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Recent studies indicate that state-owned enterprises (SOEs) face heightened regulatory examination when procuring companies in foreign markets, leading to escalated acquisition expenses.
The research published in the Global Strategy Journal unveils the concept of a liability of stateness, wherein host country stakeholders perceive SOEs as less legitimate entities representing foreign political interests. Nonetheless, the study reveals that an SOE’s awareness of the social and political dynamics can help mitigate this liability.
Scholars Cheng Li from the University of Manitoba and Klaus Meyer from Western University highlight that ideological clashes emerge when SOEs pursue acquisitions in societies strongly rooted in market capitalism ideologies like the U.S. Due to the prevalent skepticism and disapproval towards state ownership in such environments, SOEs are subjected to 9% more regulatory scrutiny compared to privately-owned enterprises.
An illustrative instance of this phenomenon is the 2006 Dubai Ports World controversy, where the sale of port management businesses in six major U.S. seaports to a state-owned company from the United Arab Emirates faced severe opposition. Concerns over national port security led the U.S. House Committee on Appropriations to veto the deal, resulting in its abandonment by DP World.
Li and Meyer delved into the liability of stateness using a dataset of cross-border acquisitions involving acquirers from 44 economies and targets across 50 U.S. states. While the heightened regulatory scrutiny was evident, the researchers identified two strategies to counter this liability.
Firstly, foreign state-owned acquirers were less likely to attract additional scrutiny when acquiring firms through subsidiaries rather than parent organizations. This approach diminishes the visibility of state influence, thereby alleviating concerns regarding foreign government interference among regulators.
Secondly, SOEs can mitigate negative perceptions by demonstrating the acquisition’s positive impact on the local economy. By analyzing local employment statistics, the study reveals that SOE acquirers encounter less scrutiny in areas with high unemployment rates. During economic crises, local stakeholders prioritize economic benefits over ideological reservations.
For instance, the study highlights the 2010 acquisition of Nexteer Automotive in Saginaw, Michigan, by China’s Aviation Industry Corp—a prominent SOE. Despite facing competition from private enterprises, the Chinese firm successfully navigated the regulatory hurdles by emphasizing commitments to local employment in a region grappling with job losses.
Li emphasizes the importance for SOE managers to consider social and political factors alongside economic aspects when venturing into foreign territories. By creating job opportunities in regions with high unemployment rates, foreign SOEs can not only reduce regulatory scrutiny and associated costs but also establish a positive precedent for future business endeavors.
For further details, refer to:
Cheng Li et al, All politics starts local: Liability of stateness and subnational labor markets, Global Strategy Journal (2023).
Provided by Strategic Management Society
Citation:
State-owned enterprises experience greater regulatory scrutiny when acquiring firms abroad: Study (2024, February 14)
retrieved 14 February 2024
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