Institutional compatibility and the internationalization of Chinese SOEs: The moderating role of home subnational institutions

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Institutional compatibility and the internationalization of Chinese SOEs: The moderating role of home subnational institutions ⁎

Jing Lia, , Jun Xiab, Daniel Shapiroa, Zhouyu Linc a

Beedie School of Business, Simon Fraser University, 8888 University Drive, Burnaby, British Columbia, V5A 1S6, Canada Jindal School of Management, University of Texas at Dallas, 800 West Campbell Rd, Richardson, TX 75080, United States c Management School, Jinan University, 601 Huangpu Avenue West, Guangzhou, China b

A R T I C L E I N F O

A B S T R A C T

Keywords: State-owned enterprise Outward foreign direct investment Coercive pressure Normative support Mimetic influence Institutional theory Subnational institutions

This study investigates the outward foreign direct investment (OFDI) of state-owned enterprises (SOEs) through the lens of the mechanism of institutional compatibility. Drawing on institutional theory, we argue that institutional compatibility (thus legitimacy) at home and institutional incompatibility (thus lack of legitimacy) abroad reduce SOEs’ OFDI activities. However, we also argue that home-country subnational factors (coercive, normative, and mimetic forces) provide a potentially offsetting effect. Using a sample of publicly listed Chinese firms, we find that coercive and mimetic forces generated from home subnational institutions reduce the negative effect of state ownership on OFDI activity.

1. Introduction Why do state-owned enterprises (SOEs) invest abroad, given that they both enjoy privileged status at home and face legitimacy barriers overseas (Cuervo-Cazurra, Inkpen, Musacchio, & Ramaswamy, 2014)? Scholars have argued that focusing on home-country institutional conditions is one of the important ways to address the question and advance our understanding of the international expansion of SOEs (Cuervo-Cazurra, 2011; Estrin, Meyer, Nielsen, & Nielsen, 2016; Hobdari, Gammeltoft, Li, & Meyer, 2017). However, the theoretical mechanisms underlying the role of home-country institutions are not fully defined. In this study, we advance this literature by proposing an institutional perspective on SOEs that employs the idea of institutional compatibility as a defining feature of their legitimacy and by extending that perspective to the subnational level. Rooted in institutional theory, the concept of institutional compatibility refers to the analysis of the relationship between the institutional context in which firms operate and the extent to which their practices are viewed as appropriate in that institutional environment (Xia, Boal, & Delios, 2009). Compatibility or incompatibility between firm practices and home-country institutional conditions can affect a firm’s OFDI activities. For example, OFDI has been viewed as an escape response to the incompatibility (misalignment) between the two (Witt & Lewin, 2007). However, we argue that SOEs are inherently more compatible with their home political systems than their private counterparts and

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thus enjoy higher levels of legitimacy at home and this in turn limits their need or desire to escape. On the other hand, SOEs face greater legitimacy hurdles in host countries, notably those that emphasize a free-market economy and the rule of law (Cui & Jiang, 2012; Globerman & Shapiro, 2009; Li, Xia, & Lin, 2017; Meyer, Ding, Li, & Zhang, 2014). Thus, we argue that domestic (home) institutional compatibility and foreign (host) institutional incompatibility make SOEs more inward looking, resulting in less-frequent investment overseas relative to private firms.1 However, SOEs do invest abroad and we therefore propose a mechanism that moderates the negative effects of state ownership on OFDI frequency. We propose that subnational institutional forces at home act as important boundary conditions. Applying institutional theory (DiMaggio & Powell, 1983; Scott, 1995), we explore the moderating effects of coercive, normative, and mimetic forces at the subnational level. Coercive pressures emanate from a firm’s home resource dependence and the resulting constraints on its behavior; normative pressures stem from the influence and expectations of professionalism; and mimetic pressures are created because uncertainty can be reduced by mimicking the practices of other firms in the same field (DiMaggio & Powell, 1983). We develop three subnational constructs (development of market institutions, OFDI associations, and peer SOEs) to capture the three forces. We argue that these forces reduce SOEs’ domestic compatibility and/or foreign incompatibility, thus reducing the negative effect of state ownership on OFDI frequency. Our results based on a

Corresponding author. E-mail addresses: [email protected] (J. Li), [email protected] (J. Xia), [email protected] (D. Shapiro), [email protected] (Z. Lin). The frequency of OFDI activities here refers to the number of foreign subsidiaries established by an emerging market firm.

https://doi.org/10.1016/j.jwb.2018.02.002 Received 30 January 2017; Received in revised form 31 January 2018; Accepted 4 February 2018 1090-9516/ © 2018 Published by Elsevier Inc.

Please cite this article as: Li, J., Journal of World Business (2018), https://doi.org/10.1016/j.jwb.2018.02.002

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sample of publicly listed firms in China largely support our arguments. Our study makes two primary contributions to the international business literature. First, we contribute to the growing literature on SOE internationalization (e.g., Cuervo-Cazurra et al., 2014; Estrin et al., 2016; Li, Cui, & Lu, 2014; Meyer et al., 2014; Pan et al., 2014) by identifying an important mechanism (institutional compatibility) from institutional theory to explain the overseas investment behavior of SOEs. There are other theories to explain SOE internationalization and they arrive at conflicting views regarding the OFDI potential of SOEs. For example, a resource-based view suggests that state ownership may provide an SOE with important resources that facilitates firms’ internationalization activities, while an agency perspective suggests that SOEs are too inefficient to succeed abroad (Cuervo-Cazurra et al., 2014). The goal of our study is not to combine/reconcile the different theoretical perspectives but rather to suggest that future research should carefully consider the relevance of institutional theory and in particular the argument that legitimacy at home and lack of legitimacy overseas make SOEs focus less on overseas (than domestic) markets. Second, we contribute to institutional theory by examining more systematically how subnational institutional factors at home affect OFDI from a large market with various and substantial subnational differences. Prior studies have largely focused on the impact of national-level home or host institutions (Cui & Jiang, 2012; Delios & Henisz, 2003; Globerman & Shapiro, 2003; Henisz & Zelner, 2001; Meyer, Estrin, Bhaumik, & Peng, 2009; Wang, Hong, Kafouros, & Wright, 2012) or national difference between home and host institutions (Berry, Guillén, & Zhou, 2010; Kostova, 1999; Tihanyi, Griffith, & Russell, 2005). However, subnational institutions matter in attracting inward FDI or stimulating outward FDI (Chan, Makino, & Isobe, 2010; Chen, Li, & Shapiro, 2015; Meyer & Nguyen, 2005; Sun, Peng, Lee & Tan, 2015). Our study extends this line of inquiry by examining how market institutional development, OFDI associations, and peer SOEs at the subnational level represent important sources of institutional forces that can alter SOEs’ degree of institutional compatibility at home and overseas, thus affecting SOEs’ OFDI activities.

