Three Essays on Multinational Transparency and the State Open Access
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This dissertation is comprised of three essays examining the common theme “multinational transparency and the state.” Understanding multinational transparency is complicated by the fact that multinational enterprises (MNEs) operate across a variety of countries and institutional environments. To overcome this challenge, I study voluntary disclosures at the project-level, which I term investment transparency. MNE investment disclosures have received little attention in the International Business (IB) literature. While the importance of investments to firm strategy has been highlighted in the scholarly literatures in finance (Maksimovic & Phillips, 2001; Maksimovic, Phillips & Prabhala, 2011) and strategic management (Capron, Mitchel and Swaminathan, 2001), transparency in investments is underrepresented in research on voluntary disclosure. Investment disclosures are worthy of examination. Multinational investment faces demands for transparency from multiple stakeholders, including capital markets, governments, and civil society. Despite the ample attention paid to the advantages of multinationality in information acquisition (Tsai, 2001; Almeida & Phene 2004), the literature lacks theory or empirical evidence on the institutional and managerial incentives for sharing value-relevant information with external stakeholders. In their place, popular conceptions about MNE transparency in both the academy and the policy arena are largely based on anecdotal evidence or inferred from a perceived lack of accountability in foreign operations.In these essays, I construct and test theories on how different interactions between firms and states influence multinational disclosure strategies. Essay 1 asks how states’ varying institutional environments constrain or enable transparency. In Essay 2, I focus on the effects of state-owned enterprises (SOEs) on the transparency of outward and inward foreign direct investment. Lastly, Essay 3 examines the greater network of geopolitical relationships between states in which multinational firms are embedded, and whether these relations mitigate host country risks and promote greater transparency. In the following pages, I briefly outline each essay in greater detail.Essay 1In this essay, I examine how investment transparency is shaped by geography and institutional context. Within these contexts, I argue that MNEs use voluntary disclosure strategically to manage information asymmetries between the firm and three primary stakeholder groups: capital markets, civil society, and governments. In examining the relationship between the firm and capital markets, I test two competing hypotheses. Couched in the accounting literature, the Global Diversification hypothesis suggests that the complexity of international operations raises agency costs, increasing managers’ incentive to disclose (Cahan et al. 2005; Hope & Thomas, 2008). This implies that firms acquiring assets across borders will be more transparent than firms making domestic investments. In contrast, research into Investor Sophistication suggests that managers should respond strategically to differing levels of investor sophistication. The same cross-border frictions attributable to classic home bias in portfolio theory are theorized to reduce the ability of capital markets to value foreign investments, as firms derive fewer benefits from providing information to less informed investors (Kang & Stulz, 1997; Coval & Moskowitz, 1999; Ahearne, Griever & Warnock, 2004; Zaheer, 1995). Thus, firms investing across borders are expected to reveal less about those investments to capital markets compared to domestic investments. Testing these competing hypotheses then becomes an empirical question.I find strong support for the Investor Sophistication hypothesis. Firms disclose significantly less about their investments abroad than they disclose for domestic investment. This result is robust to both home and host country institutional quality.Overall, my findings suggest the primary audience examined in traditional studies of voluntary disclosure - capital markets - is less influential in the multinational context. Firm-level proxies for agency conflicts are not significantly related to the level of disclosure. Instead, I find that institutional rather than agency-theoretic considerations drive MNE investment-level disclosures.I test civil society’s influence on multinational disclosure strategies by examining normative expectations of transparency in both the home and host country. Institutional theory suggests that disclosure may be preferable if conforming to societal norms of transparency lends the firm legitimacy in the eyes of key stakeholders (Parsons, 1960). MNE managers respond strategically to these pressures, as legitimacy is often required to operate successfully abroad (Oliver, 1991; Suchman, 1995). This entails conforming to expectations of transparency and information availability in both the home and host country environment (DiMaggio & Powell, 1983). For example, Guerreiro, Rodrigues & Craig (2012) demonstrate that firms can obtain legitimacy by adopting more rigorous accounting standards. My results show countries marked by high normative expectations of transparency