Faculty & Research
Faculty & Research
How Chinese State-owned Enterprises Can Build Bridges Across Economic Systems
From left: Prof Meyer, Prof Ding & Assistant Prof Zhang
When considering strategies for entering foreign markets, managers of state-owned enterprises (SOEs) should make achieving local legitimacy a guiding principle in order to work around the institutional pressures they will face abroad. This advice for globalizing SOEs is based on the research findings presented in the paper, “Overcoming Distrust in Host Societies: How state-owned enterprises adapt their foreign entries to institutional pressures” co-authored by CEIBS Professors Klaus E. Meyer, Yuan Ding and Hua Zhang.
Due to their association with the government in their home country, SOEs are subject to more complex institutional pressures than privately-owned enterprises (POEs) when going abroad. These pressures can arise from a combination of ideological conflicts, perceived national security threats, and claims of unfair competitive advantage due to support from their home country government.
In their study, the co-authors looked at a data-set that included the foreign subsidiaries of around 300 listed Chinese multi-national companies (MNCs) in 56 countries. The Chinese MNCs were both private and state-owned. The results illustrate how institutional pressures abroad have shaped the strategies of Chinese SOEs. Compared to POEs, the SOEs prefer to use acquisitions to enter foreign countries however they pursue this strategy much less often when entering markets with strong technological or institutional development, due to greater institutional pressures in those markets.
The findings also indicate that SOEs can build their legitimacy abroad by starting an entirely new venture in a foreign country – which is known as a Greenfield investment, or by taking lower equity stakes in the subsidiaries they are acquiring. These strategies provide an opportunity for a host country to get to know an unfamiliar type of foreign investor. Taking a lower equity stake in a subsidiary has the advantage of giving the SOE a chance to demonstrate their legitimacy with a lower investment risk. This path is similar to the evolution of private foreign investment in China, where in the 1980s private capital was considered illegitimate by key local players. Hampered by both regulations and what was considered as accepted practice, most foreign investment in China at that time went mainly into joint ventures. However over the next three decades host institutions evolved, private ownership gained legitimacy, and foreign investors increasingly take full ownership and even acquire local firms outright.
"For foreign companies, it is important to be trusted by their local partners, and in fact by the host society,” says Professor Meyer. “Chinese companies often start from a challenging position because people in Europe and North America understand little about Chinese businesses. They understand even less about the relationship between state and business in China. Therefore, Chinese companies need to be pro-active in engaging with their hosts abroad to build trust and gain legitimacy.”
At the same time, cooperative relationships abroad help SOEs to learn about international business. “Most SOEs still have very limited experience in international business, so a strategy of engaging more with stakeholders in host countries can also be a learning opportunity for an SOE to help them build up their local competencies and legitimacy,” Professor Meyer adds.
The paper will be published in the Journal of International Business Studies; the co-authors are CEIBS Professor of Strategy and International Business Klaus E Meyer, Professor of Accounting and Cathay Capital Chair in Accounting at CEIBS Yuan Ding, Professor Jing Li of Beedie School of Business, Simon Fraser University, and CEIBS Assistant Professor of Finance Hua Zhang.