2.1. State ownership and overseas investments SOEs are fundamentally different from private firms in terms of objectives, resource access, and corporate strategies. SOEs may follow a “state logic” in their investment behavior such that their decisions reflect in various degrees political objectives set by the government (Zhou, Gao, & Zhao, 2017). This logic is typically different from the “market logic” followed by private firms (Shapiro & Globerman, 2012). Specifically, SOEs are both economic and political agents of the government, and their relationship with the government involves a reciprocal exchange, whereby the government can provide resources and other support, and the state-owned firm provides services of value to the government (Sun, Mellahi, Wright, & Xu, 2015). From this political perspective, SOEs are more compatible with, and embedded in, home institutions than are private firms and thus possess certain home advantages (Cuervo-Cazurra et al., 2014), which, we suggest, leads to critical differences between the two groups in terms of their outward investment behavior. First, the home advantages of SOEs reduce their incentives or lower the pressure to conduct frequent overseas investments. As the home government relies on SOEs to achieve its domestic political, social, and economic goals such as employment and social stability, it is also inclined to protect and support SOEs through favorable resource allocation and public policy designs (Musacchio & Lazzarini, 2014; Pan et al., 2014; Sun, Mellahi, & Thun, 2010). In addition, SOEs are also less likely to be influenced by political and economic risk at home, as the government has incentives to protect them from adverse policy changes or exposure to economic risks (e.g., threat from competitors). Accordingly, SOEs’ incentives to “escape” from their home institutions and to seek better institutions overseas are much lower than those of private firms (Cuervo-Cazurra & Ramamurti, 2017; Witt & Lewin, 2007). Thus, SOEs benefit from domestic protection from the impact of market and political threat, which may limit their incentives to respond to market opportunities, particularly those in international markets. Second, SOEs may face extra legitimacy barriers when investing overseas (Globerman & Shapiro, 2009; Li, Xia et al., 2017; Meyer et al., 2014). SOEs are sometimes considered less legitimate investors than their private counterparts by host country stakeholders, with concerns including whether SOEs pursue political instead of economic interests, together with concerns regarding the transparency and independence of SOEs in their decision making (Cuervo-Cazurra et al., 2014; Globerman & Shapiro, 2009). There is evidence to suggest that SOEs face greater legitimacy barriers in host countries that promote a market economy and rule of law and that are rich in technological resources (Meyer et al., 2014). In the context of cross-border mergers and acquisitions, studies show that SOEs are less likely to complete their acquisitions (Zhang, Zhou, & Ebbers, 2011) or take longer to complete an acquisition (Li, Xia et al., 2017). The above arguments, taken together, suggest that, relative to private firms, SOEs are in general more compatible with home institutions and less compatible with host institutions. As a result, SOEs enjoy higher legitimacy at home but lower legitimacy abroad than do private firms, leading SOEs to be more “inward looking” in their investment decisions. Although previous studies suggest, based on the resourcebased view, that SOEs may possess more resources that could facilitate their overseas investments (Cuervo-Cazurra et al., 2014), our arguments on institutional compatibility and legitimacy suggest that SOEs are more inclined to stay home than go overseas, irrespective of their resources. Thus, we expect SOEs to establish fewer foreign subsidiaries than their private counterparts. Stated formally, we offer the following hypothesis:

2. Theory and hypothesis development Institutional theory (DiMaggio & Powell, 1983; Scott, 1995) has been widely used in the international business literature to understand differences in firm behavior under various home and host institutional pressures (Kostova, Roth, & Dacin, 2008; Yiu & Makino, 2002). From this perspective, an emerging stream of study has focused on the internationalization of SOEs as reflecting norms and values associated with state ownership and home-country political institutions (Cui & Jiang, 2012; Meyer et al., 2014; Wang et al., 2012; Xia, Ma, Lu, & Yiu, 2014). One strand of research suggests that firms escape from their home country to seek more compatible institutional environments abroad (Witt & Lewin, 2007); another suggests that the OFDI activities of firms, including SOEs, are subject to host country institutional influences because institutional conditions vary across countries (Brouthers, 2002; Chan, Makino, & Isobe, 2010; Cheng & Chow-Ming, 2008; Li & Ding, 2013; Meyer et al., 2009). These institutional differences create barriers for foreign firms to overcome in the institutionally distant host countries. Our study bridges these two streams of research by focusing on institutional compatibility and subnational institutions, as applied to SOEs. Accordingly, we argue that because of their different levels of compatibility with home institutions, SOEs and private firms have different propensities regarding their OFDI activities. Specifically, we extend the literature to argue that, although SOEs tend to invest less frequently overseas than do private firms, home subnational institutions (coercive, normative, and mimetic) can serve as contingencies that alter the relationship.

Hypothesis 1. There is a negative relationship between state ownership of a firm and the number of subsidiaries it establishes in foreign countries.

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in resource allocation and is less inclined to provide favorable access to resources to a specific group of firms. Under these conditions, coercive pressure from the market is strong, and even SOEs must also rely on markets to access resources through competitive mechanisms. Thus, in regions with a strong market economy and relatively limited government intervention, we expect the institutional compatibility between state ownership and home institutions to become less salient, implying that SOEs will enjoy fewer home-region-privileged benefits. As a result, SOEs tend to be more responsive to market forces, including overseas investment opportunities. Therefore, we expect strong subnational (regional) market-supporting institutions in the home country to represent an important institutional force that reduces SOEs’ institutional compatibility at home and generates pressures on them to invest abroad.

2.2. Home subnational institutional forces as moderators Scholars have argued that institutional pressures or institutional support may drive the adoption and diffusion of an organizational practice (Haunschild & Miner, 1997; Oliver, 1991; Scott, 1995). Our study extends this idea to explain the conditions under which SOEs are more likely to adopt a certain practice—that is, engaging in crossborder activities. Although institutional pressure or support impacts the internationalization of all firms in an emerging economy (Cheng & Chow-Ming, 2008; Li & Ding, 2013), SOEs and private firms may not be equally affected, because they face different levels of institutional compatibility at home and overseas, as we articulated above. We focus on how home subnational institutions stimulate SOEs to invest overseas by reducing the negative effects of either/both home institutional compatibility and host institutional incompatibility. A large emerging economy like China typically has substantial heterogeneity in institutional environments across regions (Chan et al., 2010; Chen et al., 2015; Shi, Sun, & Peng, 2012; Sun, Peng et al., 2015). Such institutional variation arises for multiple reasons, including divergence in legal and regulatory enforcement, market institution building, quality of administrative personnel, government efficiency, and local business norms and cultures (Estrin & Prevezer, 2011; Fan, Wang, & Zhu, 2011). We argue that these variations generate different levels of coercive, normative, and mimetic pressures on firms (DiMaggio & Powell, 1983). Specifically, development of market institutions, OFDI associations, and peer SOEs represent important subnational institutional forces that can moderate the direct effect of state ownership on firms’ OFDI activities.2 We therefore argue that the negative effect of state ownership is weaker in regions with stronger institutional pressures that either reduce SOEs’ institutional compatibility at home or provide them with means to overcome host country incompatibility problems.

Hypothesis 2. The presence of strong regional market institutions in the home country will reduce the negative direct effect of state ownership on the number of subsidiaries a firm establishes in foreign countries.