tend to encourage greater investment disclosures. Yet, home- and host country norms have notably different effects. Greater host country norms are strongly correlated with partial disclosure, while firms from home countries with higher expectations of transparency are less likely to release only partial information. I interpret these results as consistent with legitimacy-seeking behavior. Partial transparency is adequate in the host country, while limited disclosure is less likely to satisfy civil society in the home country. Lastly, multinational firms must consider what information their disclosures reveal to home and host country governments. Greif (2005, pg 728) notes that institutions that “reveal wealth” are only optimal when there are constraints that curb the coercive power of the state. Unless constrained, government officials have the discretion to expropriate value for the state (Stulz, 2005) or misuse their office to extract bribes (Rose-Ackerman, 2003). The essay contributes to a nascent but growing literature in international business exploring whether states matter for transparency and voluntary disclosure (Shi, Magnum & Kim, 2012; Healy & Serafim, 2013). While a rich literature examines corporate disclosure decisions, this literature focuses primarily on corporate-level reporting and is silent about the motivations for project-level disclosure in the multinational context. Essay 2 In the second essay, I examine how state ownership affects the transparency of both outward and inward foreign direct investment (FDI). For outward FDI, state ownership presents a number of implications for MNE disclosure strategies. First, my theory suggests the direct effect of state ownership on transparency should be negative. SOEs do not possess the incentives to disclose that private firms possess. SOEs face “soft” budget constraints as the government steps in to fill budget shortfalls and indemnify the firm for losses (Kornai, 1986). Consequently, SOEs are not subject to the discipline of the market (Megginson, 2005). Further, political interference in SOE management has the potential to marginalize formal systems of accountability (Uddin and Hopper, 2001; Wickramasinghe & Hopper, 2005; Uddin & Tsamenyi, 2005). I find support for this negative effect in fully state-owned firm investments, but not in investments in for which the state is only a partial shareholder. My results suggest these mixed ownership firms behave more like private firms. Second, I do not expect all SOEs to behave homogenously. The political economy of state ownership suggests that state-owned firms are subject to political as well as economic motivations, and these motivations need not always conflict with the objective of transparency. Rather, when political motivations promote transparency, as might be the case when democratic institutions are strong in the host country (Wehner & Renzio, 2013), one would expect a positive effect on disclosure. These effects are hypothesized to increase in response to elections, when political pressures on policy makers are the greatest. My evidence suggests that the quality of home country institutions moderates the negative effects of state ownership, but shifts firms towards partial disclosure. Only during elections do SOEs shift their strategy in favor of full disclosure. I also argue that the state may actually serve as a resource that shields SOE operations from political risks that would otherwise discourage disclosure. States are less likely to extend such benefits to private business for the fear that such protection might be seen as favoritism (Lipson, 1985). I find support for this effect. Increasing host country political risk makes SOEs more likely to fully disclose relative to private firms. Lastly, I ask whether the presence of a host country SOE affects the transparency of incoming investments. My theory suggests that the presence of a host-SOE should discourage transparency for two reasons. First, the SOE provides the host government with the capabilities needed to process information disclosed about investments (I term this the Information Advantage hypothesis). When an SOE is not present, incoming investors are less likely to fear disclosure. Second, SOEs may be viewed as competitors, discouraging incoming investors for purely competitive reasons (I term this the SOE Competition hypothesis). I disentangle these two effects by examining reserve complexity. The information advantage hypothesis would suggest a greater effect of host-SOE presence when investments are more complex, as disclosures have the potential to reveal more information. In contrast, the SOE competition hypothesis would suggest a weaker effect when investments are complex, as SOEs are at a disadvantage to private firms in operating technically sophisticated investment projects. My results find support for the information advantage hypothesis. Essay 2 makes a number of contributions. First, I generalize SOE research in IB beyond the literature’s focus on Chinese listed state-owned firms (e.g., Liang. Ren & Sun, 2014; Pan et al., 2014; Meyer et al., 2014), both in terms of ownership and geography. Second, the geographic scope of my sample allows us to address the question posed by Meyer et al. (2014) about the role of home country institutions in state-owned MNE strategy. Analyzing