By J Katherine Bahr
Typically, a company with state ownership in an emerging country has a reasonable guarantee to key resources. But what happens when government’s priorities change? A new study in the Global Strategy Journal finds that in a newer democracy, where elections can bring major swings in policy measures, resources are far from assured at state-owned companies. That uncertainty means that even companies with indirect state ownership can find it particularly difficult to maintain their international interests during election years.
What does it mean for a company to have indirect state ownership?
The study describes indirect state ownership as institutional investment from entities like public banks or government-controlled pension funds. It’s usually a minority-share ownership and exists in democracies all around the world including Australia, Canada, France, and the United States. Indirect state ownership provides a fertile middle ground: less risk of political meddling than wholly owned state companies, but with increased access to government-controlled resources. Indirect state ownership can help companies access subsidized finances, privileged information, and diplomatic networks.
How do elections change government behavior toward state-owned organizations?
In emerging countries, companies with indirect state ownership function as a valuable policy tool aiming at increasing productivity and economic development, as well as at increasing the country’s bargaining power in the world. During an election year, the firm’s management might be pressured by state-owned minority shareholders to steer the company away from foreign investment in favor of local job creation. Or, the state shareholder can use its prerogative of a regulator to pressure the company to align with its political needs. The authors examined 693 firm-year observations at 89 Brazilian multinationals (19% of which have minority state indirect ownership) from 2000-2012 covering three political elections in Brazil to see how elections changed the international strategies for organizations with indirect state ownership. Compared to fully private multinationals, state indirect ownership organizations were:
- 20% less likely to expand abroad during election years
- 40% more likely to establish a service subsidiary over a manufacturing plant
- 10% more likely to establish a wholly owned subsidiary as opposed to a jointly owned one.
The authors posit that all these tendencies exhibit a hedging against vulnerabilities during election years and an incentive to invest abroad in projects that are of lower cost and risk now but offer growth opportunities in the future. Support service subsidiaries support existing business and operational risks are costs are usually lower than for manufacturing suppliers and they offer more strategic flexibility, including growth and abandonment options. Likewise, wholly owned subsidiaries are more likely to be managed in the best interests of the parent company.
What’s the best international strategy for businesses with indirect state investment?
First, managers should weigh the pros and cons of having the state as a minority shareholder. A link to the state provides access valuable resources, but it may constrain their autonomy, especially concerning international strategy decisions. The study also stresses that managers at indirectly state-owned multinationals need to integrate political elections into their long-term international strategic planning. This might include investing in resources and capabilities at home now that could facilitate internationalization later. If they can’t delay internationalization beyond an election year, they should favor flexibility. Though the study included only multinationals in Brazil, the political volatility and extreme differences between competing parties’ ideologies that the authors describe are on the rise in some developed democracies.
DeMello, R. B., Gama, M., Bertrand, O., & Betschinger, M. (2023). The effect of political elections at home on the internationalization of state-owned multinationals from emerging countries. Global Strategy Journal. https://onlinelibrary.wiley.com/doi/10.1002/gsj.1489.
J Katherine Bahr is a Knoxville-based freelance writer and content marketer with an advanced degree in creative writing and a decade working in publishing and marketing.