2.4. Normative support as a moderator Practice adoption can also be the result of influences from professional and established norms (DiMaggio & Powell, 1983; Heugens & Lander, 2009). Professional endorsements from social networks are an important means of normative support (Zimmerman & Zeitz, 2002). Specifically, professional business associations may generate a favorable and distinctive endorsement and discourse to a given activity. Firms that adopt the activities endorsed through normative support can acquire legitimacy (Deephouse, 1996). Moreover, Rao (1994, 31) noted that “the very act of endorsement embeds an organization in a status hierarchy and thereby builds the reputation of an organization.” Thus, endorsements by professional associations not only reduce the degree of uncertainty surrounding an organizational activity but also enhance the social status of the firm that adopts the activity. In addition, professional associations often serve as information centers for their members, acting as bridges for information exchange and sharing (Aplin & Hegarty, 1980; Greenwood, Suddaby, & Hinings, 2002). Building on these insights, we suggest that regional OFDI associations in the home country can reduce the negative effect of state ownership on OFDI activities in two ways—through endorsement and networking. First, regional OFDI associations are likely to play an important role in developing the logic and norms of OFDI by promoting its value through education, conferences, and training, and by endorsing OFDI-related campaigns to increase firms’ awareness of international opportunities, thereby enhancing the normative legitimacy of OFDI. This new norm promoted by OFDI associations may alleviate SOEs’ inward-looking tendency at home, reduce the perception of incompatibility overseas, and thus increase their willingness to internationalize or “show the national flag” in the global market. Second, regional OFDI associations may facilitate information exchange among member firms through networking, which helps SOEs either avoid investing in countries with significant legitimacy concerns or develop strategies to deal with such concerns.3 For example, associations may provide relevant forums or conferences for firms attempting to invest abroad to understand the challenges of foreign investment environments and exchange ideas in addressing the challenges. Thus, regional OFDI associations can help SOEs overcome challenges associated with institutional

2.3. Coercive pressure as a moderator Coercive pressures emanate from the reliance of an organization on external resources. Resource dependence (Salancik & Pfeffer, 1978) is therefore an important dimension of coercive pressure (DiMaggio & Powell, 1983; Heugens & Lander, 2009). Thus, the degree to which firms adopt a practice such as OFDI is likely to rely on resource dependencies that drive the adoption. As we argued earlier, SOEs and the government are interdependent. As such, SOEs are more likely than private firms to rely on governments for access to the resources, including market access and protection from competition. However, in the transition from a planned economy to a market-oriented economy, the state’s resource allocation and distribution systems gradually give way to market mechanisms (Peng & Heath, 1996). Thus, SOEs become less reliant on state support systems, more market oriented, and less bound to state policy. Moreover, some regions are more advanced than others in their development of market institutions, which fosters market competition. For example, the coastal areas in China are much better developed than the inland areas in terms of the role of market forces (relative to government forces) in directing resource allocation (Fan et al., 2011; World Bank, 2006). In regions characterized by lagging levels of transition, market-supporting institutions may be slow to emerge, and SOEs may continue to rely on government systems. In contrast, in regions where market principles dominate, the government plays a less important role

3 The interviews conducted by one of the authors with an executive who was CEO of a subsidiary of a large Chinese SOE confirm the important role played by OFDI associations. The interviewed executive was often contacted by OFDI associations to share knowledge and experience in conferences they organized. He provided an example of the China Council for the Promotion of International Trade (CCPIT) that has subsidiary organizations in each province of China. CCPIT establishes business networks among member firms in each province, organizes conferences, and promotes knowledge sharing, all of which may facilitate firms’ OFDI.

2

Interviews conducted by one of the authors with an executive who was CEO of a subsidiary of a large Chinese SOE confirm the important role played by subnational institutional factors. The executive suggested that OFDI associations and peer SOEs in the same province or municipalities generate most influence on focal SOEs; it would be difficult to imagine the behavior of SOEs in Zhejiang province influences that of SOEs in Inner Mongolia (a different province) because market conditions and managerial mindsets are very different.

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(unless otherwise specified), and thus the observation window for our dependent variable is from 2001 to 2014, and that for our explanatory variables is from 2000 to 2013.

incompatibility in overseas markets. Taken together, we expect: Hypothesis 3. The presence of regional OFDI associations in the home country will reduce the negative direct effect of state ownership on the number of subsidiaries a firm establishes in foreign countries.

3.2. Variables and measurements 3.2.1. Dependent variable Our dependent variable is measured by a firm’s number of foreign subsidiaries established in a specific year. This information on foreign subsidiaries is from the OFDI database maintained by the Ministry of Commerce of China. OFDI frequency has often been used in prior studies to capture firms’ internationalization activities (e.g., Xia, Boal, & Delios, 2009; Xia et al., 2014).

2.5. Mimetic force as a moderator Mimetic pressures often drive firms with similar attributes to imitate each other under conditions of uncertainty (DiMaggio & Powell, 1983; Scott, 1995), including in the context of international expansion (Guillen, 2002; Henisz & Delios, 2001; Lu, 2002). In regions where more SOEs have expanded abroad, SOEs have more opportunities to observe peers and undertake new international initiatives using the mechanism of imitation (Wang et al., 2012). Therefore, we expect international expansion of other SOEs in the past in a given region to increase the cognitive legitimacy of such moves in the eyes of focal SOEs and relevant government agencies and to reduce procedural and outcome uncertainties. Thus, OFDI activities of other SOEs reduce the tendency of focal SOEs to focus on the home market and at the same time stimulate them to undertake OFDI. Moreover, mimicry of their peers allows SOEs to overcome the challenges associated with institutional incompatibility and thus change their disadvantaged position in the foreign market. Imitation allows SOEs to gather information and adopt investment strategies (e.g., entry timing, country choice, and entry mode choice) and organizational practices acceptable in the foreign market (Henisz & Delios, 2001). For example, to enhance legitimacy, SOEs may choose greenfield investments (versus acquisitions) or lower equity shares in acquired subsidiaries (Meyer et al., 2014). Mimicry, then, can help SOEs overcome legitimacy barriers in foreign countries and increase their chance of success when expanding in the international market. We thus offer the following hypothesis:

3.2.2. Independent and moderating variables Following prior studies (Xia et al., 2014), we used state ownership of the top ten shareholders to capture state ownership (information is available for only the top ten shareholders in the Wind database). In a robustness check, we also used the share percentage of the largest SOE shareholder to proxy state ownership and obtained similar results. The state ownership information is from the Wind database. To capture coercive institutions in a province, we used strength of market forces in a province, drawing on information from the NERI index of marketization of China’s Provinces 2011 report (Fan et al., 2011). Specifically, our measure is based on the government-market relationship index, a composite measure that includes five dimensions (the extent to which the market dominates the allocation of economic resources, the extent to which a province reduces burdens of taxes and fees for farmers, the extent to which the government limits its interference in firms, the extent to which the government reduces extra-tax burdens for firms, and the extent to which government agencies reduce their employment). This measure includes data ending in 2009. Because the relative degrees of marketization of provinces are stable over the years, we followed the method in Zhang, Marquis, and Qiao (2016) in using the 2009 values to proxy values for 2010 to 2013. To capture normative institutions, we used OFDI associations in a province, measured by the number of nongovernment professional associations that promote international investment and trade in a province. This information is from the economy-wide census dataset, maintained by the National Bureau of Statistics of China, which contains all profit and nonprofit organizations in China (Chang & Wu, 2014). To capture mimetic institutions, we used industry-province OFDI frequency of other SOEs, measured by the number of foreign subsidies established by other SOEs located in the same province and industry of the focal firm in the preceding five years (Guillen, 2002; Henisz & Delios, 2001). In the supplementary analysis, we also used OFDI frequency of other SOEs in a province—that is, the number of foreign subsidiaries established by other SOEs located in the same province as the focal firm (regardless of industries) in the preceding five years. These measures are based on OFDI information from the OFDI database and location and industry information from the Wind database.

