THE INTERNATIONAL ACTIVITIES AND EFFECTS OF STATEOWNED ENTERPRISES

1
THE INTERNATIONAL ACTIVITIES AND EFFECTS OF
STATE-OWNED ENTERPRISES

• Daniel Shapiro
• Steven Globerman

2
Purpose

• To identify the nature and performance
  characteristics of state-owned enterprises
  (SOEs), and in particular to examine their
  international activities
• To discuss the degree to which these
  characteristics require a re-examination of
  Canadian public policy with respect to FDI by
  SOEs
• Motivated by recent rapid increase in FDI by SOEs
  from emerging markets, including China, Russia,
  India and Abu Dhabi

3
Overview

• The nature and extent of SOE activity in a global
  context
• Limited, and primarily relevant to developing
  countries
• The performance of SOEs
• Governance characteristics result in clearly
  inferior performance in developed economies, not
  so clear in emerging and transition markets
  (ETMs)
• SOEs in the context of the theory of FDI
• More likely to engage in asset seeking than asset
  exploitation
• May changes the nature of host country benefits
• The international operations of Chinese SOEs
• Canadian public policy possible directions

4
What is an SOE?

• SOEs are government-owned or government-controlled
  entities whose assets are held in a corporate
  form, and which generate the bulk of their
  revenues from the sale of goods and services

5
State Ownership Varies Across OECD Countries
6
State Ownership is Increasingly Centralized
7
How Important are SOEs?

• Despite considerable privatization activity in
  the 1980s and 1990s, the state remains a large
  owner of commercial enterprises in some OECD and
  non-OECD countries
• SOEs particularly important in emerging and
  transition markets such as China, Vietnam,
  Singapore, Malaysia, Czech Republic, Russia, UAE

8
SOEs From Emerging Markets Enter the Fortune
Global 500

• Gazprom now ranks 52
• China has 24 firms on the list, all SOEs
• India has 6 firms on the list, 4 of which are
  SOEs
• Brazil has 5 firms on the list, including
  Petrobras and CVRD
• Most of these firms are in mining and resources

9
SOEs Remain Minor Players on the International
Stage

• Although 14 of the worlds 100 largest
  non-financial MNEs are SOEs, 12 are from
  developed economies and most of these have
  minority and likely passive state owners (TOTAL
  of France) or operate in a purely commercial
  fashion (STATOIL of Norway)
• Few of the largest cross-border MAs involve SOEs
• South-North FDI is miniscule
• On the other hand, of the 100 largest
  non-financial MNEs from emerging markets 23 are
  SOEs, and many have large and active state-owners
• Heavily concentrated in natural resource
  industries

10
Sovereign Wealth Funds are Becoming More Important
11
Why SOEs?

• The standard economic justification is that SOEs
  can be socially efficient if they overcome market
  failures, and are superior to regulatory
  alternatives
• Public commitment problem state cannot credibly
  commit to refrain from confiscating private
  assets
• Private commitment problem regulators are
  captured by private firms
• Implication is that SOEs are more likely in
  countries with weak governance infrastructure

12
Governance of SOEs

• Goal ambiguity resulting from a mix of social,
  political and commercial objectives
• Ownership ambiguity resulting from complex mix
  of principals and agents
• Weak internal and external constraints on
  management

13
How Weak Governance Can Affect Performance

• Ambiguous goals leave room for managerial
  discretion
• Political goals dominate commercial goals
• State assets diverted to favoured elites
• State finance removes threat of bankruptcy
• Absence of take-over threat entrenches
  management
• Boards dominated by state appointees
• Implication is that SOEs are expected to be less
  efficient and in general under-perform relative
  to comparable private firms

14
Performance of SOEs in Developed Economies

• Evidence is relatively unambiguous
• SOEs in competitive environments under-perform
  comparable private firms (are less efficient and
  less profitable)
• Privatization results in improved performance
• Implication is that the remaining SOEs in
  developed countries either serve well-defined
  non-commercial public policy goals, or if their
  goals are commercial, they have learned to
  simulate private sector governance or are likely
  candidates for future privatization

15
Performance of SOEs in Emerging and Transition
Markets

• Evidence is relatively ambiguous
• SOEs in competitive environments do not always
  under-perform comparable private firms mixed
  enterprises in China sometimes do better
• Privatization results in improved performance
  only in some circumstances related to the nature
  of privatization
• In China, there is evidence that state ownership
  in a joint venture enhances innovative
  capabilities
• Implication is that the generally weak
  governance infrastructure in emerging markets can
  result in SOE performance that is not always
  weaker than comparable private sector firms. SOEs
  may continue to grow in some countries.

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What We Dont Know

• We dont know much about the international
  behaviour and performance of SOEs, in particular
  those from emerging and transition markets, nor
  do we know much about sovereign wealth funds
• Goldstein and Pananond (2007) find that the
  performance of Temasek (Singapore) did not
  out-perform the market over the past 10 years
• Shapiro el al (2007) find no evidence that SOEs
  under-performed in the global mining industry,
  but did find that CVRD adopted strategies very
  similar to the major companies
• Eller el al (2007) found that SOEs were less
  efficient than average in the global petroleum
  industry.

