Thanks but No Thanks StateOwned Multinationals from Emerging

Thanks but No Thanks: State-Owned Multinationals from Emerging Markets and Host Country Policies Alvaro CUERVO-CAZURRA Northeastern University a. cuervocazurra@neu. edu Copenhagen Business School October 12, 2018

Motivation and Research Question • October 2005, the state-owned port management firm Dubai Port World (DP World) acquired the British P&O, which managed six US ports, after approval by the British High Court and the US government’s Committee on Foreign Investment in the United States (CFIUS) • February 2006, Republican and Democratic politicians in the US Congress voiced security concerns and an opposition campaign in the media started, despite that a British firm was the previous manager, DP World operated independently, port workers were US citizens, and U. S. Customs and Border Protection was in charge of screening cargo. • December 2006, after attempts at addressing concerns DP World sold the management contracts to the US asset management AIG Global Investment Group, despite its lack of experience • (Beisecker, 2006) • • (c) Cuervo-Cazurra https: //www. youtube. com/watch? v=gm 3 ml. Ahcr 5 s https: //www. youtube. com/watch? v=lqmu. Ac. OU 8 h. U 2

Motivation and Research Question • Most countries develop policies to attract inward foreign direct investment (FDI) (Tavares et al. , 2016): reductions in taxes, subsidized investment, investment promotion agencies… • But investments by state-owned multinationals (SOMNCs) from emerging countries tend to be disliked or blocked (e. g. , DP World management of ports, CNOOC acquisition of SUNOCO…) • Tension between theoretical arguments and reality for some firms • Question: What is the impact on the internationalization of stateowned companies from emerging markets on host country government policy? (c) Cuervo-Cazurra 3

Identifying SOMNCs from Emerging Markets • Difficult to identify SOMNCs from emerging markets • 1. What is a SOMNC? Multiple levels of state ownership (and most are probably not multinationals) • How may SOEs are in Sweden? And how many in Germany? (c) Cuervo-Cazurra Source: PWC (2015) 4

Identifying SOMNCs from Emerging Markets • Difficult to identify SOMNCs from emerging markets • 2. No database of SOMNCs: OECD and selected countries Number of SOEs. Majority. Number of owned SOEs-All listed (2012) entities Australia (AUS) 15 0 Austria (AUT) 9 2 Belgium (BEL) 8 1 Canada (CAN) 47 0 Chile (CHL) 34 3 Czech Republic (CZE) 125 1 Denmark (DNK) 17 1 Estonia (EST) 57 0 Finland (FIN) 39 3 France (FRA) 48 2 Germany (DEU) 72 0 Greece (GRC) 52 5 Hungary (HUN) 371 1 Iceland (ISL) 37 0 Ireland (IRL) 24 0 Israel (ISR) 34 0 Italy (ITA) 17 7 Japan (JPN) 13 0 Korea (KOR) 57 8 Luxembourg (LUX) 34 0 Mexico (MEX) 69 0 (c) Cuervo-Cazurra Number of SOEs. Number of Value of SOEs-Majority. Statutory and SOE -owned non- quasiemployees- SOEs (USD listed entities corporations All bn)-All 5 10 49945 18. 3 6 1 74161 22. 1 7 0 88476 10. 2 0 47 86588 28. 3 7 24 48900 22. 2 89 35 140300 40. 3 10 6 22823 11. 9 30 27 25661 5. 4 34 2 84760 44. 2 25 21 781643 70. 3 71 1 349203 47 0 45258 12. 9 370 0 124924 6. 6 26 11 4737 5. 6 24 0 39582 31. 9 34 0 54959 48. 9 10 0 526911 226. 1 8 5 64173 339. 3 49 0 129235 200. 9 34 0 13118 n. a. 46 23 n. a. 83. 2 Netherlands (NLD) New Zealand (NZL) Norway (NOR) Poland (POL) Portugal (PRT) Slovak Republic (SVK) Slovenia (SVN) Spain (ESP) Sweden (SWE) Switzerland (CHE) Turkey (TUR) United Kingdom (GBR) United States (USA) China (CHN) India (IND) Indonesia (IDN) Russian Federation (RUS) South Africa (ZAF) Malaysia (MYS) United Arab Emirates (ARE) Viet Nam (VNM) Number of SOEs. Number of Majority. SOEs-All owned listed (2012) entities 26 0 18 4 45 3 326 6 82 0 73 0 39 4 53 1 54 0 4 1 34 8 24 1 19 2 147000 286 1097 68 141 16 1147 7 512 n. a. 57 n. a. 3239 14 Number of SOEs. Value of SOEs-Majority-Statutory SOE owned non- and quasi- employees- SOEs (USD listed entities corporations All bn)-All 26 0 50313 107. 2 12 2 33424 8. 1 25 17 221045 243. 7 295 25 159730 61. 6 31 51 146899 8. 0 37 36 n. a. 17. 3 35 0 52039 12. 6 44 8 95589 5. 5 51 3 135608 85. 6 1 2 101098 39. 7 21 5 170759 69. 8 11 7 397312 88. 0 1 16 599010 13. 5 n. a. 35947000 n. a. 111 n. a. 147. 0 17 n. a. 14305100 n. a. 1606400 116. 3 Source: OECD (2015) 5