Hypothesis 4. Prior OFDI experience of other SOEs in the same home region will reduce the negative direct effect of state ownership on the number of subsidiaries a firm establishes in foreign countries. 3. Methods 3.1. Data and sample Our sample draws from two main sources: the Wind database that covers financial information on all Chinese publicly listed companies, and the OFDI database maintained by China’s Ministry of Commerce, which provides systematic information on all Chinese firms’ OFDI activities from 1990 to 2014. Both databases have been used in studies of cross-border investment strategies by Chinese firms (e.g., Meyer et al., 2014; Wang et al., 2012; Xia et al., 2014). We first obtained information on the number of foreign subsidiaries by firm and year, regardless of host economy. We excluded Hong Kong as an investment destination because of concerns that some Chinese firms’ investments in Hong Kong are round tripping in nature and are not real outward foreign investments. We also excluded investments in Macau and tax havens such as the Cayman Islands. We then merged the foreign subsidiary information with the financial information collected from the Wind database according to firm and year. In addition, we focused on foreign subsidiaries established after 2000, the year after which Chinese outward investment took off. As a result, our sample contains 2585 firms with 1454 foreign subsidiaries in total from 2001 to 2014, among which 713 foreign subsidiaries belonged to SOEs. Our total number of observations is 22,238, of which 22% are in processing, 21% in services, 18% in equipment manufacturing, 13% in electronic equipment, 11% in trades, 8% in extraction, 4% in consumables, and 3% in textiles and apparel (Amburgey & Miner, 1992). To deal with potential endogeneity concerns, we lagged all time-varying explanatory variables by one year

3.2.3. Control variables We included a series of firm, industry, and year variables that potentially affect firms’ OFDI activities. First, we controlled for firm size (log of total assets), firm age (the difference between the year of OFDI activities and the founding year of a firm) to reflect a firm’s inertia (Guillen, 2002), firm patents (number of granted patents) to capture a firm’s innovation capability, return on assets (ratio of net income to total assets) to capture a firm’s profitability, debt equity ratio (ratio of total debt to equity), and export ratio (ratio of export value to total sales). We expect firms that are larger, more innovative, more profitable, and with higher levels of exports to conduct more overseas investment activities, but older firms and firms facing more financial risks to be less likely to do so. Firm-level information is from the Wind database, except that 4

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firm patents are from the State Intellectual Property Office of China, which contains detailed information of each patent filing (such as the date of filing and the name of the applicant) since 1985. At the firm level, we also included a central SOE dummy (coded as 1 if the firm is owned by the central government and as 0 otherwise) because central SOEs may be under greater pressure by the Chinese government to go abroad to secure resources. At the industry level, we controlled for industry concentration, using a Herfindahl index (i.e., the sum of the square of the market shares of all companies in an industry) to capture the level of competition. A less concentrated or a more competitive domestic market might push firms to go overseas to seek new opportunities. Data for this measure are based on information in the Wind dataset. At the regional level, we included two dummies: eastern region (coded as 1 for companies located in Beijing, Guangdong, Hainan, Hebei, Jiangsu, Liaoning, Shandong, Shanghai, Tianjin, Fujian, Zhejiang, and as 0 otherwise) and central region (coded as 1 for companies located in Anhui, Heilongjiang, Hubei, Hunan, Jilin, Jiangxi, Henan, Shanxi and as 0 otherwise) to capture potential differences in OFDI policies. The western region includes the remaining provinces and works as the comparison group. Although local governments rarely publish their OFDI policies (these policies are often considered to help “hollow out” domestic capital and are thus not popular), studies find some preliminary evidence to show that governments in the eastern region are more proactive in promoting OFDI than the central and western regions (Davies, 2013). Finally, we included industry and year dummies to control for other industry and temporal effects.

Table 2 reports the ZINB estimation results. Model 1 includes the control variables only. Model 2 adds the main effect of state ownership. Models 3, 4, and 5 examine the interaction effects of state ownership and the three subnational institutional variables, respectively. Model 6 is the full model that contains all predictors and interaction terms. The results are highly consistent across the models. Some results on control variables are noteworthy. Younger and larger firms with more patents and exports do, as expected, carry out more OFDI activities. Those operating in highly concentrated industries or located in regions with a strong market economy also tend to conduct OFDI more frequently. Hypothesis 1 suggests that state ownership of a firm has a negative effect on OFDI frequency. Results in Model 2 show that state ownership has a significant, negative effect on the number of foreign subsidiaries (b = −1.124; p < 0.01), providing support for Hypothesis 1. Hypothesis 2 suggests that the stronger the market forces in a province, the weaker will be the negative effect of state ownership on firms’ OFDI frequency. Results in Model 3 show that state ownership × strength of market forces in a province has a significant, positive effect on the number of OFDI activities (b = 0.647, p < 0.01), suggesting that market forces in a province represent an important moderating factor that reduces the negative consequences of state ownership for firms’ number of subsidiaries overseas. We adopted the method developed by Wiersema and Bowen (2009) to address the nonlinearity issue when interpreting the interactive estimations. With respect to the interaction between state ownership and strength of market forces in a province, Fig. 1a illustrates that about 89% of observations have a positive sign, and Fig. 1b shows that 58.6% of observations are significant at least at the 90% level (with a z-score of 1.67 or beyond), and only 2.2% of observations have negative and significant marginal effects. Taken together, these results support Hypothesis 2. Hypothesis 3 suggests that the more professional associations are in a province, the weaker will be the negative effect of state ownership on firms’ number of overseas subsidiaries. Results in Model 4 show that state ownership × OFDI associations in a province has a positive, significant effect. However, we do not find consistent results in Model 6, the full model when other interactions are controlled for. Hypothesis 3 is not fully supported. The inconsistent findings between the separate and full models may be due to the relatively high correlation of the measures for normative and coercive forces (0.46), and we thus use an alternative measure for coercive forces in the supplementary tests. Hypothesis 4 suggests that the more OFDI activities that other SOEs in the same province conduct, the weaker will be the negative effect of state ownership on firms’ number of foreign subsidiaries. Results in Model 5 show that state ownership × industry-province OFDI frequency of other SOEs has a significant, positive effect on the number of OFDI activities (b = 0.343; p < 0.05). We further drew Fig. 2 to illustrate the interaction effect, based on the results in Model 5. Fig. 2a shows that about 95.9% of observations have a positive sign, and Fig. 2b shows that about 30% of observations are significant at least at the 90% level, and only three observations have negative and significant marginal effects. Thus, these results show qualified support for Hypothesis 4.

