Abstract
We analyze the direct and simultaneous effects of internationalization on the ownership structure of Latin American companies based on agency theory. Using a sample of 425 Latin American firms between 2007 and 2011, which corresponds to 1,776 observations, we use random effects and three-stage least squares panel data regression to test these effects. We find that the hypothesized positive effect of internationalization on ownership concentration is rejected. Our results support the negative relationship that is predicted by principal-agent theory when analyzing the effect of ownership on the degree of internationalization. Greater internationalization via the equity entry mode is associated with lower levels of ownership concentration. Finally, there is simultaneity in the determination of the relationship between the degree of internationalization and ownership concentration.
internationalization; entry modes; ownership structure; ownership concentration; property identity
Introduction
According to the report of the Economic Commission for Latin America and the
Caribbean (ECLAC, 2011Economic Commission for Latin America and the Caribbean
(2011). Anuario estadístico de América Latina y el Caribe 2011. Santiago,
Chile: CEPAL.), there has been an
intense internationalization movement of Latin American companies during the last
five years (ECLAC, 2011Economic Commission for Latin America and the Caribbean
(2011). Anuario estadístico de América Latina y el Caribe 2011. Santiago,
Chile: CEPAL.). The same situation
has been reported in countries such as Thailand and China; similar to Latin American
countries, these Asian countries are considered emerging countries or late movers
(Bhaumik, Driffield, & Pal, 2010Bhaumik, S. K., Driffield, N., & Pal, S. (2010). Does ownership
structure of emerging-market firms affect their outward FDI? The case of the
Indian automotive and pharmaceutical sectors. Journal of International
Business Studies, 41(3), 437-450. doi:
10.1057/jibs.2009.52
https://doi.org/10.1057/jibs.2009.52...
;
Lien, Piesse, Strange, & Filatotchev,
2005Lien, Y.-C., Piesse, J., Strange, R., & Filatotchev, I. (2005).
The role of corporate governance in FDI decisions: evidence from Taiwan.
International Business Review, 14(6), 739-763. doi:
10.1016/j.ibusrev.2005.08.002
https://doi.org/10.1016/j.ibusrev.2005.0...
).
Studies based on agency theory provide evidence of ownership structure as a
determinant of outward foreign direct investment (FDI). Lien, Piesse, Strange and Filatotchev (2005)Lien, Y.-C., Piesse, J., Strange, R., & Filatotchev, I. (2005).
The role of corporate governance in FDI decisions: evidence from Taiwan.
International Business Review, 14(6), 739-763. doi:
10.1016/j.ibusrev.2005.08.002
https://doi.org/10.1016/j.ibusrev.2005.0...
find that the
corporate governance characteristics of Taiwanese firms, such as different forms of
ownership structure and the composition of the board of directors, affect their FDI
strategies. Bhaumik, Driffield and Pal (2010)Bhaumik, S. K., Driffield, N., & Pal, S. (2010). Does ownership
structure of emerging-market firms affect their outward FDI? The case of the
Indian automotive and pharmaceutical sectors. Journal of International
Business Studies, 41(3), 437-450. doi:
10.1057/jibs.2009.52
https://doi.org/10.1057/jibs.2009.52...
conclude that family firms and firms with concentrated ownerships are less likely to
invest overseas than other types of firms.
Although the main strands of agency literature provide evidence that ownership
structure affects internationalization, little research has examined how
internationalization decisions affect ownership structure or whether both may be
mutual determinants. Would this situation constitute another case of endogeneity in
finance as described by Coles, Lemmon and Meschke
(2012)Coles, J. L., Lemmon, M. L., & Meschke, J. F. (2012). Structural
models and endogeneity in corporate finance: the link between managerial
ownership and corporate performance. Journal of Financial Economics,
103(1), 149-168. doi:
10.1016/j.jfineco.2011.04.002
https://doi.org/10.1016/j.jfineco.2011.0...
?
This paper extends the agency literature on ownership structure by investigating the
effects of the degree of internationalization and main entry modes on ownership
structure. In particular, using a sample of listed companies from Argentina, Brazil
and Chile, we seek to assess how ownership structure is affected by (a) ownership
concentration and (b) different forms of shareholders presences, including financial
institutions, professional/business groups, families/individuals, investment funds
and governments (La Porta, Lopez‐de‐Silanes, &
Shleifer, 1999La Porta, R., Lopez‐de‐Silanes, F., & Shleifer, A. (1999).
Corporate ownership around the world. The Journal of Finance,
54(2), 471-517. doi: 10.1111/0022-1082.00115
https://doi.org/10.1111/0022-1082.00115...