Identifying SOMNCs from Emerging Markets • Difficult to identify SOMNCs from emerging markets • 2. No database of SOMNCs: We only know about partially owned SOMNCs (Fortune 500) (c) Cuervo-Cazurra Source: PWC (2015) 6

Identifying SOMNCs from Emerging Markets • Difficult to identify SOMNCs from emerging markets • 3. The list matters: Leading SOMNCs may be excluded (e. g. , oil and gas) Rank Forbes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 (c) Cuervo-Cazurra Company Country Exxon. Mobil Royal Dutch Shell China Petroleum & Chemical Total Gazprom Rosneft Petro. China Reliance Industries Luk. Oil PTT PCL Phillips 66 Valero Energy Repsol Oil & Natural Gas Indian Oil Marathon Petroleum Surgutneftegas BP Chevron SK Holdings USA Netherlands China France Russia China India Russia Thailand USA Spain India USA Russia UK USA South Korea Sales 2016, US$ Profits 2016, Assets 2016, Market Value billions US$ billions 197. 5 7. 8 330. 3 234. 8 4. 7 411. 3 255. 7 7 216. 7 128. 1 6. 2 231 91. 4 12. 1 265. 4 74. 9 2. 7 193. 2 214. 8 1. 2 344. 9 41. 8 4. 3 97. 9 74. 6 3. 1 83. 2 48. 7 2. 6 63. 4 71. 2 1. 5 51. 7 75. 7 2. 3 46. 8 38. 4 1. 9 68. 4 19. 9 2. 2 57. 7 54. 1 1. 7 37. 3 56 1. 2 44. 4 13. 9 7. 8 60. 9 183. 8 0. 115 263. 3 110. 5 -0. 497 260. 1 72. 1 0. 66 85. 3 2016, State owned 343. 2 228. 8 105. 1 Yes 128. 1 51. 8 Yes 62. 4 Yes 204. 5 Yes 71. 2 44. 6 32. 4 Yes 39. 9 29. 4 23. 8 37. 2 Yes 30 Yes 26. 4 18. 5 114. 7 206. 1 14. 7 Source: Forbes (2017) 7

Identifying SOMNCs from Emerging Markets • Difficult to identify SOMNCs from emerging markets • 2. The list matters: Leading SOMNCs may be excluded (e. g. , oil and gas) Rank 2016 (c) Cuervo-Cazurra 1 2 3 3 5 6 6 8 9 10 11 12 12 14 15 16 17 18 19 20 Company Saudi Aramco NIOC Exxon. Mobil CNPC PDV Rosneft BP Royal Dutch Shell Gazprom Total Chevron Sonatrach Petrobras KPC Adnoc Lukoil QP Pemex Petronas Sinopec Country Saudi Arabia Iran US China Venezuela Russia UK The Netherlands Russia France US Algeria Brazil Kuwait UAE Russia Qatar Mexico Malaysia China Revenue 2015 (US$ billion) State Ownership (%) 478. 0 100. 0 110. 0 100. 0 268. 9 428. 6 100. 0 128. 4 100. 0 91. 7 69. 5 222. 8 265. 0 106. 3 50. 0 212. 0 129. 9 76. 1 100. 0 130. 0 28. 7 251. 9 100. 0 60. 0 100. 0 144. 2 37. 0 100. 0 117. 5 100. 0 100. 7 100. 0 455. 5 70. 9 8 Source: Energy Intelligence (2017), Energy Business Review (2016)

Concerns on SOMNCs • Host concerns of SOMNCs investment • Managers concerns of SOEs • Preferential treatment and competitive • Conflict and interference distortions • Distortion of competition • Some on national security on infrastructure and strategic technology • No differences in motivation Concerns about foreign SOE investment (public officials, 2015) Low Somewhat Strong Maintain a level playing field 8 38 54 Competition enforcement 31 31 38 National security 50 17 33 Ad hoc political intervention 8 59 33 Public Interest 33 42 25 Insufficient Information 46 31 23 Corruption Risk 58 25 17 Net economic benefits 41 42 17 Protect national champions 50 41 8 Re-nationalisation 50 50 0 SOE Governance 42 58 0 (c) Cuervo-Cazurra Source: Sultan Balbuena (2016) Source: PWC (2015) 9

Concerns on SOMNCs from Emerging Markets • Separate two sources of concerns • State ownership: Non-business objectives, unfair advantage • Emerging markets: Hollowing out, competitive decline • Views on foreign investors Home country of foreign investor State Ownership of foreign investor Advanced Positive: Well behaved firms with good governance operating like private firms (I had no idea it was state-owned) (Those are not the investors we want) Most positive: Leading investors who will bring Negative: Companies in search of strategic assets that Private new technology and help upgrade local firms will hollow out local firms (We are delighted you are coming) (c) Cuervo-Cazurra Emerging Most negative: Rapacious companies in search of strategic assets that are poorly governed and will take advantage of the host country (You cannot trust them) 10