3.3. Estimation methods Because our dependent variable is a count variable with many zero values, ordinary count models, such as Poisson and negative binomial, may not be appropriate because they would simply discard these observations, leading to the loss of observations and underestimation of firms’ propensity to conduct OFDI activities (Long & Freese, 2006). A zero-inflated negative binomial (ZINB) or zero-inflated Poisson (ZIP) model, on the other hand, performs a two-step analysis, first estimating the probability of conducting OFDI activity in a logit model and then predicting the number of foreign subsidiaries using a negative binomial (or Poisson) model. We conducted the following tests to examine which model was appropriate. First, we estimated the over-dispersion coefficient, alpha, and found that the alpha coefficient is significantly different from zero (Model 6: Chi2 = 372.33; p = 0.00 for the likelihood ratio test of alpha = 0), indicating that a ZINB model is more appropriate than a ZIP model for our estimation (Long & Freese, 2006). Second, we conducted Vuong tests to compare a ZINB model with a negative binomial model. The significance of z-test (Model 6: z = 7.23; p = 0.00) suggests that a ZINB model is better than an ordinary negative binomial model (Long & Freese, 2006). In the ZINB models, we used a firm’s number of foreign subsidiaries in the preceding five years and its return on assets as the zero-inflation parameters, which influence the likelihood that a firm has above-zero OFDI frequency in the present year (Xia et al., 2014). Finally, we estimated all models using firm-level clustered standard errors that account for within-firm correlations.

4.1. Supplementary analysis We conducted multiple supplementary analyses to ensure the robustness of our findings. First, we considered the type of investment destination (host country) and the possibility that the nature of the host country affects the relationship between state ownership and OFDI frequency4 (Luo & Zhang, 2016). Specifically, we considered the possibility that the negative impact of state ownership on overseas investment frequency is more salient when firms target developed economies (versus developing economies) as investment destinations. This is because SOEs, including Chinese SOEs, face stronger legitimacy

4. Results Table 1 presents the correlation matrix and descriptive statistics for the variables used in this study. The results of the variable inflation factor (VIF) test show that all VIF values are below 5.50 with an average of 2.05, indicating that multicollinearity is not a problem in our regression analysis (Chatterjee, Hadi, & Price, 2000). We mean-centered all the variables that were involved in the interaction terms to reduce potential multicollinearity problems between the main and interaction variables (Aiken & West, 1991).

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We would like to thank the editor for the suggestion.

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Table 1 Descriptive statistics and correlation matrix.

1 2 3 4

5 6 7 8 9 10 11 12 13 14 15

Variables

1

2

3

Number of foreign subsidiaries State ownership Strength of market forces in a province Industry-province OFDI frequency of other SOEs OFDI associations in a province Patents Return on assets Firm size Firm age Debt equity ratio Export ratio Central SOE Industry concentration Eastern region Central region Mean S.D.

1

4

5

6

7

8

9

10

11

12

13

−0.016 0.042

1 −0.227

1

0.079

−0.237

0.269

1

0.041

−0.216

0.457

0.165

1

0.135 0.028 0.115 −0.005 0.004 0.068 0.030 −0.001

−0.165 −0.065 0.213 −0.195 0.032 −0.120 0.332 0.017

0.179 0.084 0.117 0.224 0.013 0.102 −0.026 −0.035

0.435 0.039 0.078 0.182 −0.058 0.167 0.032 −0.291

0.174 0.089 0.040 0.077 −0.015 0.128 −0.080 −0.035

1 0.103 0.182 0.046 −0.055 0.193 0.038 −0.095

1 0.047 −0.033 −0.149 0.038 −0.027 0.050

1 0.155 0.282 −0.032 0.201 −0.009

1 0.097 −0.007 −0.048 −0.027

1 −0.045 0.047 0.003

1 −0.024 −0.094

1 0.026

1

0.030 −0.013 0.058 0.469

−0.128 0.087 0.285 0.255

0.530 −0.214 8.499 1.597

0.026 0.005 2.521 1.823

0.597 −0.297 32.791 24.208

0.069 −0.011 0.677 1.214

0.077 −0.034 0.037 0.063

0.078 −0.027 21.561 1.338

0.031 −0.046 12.024 6.006

0.011 −0.016 1.399 3.013

0.081 −0.044 0.034 0.139

−0.012 0.012 0.164 0.37

0.012 −0.030 0.076 0.136

14

15

1 −0.645 0.636 0.481

1 0.192 0.394

Notes: N = 22,238; correlations with absolute values no less than 0.01 are significant at 5%.

(Li, Meyer et al., 2017). Our empirical findings, as summarized in Table 4, support some of these arguments. Consistent with our expectation, the results do not show a significant difference between central and local SOEs in terms of the number of foreign subsidiaries they established overseas. However, we found that central SOEs establish more subsidiaries in developing countries than do local SOEs (Model 11: b = 0.529; p < 0.05). Interestingly, they have lower OFDI frequency in developed countries than local SOEs (Model 10: b = −0.390; p < 0.10), possibly indicating that central SOEs face more legitimacy barriers than local SOEs in developed countries. Third, we explored alternative measures of state ownership by using the shareholding of the largest shareholder as an alternative measure of state ownership in a firm. At least in China, a government entity has a controlling influence even as a minority shareholder if it is the largest shareholder (Meyer et al., 2014). We thus assigned a value of zero to state ownership if the largest shareholder of the company was not an SOE, or else used the share percentage of the largest SOE shareholder to proxy state ownership. We found similar empirical results using this alternative measure, bolstering confidence in our main findings. Fourth, we used the average of the two dimensions in the marketization index (i.e., the extent to which the government reduces extratax burdens for firms and the extent to which government agencies reduce their employment) as an alternative measure for strength of market forces in a province. The correlation between this new measure and OFDI associations is 0.24. We found that both normative (OFDI associations) and coercive forces (strength of market forces) have the expected moderating effects in the full sample. Thus, the lack of significance of the moderating effect of OFDI associations in the full sample of Table 2 is in fact due to the high correlation between the measures. Finally, to deal with the potential concern that our industry-specific mimetic force may capture mainly an industry effect, we developed two additional measures to capture the behavior of other SOEs. Both measures are not specific to industries. The first one is OFDI frequency (i.e., number of foreign subsidiaries) of other SOEs located in the same province as the focal firm in the preceding five years. The second one is OFDI frequency of central SOEs (excluding the focal firm, if applicable) in the same province, measured by the number of foreign subsidiaries established by central SOEs in the preceding five years. To the extent