; Leal, Silva, &
Valadares, 2002Leal, R. P. C., Silva, A. L. C. da, & Valadares, S. M. (2002).
Estrutura de controle das companhias brasileiras de capital aberto.
Revista de Administração Contemporânea, 6(1), 7-18. doi:
10.1590/S1415-65552002000100002
https://doi.org/10.1590/S1415-6555200200...
).
Thus, this paper investigates the unexplored relationship between internationalization and ownership and the simultaneity between them in Latin American multinationals. The following questions regarding internationalization and ownership structure will be investigated: (a) Do more internationalized companies tend to have a more or less concentrated ownership structure? (b) Do international market entry modes determine the level of ownership concentration? (c) Is there a relationship between internationalization and the presence of specific ownership? (d) Finally, is there a simultaneous relationship between internationalization and ownership structure?
Literature
The agency theory proposed by Jensen and Meckling
(1976)Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm:
managerial behavior, agency costs and ownership structure. Journal of
Financial Economics, 3(4), 305-360. doi:
10.1016/0304-405X(76)90026-X
https://doi.org/10.1016/0304-405X(76)900...
argues that managers have a propensity to pursue their own
interests at the expense of shareholders because of information asymmetry and
differences between the interests of business owners and managers. This
opportunistic behavior causes managers to make suboptimal decisions and waste
resources and thus reduces the value of companies. Shareholders who pursue the
maximization of corporate value tend to increase control to reduce such conflicts of
interest. Accordingly, agency costs relating to ownership structure are created.
This nature of agency conflict arises when a company expands abroad. Multinational
enterprises (MNEs) tend to have higher agency costs than domestic firms as a result
of the greater difficulty of monitoring the behavior and actions of managers who are
outside of the country (Wright, Madura, & Wiant,
2002Wright, F. W., Madura, J., & Wiant, K. J. (2002). The
differential effects of agency costs on multinational corporations.
Applied Financial Economics, 12(5), 347-359. doi:
10.1080/09603100210124984
https://doi.org/10.1080/0960310021012498...
). In addition, shareholders of multinational companies are more
susceptible to communication and information failures, which in turn increases the
cost of monitoring by shareholders (Burgman,
1996Burgman, T. A. (1996). An empirical examination of multinational
corporate capital structure. Journal of International Business Studies,
27(3), 553-570. doi: 10.1057/palgrave.jibs.8490143
https://doi.org/10.1057/palgrave.jibs.84...
).
Agency conflict between MNEs and their international operations
Agency costs for MNEs exceed those of purely domestic companies. The complexity of
international operations activities compared with domestic operations, including
auditing and preparing multiple financial statements for each country with different
cultures, languages and regulations makes monitoring activities more difficult for
multinational companies than for domestic firms (Wright et al., 2002Wright, F. W., Madura, J., & Wiant, K. J. (2002). The
differential effects of agency costs on multinational corporations.
Applied Financial Economics, 12(5), 347-359. doi:
10.1080/09603100210124984
https://doi.org/10.1080/0960310021012498...
).
Another conflict that cannot exist in a purely domestic company is the
headquarters-subsidiary conflict, which also increases multinational firms’ agency
costs (Wright et al., 2002Wright, F. W., Madura, J., & Wiant, K. J. (2002). The
differential effects of agency costs on multinational corporations.
Applied Financial Economics, 12(5), 347-359. doi:
10.1080/09603100210124984
https://doi.org/10.1080/0960310021012498...
).
The parent-subsidiary relationship is essentially a principal-agent structure that
gives rise to conflicts resulting from the mismatch between the objectives of
headquarter managers and those of branch managers. They argue that although
headquarter managers may act in line with the objective of maximizing shareholder
wealth, foreign subsidiary managers may not do so.
This conflict between MNEs and their operations in other countries has been
recognized in the literature on equity and non-equity entry-mode decisions. Based on
agency theory and transaction cost analysis, Fladmoe-Lindquist and Jacque (1995)Fladmoe-Lindquist, K., & Jacque, L. L. (1995). Control modes in
international service operations: the propensity to franchise.
Management Science, 41(7), 1238-1249. doi:
10.1287/mnsc.41.7.1238
https://doi.org/10.1287/mnsc.41.7.1238...
explain a service firm’s
international organizational choice between equity-based control and franchising.
