Don’t Dis­count the Com­pet­i­tive­ness of State-Owned Multi­na­tion­als

Business a.m. - - FRONT PAGE - Fe­lipe Mon­teiro Fe­lipe Mon­teiro is an Af­fil­i­ate Pro­fes­sor of Strat­egy at IN­SEAD. He is also the Aca­demic Di­rec­tor of the Global Tal­ent Com­pet­i­tive­ness In­dex. “This ar­ti­cle is re­pub­lished cour­tesy of IN­SEAD Knowl­edge(http://knowl­edge.in­sead.edu). Copy­rig

Don't Dis­count State-Owned ZINGY, THE LIT­TLE or­ange blob that rep­re­sents EDF En­ergy in the United King­dom, is not the kind of mar­ket­ing one would nec­es­sar­ily as­so­ciate with a state-owned firm. This level of me­dia so­phis­ti­ca­tion op­poses the stereo­typ­i­cal image of a non-per­cep­tive, bu­reau­cratic com­pany.

ZINGY, THE LIT TLE or­ange blob that rep­re­sents EDF En­ergy in the United King­dom, is not the kind of mar­ket­ing one would nec­es­sar­ily as­so­ciate with a state-owned firm. This level of me­dia so­phis­ti­ca­tion op­poses the stereo­typ­i­cal image of a non-per­cep­tive, bu­reau­cratic com­pany. The in­no­va­tive French-owned (84.94% as of 2017) com­pany is pre­par­ing for a nu­clear power plant to go on­line in the U.K. As a state-owned multi­na­tional (SOMNC), EDF is pub­licly traded and com­petes on an in­ter­na­tional level with other SOMNCs and pri­vate firms.

The per­cep­tion of a sta­te­owned en­ter­prise (SOE) is gen­er­ally one of two ex­tremes. For some it’s a slow mono­lithic hulk, loom­ing large over the eco­nomic land­scape. For oth­ers, it’s a steady, wel­com­ing and safe place to work.

A close look at global, pub­licly traded multi­na­tional cor­po­ra­tions with state own­er­ship has shown that the re­al­ity is far from th­ese ex­tremes. SOMNCs, like fam­ily or pri­vate firms, have ben­e­fits and draw­backs.

In a chap­ter of The Ox­ford Hand­book of Man­age­ment in Emerg­ing Mar­kets, my co-au­thors, Aldo Musac­chio and Ser­gio Laz­zarini, and I ex­am­ined the im­pli­ca­tions of state own­er­ship at the firm level, cre­at­ing a crossin­dus­try, cross-coun­try database of 477 large pub­licly traded state-owned MNCs in 66 coun­tries as well as a cor­re­spond­ing 431 pri­vate firms. Rather than fo­cus­ing di­rectly on one coun­try and its suc­cess or fail­ure in re­la­tion to state-owned busi­nesses, we wanted a global view and com­pared like-with-like firms – that is, pub­lic with pri­vate – wher­ever pos­si­ble.

Be­cause state-owned en­ter­prises op­er­ate with low lev­els of cap­i­tal­i­sa­tion, we used the re­turn on as­sets (ROA) ra­tio rather than ROI for com­par­i­son. To match pri­vate firms with SOMNCs,

we used firm-level vari­ables (like fixed cap­i­tal and lever­age) and coun­try-level in­di­ca­tors (ease of credit, mar­ket cap­i­tal­i­sa­tion, rule of law). Our sam­ple of large, pub­licly traded SOMNCs do not un­der­per­form com­pared to pri­vate firms. Nei­ther one nor the other had a sig­nif­i­cant, sys­tem­atic ad­van­tage.

SOMNCs around the world

Coun­tries with de­vel­oped economies have prom­i­nent SOMNCs, such as EDF in France or Equinor (formerly Sta­toil) in Nor­way. One mis­con­cep­tion about SOMNCs is that they are only found in de­vel­op­ing mar­kets, such as China or Brazil. SOMNCs are var­ied and in­ter­na­tional; in fact, a quar­ter of the For­tune 100 com­pa­nies in 2013 had some state own­er­ship. There are state-owned en­ter­prises that only op­er­ate in their own coun­try, but that type of or­gan­i­sa­tion was not ad­dressed in our study.