challenges in developed than in developing economies. In developed countries, SOEs are often seen as being incompatible with the free market and possibly a threat to national security when natural resources or technologies are involved (Globerman & Shapiro, 2009). Li, Xia et al. (2017), for example, showed that foreign SOEs take longer to complete acquisition proposals in the United States and have a lower likelihood of completing acquisitions involving target firms with more R&D resources. Developing economies, on the other hand, tend to value investments by Chinese SOEs more because they are often accompanied by loans and infrastructure support by the Chinese government (Li, Newenham-Kahindi, Shapiro, & Chen, 2013; Shapiro, Vecino, & Li, 2017). Thus, we expect the institutional incompatibility to be more salient when SOEs aim to invest in developed economies rather than in developing economies. However, our findings in Table 3 show that state ownership has a significant, negative impact on the number of foreign subsidiaries in both the developed and developing economies equations (b = −1.118, p < 0.01 in Model 7; b = −0.87, p < 0.10 in Model 8). Thus, regardless of the host destination, the effect of institutional compatibility at home dominates, which discourages SOEs from investing more frequently overseas. We further examined differences between SOEs owned by central and local governments. It may be argued that central SOEs are equipped with more financial, human, and diplomatic resources than local SOEs because ties with central governments represent stronger political connections and bring in more resources (Li, Meyer, Zhang, & Ding, 2017). Thus, from the resource-based view, we expect central SOEs to establish more subsidiaries overseas than local SOEs. On the other hand, central SOEs may also face more legitimacy barriers overseas because they are more likely to be viewed as political agents of national governments and pose threats to national security in a host country. On balance, it is unclear whether central SOEs will engage in more OFDI activities than local SOEs. Second, to tease out the difference between central and local SOEs in their OFDI activities, we also considered investment destinations. We expect central SOEs to conduct more OFDI activities than local SOEs in developing countries (as compared with developed countries) because the central Chinese government has amicable diplomatic connections with many developing countries and central SOEs can better leverage these connections to secure investment opportunities than local SOEs 6

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Table 2 ZINB model results predicting the number of subsidiaries in foreign countries. Variables

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6

Patents

0.101** (0.047) 0.750 (1.814) 0.412*** (0.070) −0.022* (0.012) −0.080** (0.035) −0.060 (0.183) 1.107*** (0.265) 2.026*** (0.669) −0.181 (0.255) 0.014 (0.235) 0.169*** (0.063) 0.004 (0.003) 0.053 (0.105)

0.089** (0.045) −0.036 (1.728) 0.475*** (0.078) −0.024** (0.012) −0.083** (0.035) 0.225 (0.190) 1.042*** (0.260) 1.874*** (0.648) −0.159 (0.262) 0.037 (0.241) 0.137** (0.058) 0.003 (0.003) 0.035 (0.104) −1.124*** (0.373)

0.089** (0.045) 0.073 (1.761) 0.456*** (0.075) −0.027** (0.013) −0.083** (0.035) 0.189 (0.194) 1.087*** (0.258) 1.982*** (0.650) −0.172 (0.264) 0.049 (0.245) 0.186*** (0.056) 0.004 (0.003) 0.030 (0.101) −1.365*** (0.373) 0.647*** (0.173)

0.093** (0.045) −0.123 (1.710) 0.470*** (0.075) −0.027** (0.012) −0.084** (0.035) 0.234 (0.189) 1.065*** (0.253) 1.890*** (0.642) −0.107 (0.257) 0.054 (0.238) 0.152*** (0.056) 0.005 (0.003) 0.032 (0.102) −1.262*** (0.362)

0.092** (0.044) −0.001 (1.741) 0.451*** (0.075) −0.025** (0.012) −0.086** (0.036) 0.181 (0.200) 1.057*** (0.257) 1.798*** (0.638) −0.190 (0.266) 0.008 (0.246) 0.128** (0.058) 0.003 (0.003) 0.057 (0.101) −1.410*** (0.389)

0.094** (0.045) −0.007 (1.742) 0.440*** (0.071) −0.029** (0.013) −0.085** (0.035) 0.175 (0.200) 1.099*** (0.253) 1.899*** (0.638) −0.150 (0.260) 0.038 (0.244) 0.175*** (0.055) 0.004 (0.003) 0.049 (0.099) −1.613*** (0.394) 0.424** (0.170) 0.019 (0.012) 0.272* (0.150) −11.359*** (1.519) 774 21464 22238 −3496.509 249.297 2 29.940***

Return on assets Firm size Firm age Debt equity ratio Central SOE Export ratio Industry concentration Eastern region Central region Strength of market forces in a province OFDI associations in a province Industry-province OFDI frequency of other SOEs State ownership State ownership × Strength of market forces in a province

0.028** (0.012)

State ownership × OFDI associations in a province

−12.199*** (1.666) 774 21464 22238 −3511.479 243.889

−11.759*** (1.580) 774 21464 22238 −3502.919 252.385

−12.038*** (1.596) 774 21464 22238 −3505.725 269.208

0.343** (0.149) −11.623*** (1.603) 774 21464 22238 −3504.096 231.755

1 25.220***

2 17.120***

2 11.510***

2 14.770***

State ownership × Industry-province OFDI frequency of other SOEs −10.741*** (1.461) 774 21464 22238 −3524.088 234.852

Constant Nonzero observations Zero observations Total observations Log Likelihood Chi2 Improvement in model fit test Comparing with Model Chi2 test of Δ LogL

2 -4

-.05

-2

0

Z_statistic

.1 0

.05

Z_statistic

.15

4

.2

Notes: Robust standard errors in parentheses. Industry and year dummies included. *** p < 0.01. ** p < 0.05. * p < 0.10.

0

2

4

6

8

0

Predicted OFDI Frequency

2 4 Predicted OFDI Frequency

Fig. 1. (a, b). The marginal effect and significance of the interaction between state ownership and strengthen of market forces in a province.

7

6

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1

-2

0

-1

0

Z_statistic .05

Z_statistic

2

.1

3

J. Li et al.

0

2

4

6

8

0

Predicted OFDI Frequency

1

2

3

4

5

Predicted OFDI Frequency

Fig. 2. (a, b). The marginal effect and significance of the interaction between state ownership and industry-province OFDI frequency of other SOEs.

that central SOEs enjoy the highest level of legitimacy in the eyes of home governments, other SOEs may imitate their behavior in outward investment activities. We found that OFDI frequency of other SOEs in the same region has a significant, positive moderating effect on the relationship between state ownership and the number of foreign subsidiaries. However, OFDI frequency of central SOEs in the same region does not have such an effect. Thus, SOEs do imitate their peers in the same province regardless of industry but do not necessarily imitate central SOEs in the same province. Central SOEs are a special privileged group in China, different from local SOEs in strategic objectives and institutional resources; thus, central SOEs are not necessarily the benchmark group for an average SOE to imitate. All supplementary test results are available upon request.