the systems of accountability that exist for the SOE’s principal stakeholder, the government, I show that quality of institutions and elections matter. I also build on Meyer et al. (2014)’s theory regarding SOE reaction to host country institutions. While the authors’ argument that better host country institutions create legitimacy hurdles for state-sponsored FDI suggests that SOEs face less pressure to disclose in institutionally weak environments, my results demonstrate that SOE disclosures are less sensitive to the quality of host country institutions than those of private firms.Lastly, I add to the literature on MNE-host country bargaining (Vernon, 1971). I find that MNEs are less transparent regarding complex investments when a host country SOE is present. This supports my proposition that host governments leverage SOE capabilities to better understand technological complexity. My results suggest that as host-government capacity to process and act on information about FDI improves, inward FDI becomes more opaque. While IB theory has long acknowledged how information-processing advantages benefit firms (Egelhoff, 1982), the potential for external stakeholders, such as governments, to exploit these benefits has gone unexamined.Essay 3In the final essay, I analyze one potential mechanism behind the advantages of state ownership introduced in Essay 2: Geopolitical Capital. Strategic disclosure as a non-market strategy comes at the cost of the numerous advantages of transparency discussed in Essay 1 (e.g., lower cost of capital, legitimacy). To achieve the advantages of transparency without incurring the political costs of disclosure, firms must find other means of managing host country risk. The home country’s diplomatic resources provide such a means. A large body of theory and evidence explores the value of “political capital”, a form of social capital firms amass through governmental connections (Hillman, Zardkoohi & Bierman, 1999; Siegel, 2007). I take this work a step further by examining the social capital that results from a home government’s geopolitical ties to other states. While firms may be constrained in their capacity to influence host country government policy abroad, diplomatic relationships provide the home country government a resource for incentivizing foreign policy makers that MNEs themselves do not possess. Moreover, state-owned firms should enjoy advantageous access to these resources by virtue of their intrinsic ties to the state.My work represents a theoretical innovation over prior research in economics and international business that treats relations between states as dyadic (Desbordes & Vicard, 2009; Li & Vashchilko, 2010; Arikan & Shenkar, 2013) by conceiving geopolitics as a network of relationships. Building on recent work in international relations, I argue that the geopolitical capital at a MNE’s disposal is a product of the home country’s relationship with the host country government, their mutual relations with other states, and the position of the MNE within the structure of this network. I make three contributions in Essay 3. Recent research in the non-market strategy literature has begun to explore how firm political resources influence firm strategy (Hillman, Zardkoohi & Bierman, 1999). This essay complements this work by suggesting that political relations in the home country provide advantages abroad by granting the firm access to the state’s diplomatic capital. Second, I provide a deeper theoretical understanding of the mechanisms through which inter-state relations impact firm strategy. Prior work has argued that geopolitical ties between states influence MNEs through two channels: actively through diplomatic pressure, or passively by promoting shared understandings and mutual trust. The former represents a state’s assertive use of its diplomatic standing in the global system to constrain the policies of other actors (Duanmu, 2014). In the later, geopolitical ties represent normative bonds between countries that shape both host country opportunism, and managerial perceptions of host government credibility (Arikan & Shenkar, 2013; Guiso, Sapienza & Zingales, 2009).Lastly, I build on Essay 2’s contribution to the nascent but growing literature on the effects of state ownership on firm strategy. Prior work argues that investment by the state diminishes the detrimental effects of institutional voids by transferring risks, thus allowing the SOE to finance projects that would otherwise go unfunded (Inoue, Lazzarini and Musacchio, 2013). My theory suggests a more direct benefit. State-owned enterprises have preferential access to home country diplomatic capital, diffusing potential political costs abroad. My results confirm my theory that geopolitical capital is an important resource for mitigating host country risk, which promotes transparency in foreign direct investment. Further, I demonstrate that state-owned enterprises have preferential access to this resource. My greatest insight is that limiting the study of diplomatic ties to the dyadic relationships commonly examined in the literature only tells part of the story. I find evidence that geopolitical capital is a network resource: a function of both the home country’s direct relations with the host country, and its position within the greater global network of ties among nations.