Concerns on SOMNCs from Emerging Markets • Concerns and policy responses Behavior Stateownership Concerns Characteristic Response Emerging Behavior Concerns market Response origin © Alvaro Cuervo-Cazurra Economic Non-business objectives National security Exclude Acquire capabilities Hollowing out Exclude Approach Political Multilevel agency Psychological Soft power Opaque behavior Monitor Weak governance Unethical behavior Monitor Trojan horse Control New competitors Status loss Control 11

Concerns on SOMNCs from Emerging Markets • State ownership Economic Difference in behavior Non-business objectives: in comparison to other State-owned firms created to multinationals address market imperfections and follow non -business objectives abroad Host country National security: Stategovernment concerns owned firms threaten over their behavior in national security in host the host country Suggested host Exclude: Exclude all foreign country government firms from national security policy responses interest © Alvaro Cuervo-Cazurra Approach Political Multilevel agency: Stateowned firms suffer multilevel agency problems and unclear governance of foreign investments Opaque behavior: Opacity in the ultimate decision making of state-owned firms Psychological Soft power: State-owned firms used for soft power abroad Monitor: Force disclosure of decision makers and monitor behavior Control: Identify friendship and control firms from unfriendly countries, reciprocity Trojan horse: Unfriendly government influence 12

Concerns on SOMNCs from Emerging Markets • Emerging market origin Difference in behavior in comparison to other multinationals Host country government concerns over their behavior in the host country Suggested host country government policy responses © Alvaro Cuervo-Cazurra Economic Acquire capabilities: Emerging market firms obtain foreign advanced technologies to compensate for weak innovation system Hollowing out: Acquisitions lead to hollowing out of technology of host country Approach Political Weak governance: Emerging market firms learn to operate with underdeveloped institutions Psychological New competitors: Emerging market firms rapid catch up, combining low-cost production and foreign hightechnology Unethical behavior: Emerging Status loss: Loss of relative market firms bring poor advance status of host governance standards to host country Exclude: Exclude particular Monitor: Require and monitor Control: Control expansion in technologies from acquisition/ high governance standards areas of future development transfer 13

Conclusions • SOMNCs from emerging economies: Political concerns over their foreign expansion • Challenge traditional view of policies welcoming and supporting inward FDI • Research challenges • Identification of SOMNCs: Variety of state influence on firms; multiple levels of government; most studies on partially owned SOEs; datasets exclude leading firms • Policy challenges • Separate state ownership from emerging market origin concerns and policies • State ownership concerns: • National security (non-business objectives) • Opacity (multilevel agency) • Trojan horse (soft power) • Emerging market concern • Hollowing out (acquire capabilities) • Unethical behavior (weak governance) • Status loss (new competitors) • Policy development • Ex-ante policies that clarify to achieve benefits of inward FDI, with reciprocity • Exclusion: National security and hollowing out Monitoring: Opaque behavior and unethical behavior (c) Cuervo-Cazurra • Control: Trojan horse and status loss 14

Thanks but No Thanks: State-Owned Multinationals from Emerging Markets and Host Country Policies Alvaro CUERVO-CAZURRA Northeastern University a. cuervocazurra@neu. edu

© Alvaro Cuervo-Cazurra 16

State Ownership: Concerns and Policies • Concerns: Objectives of government • Unfair advantages: Subsidies and support from government • National security: Foreign government obtains state secrets and influences domestic politics • Depends on relationship among governments, industry of operation, and location of investment • Policies: ex-ante rules (ownership neutrality) • Unfair advantages: Unclear claim, large private firms control home market and subsidize foreign operations • National security: Identify areas of concern and review investments for state and private firms (e. g. , domestic shipping in US (!), defense hardware and software, airlines…) (c) Cuervo-Cazurra 17

Emerging Market Origin: Concerns and policies • Concerns: Location of technologies • Loss of comparative advantage: Combination of low-cost production with high-tech advantages in home country • Hollowing out: Extraction and transfer of strategic technologies from target company to upgrade home country operation, no new investments in the host country • Policies: ex-ante rules (home origin neutrality) • Loss of comparative advantage: Unclear claim, maintain source of technology and benefit from innovation system of advanced economy • Strategic technologies: Define strategic areas or technologies and limit or constrain control (e. g. export constraints on nuclear material, advanced computers, high technology, …) (c) Cuervo-Cazurra 18

Concerns on SOMNCs • SOMNCs concerns on their foreign investments • Evaluation of investments and oversight • Exclusions from activities Concerns of SOEs operating abroad (public officials, 2015) Low Administrative and regulatory procedures Public procurement Transactions with subsidiaries Industry restrictions Trade/investment agreements Competition law and policies Investment review Institutional factors Negative media coverage Ideological/cultural/language barriers Somewhat 10 30 30 20 10 60 30 50 50 30 Strong 30 20 30 40 60 10 50 30 30 50 60 50 40 40 30 30 20 20 Source: Sultan Balbuena (2016) (c) Cuervo-Cazurra 19