Table 3 ZINB model results predicting the number of foreign subsidiaries in developed and developing economies. Variables

Model 7 Number of foreign subsidiaries in developed economies

Model 8 Number of foreign subsidiaries in developing economies

Patents

0.061 (0.048) −1.026 (2.316) 0.361*** (0.056) −0.031*** (0.011) −0.146** (0.062) −0.393* (0.211) 1.002*** (0.326) 1.946*** (0.628) 0.285 (0.298) 0.258 (0.279) 0.061

0.076 (0.056) 1.077 (2.290) 0.467*** (0.089) −0.010 (0.017) −0.057 (0.045) 0.592*** (0.227) 0.874** (0.364) 0.980 (0.852) −0.583** (0.287) −0.190 (0.274) 0.191**

(0.070) −0.001

(0.077) 0.008

(0.003) 0.217**

(0.005) −0.106

(0.089) −1.118*** (0.350) 774 21464 22238 −10.486*** (1.306) −2024.444 152.699***

(0.116) −0.870* (0.511) 774 21464 22238 −12.225*** (1.949) −2109.984 231.170***

Return on assets Firm size Firm age Debt equity ratio Central SOE Export ratio Industry concentration Eastern region Central region Strength of market forces in a province OFDI associations in a province Industry-province OFDI frequency of other SOEs State ownership Nonzero observations Zero observations Total observations Constant Log Likelihood Chi2

5. Discussion and conclusion Drawing on institutional theory, we develop a theoretical framework to explain how home institutions influence the degree to which SOEs invest abroad. Using OFDI frequency information by Chinese firms over a fourteen-year period, we find that, SOEs tend to invest overseas less frequently, but this tendency is substantially reduced when they are located in regions with strong coercive and mimetic pressures. Below, we discuss our contributions to the literature on SOE internationalization and on institutions and OFDI. 5.1. SOE internationalization There are multiple theoretical perspectives to explain SOE internationalization, some of which lead to the conclusion that SOEs are advantaged in internationalization activities (Cuervo-Cazurra et al., 2014). For example, from a transaction cost perspective, SOEs tend to tolerate more risk and may therefore engage in risky overseas investments. From a resource-based view, state ownership is an important resource that enables large OFDI projects. There is also evidence to suggest that state support can help SOEs deal with hostile institutional environments and that SOEs are less sensitive to host expropriation risks in making foreign investment decisions (Duanmu, 2014; Henrik, Asmund, & Helge, 2011; Pan et al., 2014). However, studies rooted in agency theory emphasize the liabilities of SOEs (Shapiro & Globerman, 2012; Musacchio, Lazzarini, & Aguilera, 2015). These theoretical approaches typically focus on the governance problems associated with state ownership, including the lack of managerial oversight, limited incentives, and the pursuit of complex social and political goals that may limit profitability and efficiency and thereby the ability to invest abroad (Musacchio et al., 2015).

Notes: Robust standard errors in parentheses. Industry and year dummies included. *** p < 0.01. ** p < 0.05. * p < 0.10.

8

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home country (Morck, Yeung, & Zhao, 2008), which limits their incentive to go abroad. Of course, escape investments can take several forms (Cuervo-Cazurra & Ramamurti, 2017), and future research should consider whether SOEs move abroad for other escape-related reasons (notably to offset technological deficiencies in the home market) and the degree to which our results for China can extend to other countries. Our findings suggest the importance of investigating different measures of OFDI activities to gain a fuller understanding of the difference in OFDI behavior between SOEs and private firms. We suspect that home-government support affects mainly the scale of overseas investments by SOEs but not necessarily the frequency of their investments (the main consideration of our study). SOEs are often in strategic resource sectors (e.g., natural resources) that, by nature, require large investments in overseas deals. The home government tends to encourage and sponsor such signature investments that are crucial to national competitiveness. Thus, it is not surprising that Wang et al. (2012) found a positive relationship between SOEs and their overseas investment scale. In our case, however, we have found that SOEs conduct overseas investments less frequently than their private counterparts, suggesting that their relatively higher legitimacy enjoyed at home may shape their decisions on the number of subsidiaries established in foreign markets. The supplementary test in our study also indicates the necessity to treat central and local SOEs as different groups of firms when investigating their OFDI behavior (Li et al., 2014). We have found that central SOEs invest more frequently than local SOEs in developing countries, possibly for both political and economic reasons. The Chinese government often uses loans and infrastructure support to build good relations with host governments in developing countries, likely benefiting investment by central SOEs more than by local SOEs (Li et al., 2013; Shapiro et al., 2017). On the other hand, central SOEs may face more legitimacy barriers in developed countries than local SOEs, leading to lower investment frequency in those countries. All of this suggests that future research should not only distinguish between central and local SOEs but should also work to better understand exactly the ways in which the Chinese government influences OFDI behavior of SOEs.

Table 4 ZINB model results predicting the number of foreign subsidiaries by central and local SOEs in the sample of SOEs. Variables

Model 9 Number of foreign subsidiaries in all economies

Model 10 Number of foreign subsidiaries in developed economies

Model 11 Number of foreign subsidiaries in developing economies

Patents

0.035 (0.064) 1.909 (2.464) 0.386*** (0.084) −0.001 (0.018) −0.021 (0.046) 0.204 (0.183) 1.872*** (0.690) 2.162***

0.122* (0.073) 3.584 (2.839) 0.325*** (0.085) −0.031* (0.018) −0.062 (0.048) −0.390* (0.217) 0.461 (0.647) 2.135**

−0.029 (0.072) 1.519 (2.933) 0.376*** (0.091) 0.017 (0.024) −0.016 (0.051) 0.529** (0.226) 2.063*** (0.797) 1.530

(0.764) −0.329 (0.342) 0.013 (0.311) 0.160**

(0.926) −0.191 (0.401) −0.127 (0.364) 0.113

(1.070) −0.606 (0.413) 0.042 (0.385) 0.203*

(0.079) 0.009*

(0.104) 0.001

(0.105) 0.016**

(0.005) −0.054

(0.005) 0.107

(0.007) −0.182

(0.133) −0.231 (0.606) −11.400*** (1.852) 324

(0.139) −0.572 (0.569) −10.572*** (2.056) 324

(0.157) 0.049 (0.814) −11.522*** (2.100) 324

12467 12791 −1512.599 194.002***

12467 12791 −758.198 73.662***

12467 12791 −1015.587 1275.032***

Return on assets Firm size Firm age Debt equity ratio Central SOE Export ratio Industry concentration Eastern region Central region Strength of market forces in a province OFDI associations in a province Industry-province OFDI frequency of other SOEs State ownership Constant Nonzero observations Zero observations Total observations Log Likelihood Chi2

5.2. Home institutions and OFDI Our study also contributes to the international business literature by providing a systematic analysis of the role of home institutions in supporting the internationalization of SOEs. There have been several recent calls for more research on how home-country context shapes firms’ overseas investment activities (Cuervo-Cazurra, 2011; Estrin et al., 2016; Hobdari et al., 2017; Ramamurti, 2012). Several recent studies have examined the impact of home institutions. Cui and Jiang (2012), for example, investigated only one dimension of home institutions—that is, home-country regulatory restrictions. Although Wang et al. (2012) emphasized coercive, normative, and mimetic pressures within firms because of government involvement, they did not examine how institutional pressures external to firms moderate the relationship between state ownership and firms’ overseas investment activities. From this viewpoint, the use of an institutional theory approach allows us to consider the subnational institutional context that may account for the rise of state-owned multinationals, particularly from emerging markets (Musacchio et al., 2015). Our study examines three external institutional pressures, all measured at the subnational level. First, we suggest that factors that shift dependence from the government to dependence on the market may become a coercive force that encourages SOEs to expand abroad. Consistent with these arguments, we have found that coercive forces in a region arising from the development of strong market institutions reduce the negative effect of state ownership on firms’ OFDI frequency. In general, it is argued that the transition to stronger market

Notes: Robust standard errors in parentheses. Industry and year dummies included. *** p < 0.01. ** p < 0.05. * p < 0.10.