To mea­sure pen­e­tra­tion of state-owned en­ter­prises around the world, we cre­ated a coun­try in­dex by di­vid­ing the num­ber of SOEs by the pop­u­la­tion in mil­lions. As one of the world’s fastest grow­ing economies, China has a much larger num­ber of state-owned firms (17,000 per mil­lion peo­ple) than the next largest on our in­dex (Rus­sia, with 7,964 per mil­lion). And rather than ex­pand­ing state in­vest­ment in pri­vate firms, this year has seen a shift in Chi­nese pri­vate firms sell­ing shares to state-con­trolled en­ter­prises – re­vers­ing a 20year trend.

Our global study shows that SOMNCs can be com­pet­i­tive firms. Rather than see­ing SOMNCs as ei­ther safe or stag­nant, there are dif­fer­ent, nu­anced ways to ap­proach them. And man­agers at pri­vate firms need to keep this in mind to en­sure they are not lulled into a false sense of non-com­pet­i­tive se­cu­rity. In the past there was a per­cep­tion that as the state with­draws from cer­tain busi­ness, it with­draws com­pletely. When an econ­omy de­vel­ops and pri­vati­sa­tion con­tin­ues apace, there is no in­di­ca­tion that all sta­te­owned firms will dis­ap­pear as an econ­omy de­vel­ops.

OECD coun­tries, by and large, have al­ready been through a pri­vati­sa­tion process. To­tal state di­vesti­ture was not al­ways the goal of pri­vati­sa­tion. We see nu­ances in the way that state own­er­ship evolves in dif­fer­ent coun­tries. In many cases, the gov­ern­ment re­tains some own­er­ship. In­deed, SOMNCs in 2011 were val­ued at more than US$1 tril­lion in OECD coun­tries.

Swe­den, for ex­am­ple, wholly or par­tially owns 48 com­pa­nies in the coun­try; the gov­ern­ment’s ob­jec­tive is “for the com­pa­nies to gen­er­ate value”. In our database, the me­dian level of state ma­jor­ity own­er­ship is 71.2 per­cent and that of mi­nor­ity own­er­ship, 18.1 per­cent.

Im­por­tance of in­sti­tu­tions

In ad­di­tion to our com­par­isons of pri­vate and SOMNCs, we re­viewed the lit­er­a­ture on the dis­ad­van­tages and ad­van­tages of state own­er­ship.

One prom­i­nent draw­back of SOMNCs is the amount of power a gov­ern­ment may have over a firm’s strat­egy. If this power is dis­pro­por­tion­ate, it could im­pact the firm’s per­for­mance. If the coun­try’s po­lit­i­cal or eco­nomic in­sti­tu­tions are not ro­bust enough, mi­nor­ity or ma­jor­ity state own­er­ship of a com­pany leads to an agency prob­lem. Man­agers or politi­cians may put their own per­sonal gain ahead of that of the firm.

We re­fer to the idea of the grab­bing hand – the state raid­ing the en­ter­prise – but this is gen­er­ally not found in coun­tries that have strong po­lit­i­cal in­sti­tu­tions with checks and bal­ances, like OECD coun­tries. How­ever, in cer­tain emerg­ing mar­kets, in­sti­tu­tions may not be strong enough to pre­vent a high level of in­ter­fer­ence based on po­lit­i­cal af­fil­i­a­tion.

Pa­tient cap­i­tal and in­no­va­tion

One ad­van­tage of­ten as­so­ci­ated with state own­er­ship is a long-term pa­tient in­vestor men­tal­ity. The idea is that coun­tries do not have the same need for profit as pub­lic firms. Also, as money is in­vested in ar­eas the mar­ket is not in­ter­ested in, SOMNCs can spur in­no­va­tion.

One of the main ben­e­fits of multi­na­tion­als is their global in­no­va­tion ca­pa­bil­i­ties. In fu­ture re­search, we will ex­am­ine un­der which cir­cum­stances SOMNCs may cre­ate a fer­tile ground for new tech­nol­ogy.

SOMNCs are not the eco­nomic di­nosaurs they were once be­lieved to be. Rather than stereo­typ­i­cally equat­ing th­ese firms with eco­nomic lag­gards, man­agers at pri­vate firms need a more bal­anced view be­cause pub­licly traded SOMNCs may be their di­rect com­peti­tors.

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