Other more common theories explain entry modes from the perspective of transaction
cost theory (TCA), the resource-based view, institutional theory and Dunning’s
eclectic framework (Brouthers & Hennart,
2007Brouthers, K. D., & Hennart, J.-F. (2007). Boundaries of the
firm: insights from international entry mode research. Journal of
Management, 33(3), 395-425. doi:
10.1177/0149206307300817
https://doi.org/10.1177/0149206307300817...
).
Greater concentrated ownership in parent MNEs could cause the MNEs to become more
attuned to shareholders’ interests, who can better control and monitor a company's
international operations and pressure managers to improve performance. A high level
of ownership concentration may also reduce the information asymmetry between the
principal and the agent because owners can request management information in a more
rapid and centralized manner. Furthermore, with higher levels of ownership
concentration, shareholders can prevent the opportunistic behavior of managers, who
tend to become more committed to maximizing firm value (Dharwadkar, George, & Brandes, 2000Dharwadkar, B., George, G., & Brandes, P. (2000). Privatization
in emerging economies: an agency theory perspective. Academy of
Management Review, 25(3), 650-669. doi:
10.5465/AMR.2000.3363533
https://doi.org/10.5465/AMR.2000.3363533...
).
Hypothesis 1: The higher the degree of internationalization is, the higher the ownership concentration is.
Agency conflict within the parent MNE
Internationalization is a means of diversifying markets, which is an interesting
strategy for managers (Aggarwal & Samwick,
2003Aggarwal, R. K., & Samwick, A. A. (2003). Why do managers
diversify their firms? Agency reconsidered. The Journal of Finance,
58(1), 71–118. doi: 10.1111/1540-6261.00519
https://doi.org/10.1111/1540-6261.00519...
), as a company can reduce its risks by investing in unrelated
activities and economically-integrated countries (Annavarjula & Beldona, 2000Annavarjula, M., & Beldona, S. (2000).
Multinationality–performance relationship: a review and reconceptualization.
International Journal of Organizational Analysis, 8(1),
48–67. doi: 10.1108/eb028910
https://doi.org/10.1108/eb028910...
; Hennart, 2007Hennart, J.-F. (2007). The theoretical rationale for a
multinationality–performance relationship. Management International
Review, 47(3), 423–452. Retrieved from
http://link.springer.com/article/10.1007%2Fs11575-007-0023-3#page-1
http://link.springer.com/article/10.1007...
).
In addition, international diversification also creates new opportunities for
investments. However, this cash-flow outlet will cause an agency problem when
managers have control of free cash flows, as this cash-withholding power can provide
a favorable condition for a manager to act opportunistically against firm value
maximization (Denis, Denis, & Sarin, 1997Denis, D. J., Denis, D. K., & Sarin, A. (1997). Agency problems,
equity ownership, and corporate diversification. The Journal of Finance,
52(1), 135-160. doi:
10.1111/j.1540-6261.1997.tb03811.x
https://doi.org/10.1111/j.1540-6261.1997...
;
Jandik & Makhija, 2005Jandik, T., & Makhija, A. K. (2005). Can diversification create
value? Evidence from the electric utility industry. Financial
Management, 34(1), 61-93. doi:
10.1111/j.1755-053X.2005.tb00092.x
https://doi.org/10.1111/j.1755-053X.2005...
).
As a consequence, when a company’s managers choose internationalization, minority shareholders may sell their shares back to the company, thereby affecting ownership concentration. Because of the small proportion of capital that they have invested in the company, minority shareholders may prefer to use capital markets to diversify their investment portfolio rather than diversifying through internationalization as a result of potential conflict issues between managers and shareholders. The difficulty in monitoring managers’ decisions also favors selling. Because of geographic and market regulation distances, the costs to monitor and obtain information from such international operations or to implement robust control and incentive programs for executives are considerably higher.
This issue becomes more critical when a company uses the equity entry mode to enter a foreign market, as joint ventures, acquisitions and new investments (equity entry modes) require the use of a company’s free cash flow. Accordingly, a company’s management may be able to enter a foreign market only if it returns a large proportion of its current net earnings to shareholders through a buyback of shares, which in turn affects ownership concentration. A portion of shareholders might also be more willing to sell their shares back to the company rather than accept higher dividends because equity participation in an international operation involves a degree of risk that some shareholders are not willing to undertake.
Hypothesis 2: Companies that choose to internationalize via equity entry modes tend to have higher levels of ownership concentration.
Simultaneity between internationalization and ownership concentration
As noted previously, agency theory has been used to explain how the concentration and
type of ownership structure affect companies’ degrees of internationalization. Lien et al. (2005)Lien, Y.-C., Piesse, J., Strange, R., & Filatotchev, I. (2005).
