Legitimacy of State Ownership in Foreign Direct Investments by Emerging Economy Firms

Abstract

Purpose

This research seeks to understand the drivers of outward foreign direct investments (FDIs) by state-owned emerging economy firms, the characteristics of their overseas FDI projects and investment locations, and the effects of home and host institutions on the market entry strategies, taking into account the legitimacy of state ownership.

Design/methodology/approach

The discussion is based on a comprehensive review of conceptual and empirical literature, as well as case studies available from recognized journals in the field.

Findings

State-owned emerging economy firms pursue outward FDIs to respond to policy incentives of the home government and to reduce its political influence over the firm. FDI projects are often large and risky and have low business values. They often enter countries where state ownership is perceived as more legitimate while engaging in legitimacy-building activities in these countries. When their home country has a high level of institutional restrictions, they are less likely to use acquisitions or hold high levels of equity control in foreign subsidiaries. To strengthen local legitimacy, they often use greenfield investments or share equity control with local firms in foreign subsidiaries, particularly when the host country is endowed with strategic assets or when it has a high level of institutional restrictions. However, when having high levels of state ownership or strong political connections, they often commit a high level of resources and hold a high level of equity control in foreign subsidiaries.

Originality/value

The literature mostly investigates the FDI of firms that are structurally separate from the institutions. When the institutions are endogenous as presented in this research, their strategic choices are substantially influenced by noncommercial political motives and perception on their political image.

Citation

Kittilaksanawong, W. (2017), "Legitimacy of State Ownership in Foreign Direct Investments by Emerging Economy Firms", International Business Diplomacy (Advanced Series in Management, Vol. 18), Emerald Publishing Limited, Leeds, pp. 173-196. https://doi.org/10.1108/S1877-636120170000018006