We depart from these studies by taking an institutional theory approach to examine the differences between SOEs and private firms in terms of their OFDI behavior. We argue that home-country institutional compatibility and host-country legitimacy barriers lead SOEs to focus relatively more on domestic markets and relatively less on international activities. Our results indicate that, although SOEs may have resource advantages relative to private firms that could facilitate OFDI activities, SOEs’ legitimacy at home and lack of legitimacy overseas provide strong incentives to focus more on domestic markets and invest less frequently overseas. Although the institutional escape argument, in which a firm moves abroad to gain the protection of stronger institutions (Witt & Lewin, 2007) and to reduce the power of government influence (CuervoCazurra et al., 2014), may explain the international expansion of some private and state-owned firms in other countries, our results suggest that Chinese SOEs are embedded in their home institutions and are not inclined to escape from them. Indeed, our results are more supportive of the view that Chinese SOEs typically enjoy preferential treatment in the 9

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international investment behavior is strongly shaped by their homeregion institutional environments. A market economy with limited government intervention likely contributes to SOEs’ international competitiveness even in the absence of subsidies. Firms in such an environment tend to be more responsive to market opportunities and develop stronger firm-specific advantages. Thus, if government policy is to promote outward investments and develop national champions, the government may consider reducing its direct intervention into the economy and instead focus on developing institutions that support the OFDI activity of all firms.

competition will facilitate the internationalization of emerging market firms for several reasons ranging from asset seeking to market seeking (Cuervo-Cazurra, 2015). While our results suggest that this may also be true of SOEs, more research is required to determine the exact mechanisms that define how SOEs respond to market-oriented reforms. We have also found that SOEs are more likely to mimic the investment behavior of other SOEs in the same region in their international investment activities. Firms in uncertain environments often pursue established practices by selectively mimicking the practices of peer firms (DiMaggio & Powell, 1983). OFDI by an emerging market firm is typically risky, and this is perhaps truer of SOEs because of the legitimacy issues they face abroad. Although we have found evidence suggestive of the fact that by following the expansion experience of other SOEs a firm can learn to better position itself in foreign markets, we have not specified exactly how this learning occurs. This remains a fruitful area for future research. In contrast, we have not found consistent evidence that supports a significant role for normative forces, as measured by professional OFDI associations in a home region, in facilitating SOEs’ overseas investments. Most Chinese firms are at an early stage of internationalization and thus their regional network may not lead to significant benefits for nearby firms. Although professional associations may provide endorsements and networks that can help firms to access needed resources (Zimmerman & Zeitz, 2002), the usefulness of regional OFDI associations remains largely unknown as the literature has seldom examined this variable. We encourage more future studies to investigate the mechanisms through which OFDI associations have an impact on firms’ overseas investments. Our study also shows the importance of investigating institutional pressures at subnational levels. Large emerging markets are often characterised by institutional heterogeneity across regions (Chan et al., 2010; Chen et al., 2015; Meyer & Nguyen, 2005; Shi et al., 2012). SOEs located in different regions are under different levels of institutional pressures and influence, and thus exhibit different patterns of international investment behavior. Because of this, investigating the impact of institutions only at the national level can conceal the heterogeneity among SOEs in their OFDI activities. In fact, subnational differences are salient not only in large emerging markets such as China, Russia, India, Indonesia, and Brazil, but also in smaller emerging markets such as Vietnam and Mexico, and in large developed markets such as the United States and Canada. Among other things, the importance of subnational institutions suggests that future research should carefully consider the nature and measurement of institutional distance between countries (Xu & Shenkar, 2002). Finally, our results suggest that, when subnational institutions supporting OFDI are “strong,” the outward investment profiles of Chinese SOEs become more like those of private firms. This finding is logically consistent with the results of Estrin et al. (2016), who found that, for a cross-national sample of SOEs and privately owned enterprises (POEs), stronger national institutions are associated with convergent international strategies for SOEs and POEs. Our results suggest that a similar dynamic process occurs within a country.

5.4. Limitations and future research In terms of the debate over the nature of EMNEs (Cuervo-Cazurra & Ramamurti, 2014), our results do point to the importance of governance in understanding the performance of emerging market firms (Hoskisson, Wright, Filatotchev, & Peng, 2013). State ownership is an important element of governance in some emerging markets, though its importance varies from country to country (Estrin et al., 2016), and it is therefore critical to understand more fully the implications of institutional incompatibility and the ways in which it can be overcome by SOEs across different institutional contexts. We note that our results hold only relative to domestic private firms in China. Future research may well benefit from comparing the nature and performance of EMNEs with different governance (ownership) characteristics (Musacchio et al., 2015), which we suggest will require more crossnational studies. While SOEs exist around the world, they are most prominent in China (PWC, 2015), and it remains unclear whether results based on Chinese SOEs can be extended to other countries. In particular, it is not clear whether the subnational effects that we observe in China can be found in other markets. We also encourage future research to investigate in greater depth the heterogeneity among SOEs that affects their OFDI activities. Besides the distinction between central and local SOEs, one can also consider differences in firm capabilities. For example, SOEs with nationwide operations may develop capabilities to deal with diversified institutional environments and be more equipped to invest overseas. In addition, as our study focuses on examining OFDI frequency of SOEs, future research should also examine OFDI scale of SOEs to gain a more complete understanding of SOEs’ overseas investment behavior. Moreover, understanding SOE managers’ incentives may well be important, and agency theory will be useful in this regard. While SOE managers may be keen to make overseas investments to please their political principals, thus achieving career advancement in the public sector, they may also see overseas investments as highly risky, and therefore to be avoided. Thus, more studies are necessary to fully examine how incentive structures and risk preferences affect SOE managers’ decisions to invest overseas. Finally, investigating the decision-making processes of SOEs may also be an important and fruitful future research area. On the one hand, SOEs may go through a lengthy approval process before making a foreign investment compared with private firms, which may reduce SOEs’ overseas investment frequency. On the other hand, it may be relatively easier and faster for SOEs to raise capital in financial markets to sponsor their overseas investments. We encourage future studies to compare the decision-making processes in SOEs and private firms that affect their overseas investment behavior.

5.3. Managerial relevance and policy implications Our findings have important implications for SOEs and governments. SOEs should fully understand their advantages and disadvantages that facilitate or hinder their international investment activities. As they face strong legitimacy barriers overseas, they can learn from peer companies’ overseas investment behavior to improve their rate of success abroad. They may also consider relocating into provinces with advanced market development and limited government intervention. This, however, might be challenging in some emerging markets where regional barriers are strong and cross-region mobility of firms is low. In terms of government policy, our results suggest that SOEs’

Acknowledgements We thank JWB guest editors Alvaro Cuervo-Cazurra, Yadong Luo, and Ravi Ramamurti and two anonymous reviewers for their insightful comments and suggestions. We also appreciate the helpful comments on earlier versions of this work from seminar participants at the JWB special issue conference at Northeastern University in 2017. Financial support is gratefully appreciated by Jing Li from the Social Sciences and 10

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Humanities Research Council of Canada and the Canada Research Chair programs, by Jun Xia from the National Natural Science Foundation of China (Project number: 71421002), and by Zhouyu Lin from the National Natural Science Foundation of China (Project number: 71502036) and Jinan University Management School Funding Program (Project number: GY18013).

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