Are OECD-Prescribed 'Good Corporate Governance Practices' Really Good in an Emerging Economy?

175.00.) European Management Journal, 30, 204-218. Special Issue for the Second Copenhagen Conference on “Emerging multinationals: Outward FDI from emerging and developing economies”