17
What FDI Theory Can Tell Us

• In the absence of empirical evidence, we have to
  rely on theory to think more carefully about the
  international role of SOEs
• We therefore examine the issue from the
  perspective of the eclectic theory of FDI, as
  well as from the perspective of the investment
  development path (IDP)

18
Eclectic Theory

• The Eclectic Theory suggests that successful
  MNEs exploit abroad firm-specific advantages
  (FSAs) developed at home
• We argue that MNEs from emerging markets (EMNEs),
  including SOEs, typically do not possess the
  FSAs required to compete in developed country
  markets they often engage in asset seeking
• Even state support has failed to produce a
  latecomer advantage
• Implication is that large and successful firms
  from emerging markets may focus on the home
  market or countries with similar institutions
  (South-South FDI)

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The Investment Development Path

• The IDP literature suggests that countries follow
  well-defined stages in terms of inward and
  outward FDI as they develop
• Higher levels of development are associated with
  higher levels of both inward and outward FDI
• At high income per capita, there is a strong
  positive correlation between OFDI and IFDI
• Same is not true at low levels of income per
  capita
• Implication is that other things equal one should
  not expect significant amounts of OFDI from
  emerging markets for some time

20
State Policy Can Accelerate the
Internationalization of EMNEs

• Many emerging markets have adopted explicit
  policies to encourage OFDI, often by SOEs
• Policy levers include state-subsidized loans, or
  credit guarantees, often through SWFs
• China in particular has encouraged SOEs to go
  abroad through its Go Global policy

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What Theory Predicts

• It will take some time before firms from emerging
  and transition markets will develop the FSAs
  required to compete in developed country markets
• Nation states may attempt to accelerate this
  process by subsidizing and supporting national
  champions
• FDI for the purposes of knowledge and resource
  acquisition will typically characterize the
  motives of EMNEs

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Implications for Host Country Benefits

• Spillover benefits from FDI may be reduced by
  asset seeking
• Governance and transparency problems associated
  with SOEs not only reduce spillover benefits but
  might also threaten suppliers, employees and
  lenders (system risk)
• Ownership pyramids may lead to tunneling
• Subsidized entry, particularly to achieve
  political goals, may threaten domestic
  competitors
• National security is threatened by SOEs acting as
  agents of another government
• Political objectives may include acquisition of
  critical natural resources resource hoarding

23
China

• Most OFDI from China is accounted for by listed
  SOEs, but Chinese OFDI represents less than 1 of
  global FDI stocks
• Most Chinese OFDI goes to Asia and Africa
  (South-South) 13 goes to North America
• However, MA activity by Chinese firms is
  accelerating
• Most MAs are in the resource sector (50
  globally, and in Canada)
• Stated intentions include both market-seeking and
  asset-seeking, but the former is largely
  South-South
• Some Chinese investments might be interpreted as
  political in nature (resource infrastructure in
  emerging markets), but the evidence is anecdotal

24
Policy Issues for Canada

• Public policy must balance the need to maintain
  Canadas attractiveness as a host country, with
  the need to maximize net benefits
• There are a number of policy instruments
  available to address these issues, both national
  and multi-national

25
Canadas FDI Regulatory Regime Is Seen To Be
Relatively Restrictive
Canada
?
Source Koyama and Golub (2006)
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Policy Considerations

• FDI by SOEs from developed countries is not
  likely to pose any substantial concern
• FDI by SOEs from emerging and transition markets
  is more problematic in principle
• SOEs are more prevalent, and more widely used as
  national champions
• SWFs create a relatively large pool of investment
  capital
• Motives are more likely a combination of asset
  seeking and political
• But the amounts are also currently small
• Institutional convergence may in future limit
  currently identified problems

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Policy Issues and Policy Remedies
28
Multilateral Issues

• Canada can also pursue policy objectives at the
  multinational level in particular national
  security
• Many countries have implemented or are
  considering a national security screen for FDI
• National security is for the most part undefined
  or often defined very broadly to include economic
  and social security
• National security therefore has the potential to
  result in a prisoners dilemma outcome whereby
  all countries choose a broad definition that
  restricts global capital flows
• This problem is unlikely to be fully resolved
  without some degree of multilateral agreement

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Conclusions

• There is no reason that the current net benefit
  test is incapable of dealing with the challenges
  produced by SOEs, particularly given the other
  policy instruments currently available
• There is some benefit to making the ICA more
  transparent, and this could include specific
  reference to governance problems associated with
  SOEs
• However, defining and observing best practice
  governance is not easy, and might best be
  approached at the international level
• National security is likely best treated directly
  by identifying relevant sectors and limiting FDI
  in those areas, possibly through multilateral
  agreements
• Subsidized entry requires further study, but is
  likely best left to multilateral agreements
• Potential problems related to natural resources
  can be addressed through the Competition Act