The role of corporate governance in FDI decisions: evidence from Taiwan.
International Business Review, 14(6), 739-763. doi:
10.1016/j.ibusrev.2005.08.002
https://doi.org/10.1016/j.ibusrev.2005.0...
study
corporate governance factors in firms’ decisions to accept FDI. Extending this
discussion and considering ownership concentration and structure as key responses to
the weak institutions of the emerging market, Bhaumik
et al. (2010)Bhaumik, S. K., Driffield, N., & Pal, S. (2010). Does ownership
structure of emerging-market firms affect their outward FDI? The case of the
Indian automotive and pharmaceutical sectors. Journal of International
Business Studies, 41(3), 437-450. doi:
10.1057/jibs.2009.52
https://doi.org/10.1057/jibs.2009.52...
find that firms with concentrated
ownership are less likely to invest overseas than firms with lower levels of
ownership concentration.
Oesterle, Richta and Fisch (2013)Oesterle, M.-J., Richta, H. N., & Fisch, J. H. (2013). The
influence of ownership structure on internationalization. International
Business Review, 22(1), 187–201. doi:
10.1016/j.ibusrev.2012.03.007
https://doi.org/10.1016/j.ibusrev.2012.0...
consider
beyond the linear approach by arguing that the effect of ownership concentration on
the expected degree of a company’s internationalization follows a cubic function in
a U shape. This pattern was introduced and confirmed in a study that
involved 1990-2006 data from the 102 largest German manufacturing companies.
The main argument is that shareholders tend to be risk neutral and apathetically reliant on managers to protect their investments when a firm presents strongly dispersed ownership. In this context, there is a free-rider problem. The cost–benefit ratio of monitoring is negative because monitoring becomes a public good as each shareholder benefits from the monitoring activities of others. As consequence, shareholders do not have an incentive to influence management, and executives have greater freedom to pursue their own interests — that is, to move toward internationalization. Thus, lower levels of ownership concentration are associated with higher degrees of internationalization. This outcome is expected even when shareholders increase their ownership position and have more personal resources involved in a company. It would be advantageous to adopt control and incentive procedures for executives to minimize the principal-agent problem, but this control is not sufficiently strong to change management behavior.
As shareholders increase their ownership position, their level of risk aversion
increases because the likelihood of reducing their wealth according to the amount of
capital invested also increases (Aggarwal &
Samwick, 2003Aggarwal, R. K., & Samwick, A. A. (2003). Why do managers
diversify their firms? Agency reconsidered. The Journal of Finance,
58(1), 71–118. doi: 10.1111/1540-6261.00519
https://doi.org/10.1111/1540-6261.00519...
). In this scenario, it becomes more feasible for
shareholders with increased participation to monitor the actions managers take to
avoid the destruction of their wealth. To do so, shareholders begin to adopt
procedures for control, supervision and incentives for executives to minimize agency
conflicts (Aggarwal & Samwick, 2003Aggarwal, R. K., & Samwick, A. A. (2003). Why do managers
diversify their firms? Agency reconsidered. The Journal of Finance,
58(1), 71–118. doi: 10.1111/1540-6261.00519
https://doi.org/10.1111/1540-6261.00519...
). In
addition to monitoring, internationalization becomes interesting for these
shareholders as a means of risk diversification for a company, especially risk
related to an organization’s market of origin
Therefore, according to Aggarwal and Samwick
(2003)Aggarwal, R. K., & Samwick, A. A. (2003). Why do managers
diversify their firms? Agency reconsidered. The Journal of Finance,
58(1), 71–118. doi: 10.1111/1540-6261.00519
https://doi.org/10.1111/1540-6261.00519...
, the concentration of ownership also influences
internationalization. Supported by this discussion and the discussion of the
previous sections, we propose the following hypothesis:
Hypothesis 3: there is simultaneity in the determination of the relationship between the degree of internationalization and ownership concentration.
Methodology
Sample selection
We collect data from the Worldscope, Compustat and Economatica databases. To
populate our sample, we initially set the population of publicly traded
companies as those that are active and listed on the stock exchanges in their
respective countries. To finalize our sample, we consider the population of
companies headquartered in Brazil, Argentina, Chile, Colombia, Mexico and
Venezuela for the period from 2007 to 2011. One of the reasons why we chose the
period between 2007 and 2011 was the availability of data for Brazil. Some of
the data on the variable degree of internationalization (DOI) for Brazil are
collected in the reports of Brazilian Transnational Corporations published by
Fundação Dom Cabral, whose first year of publication was 2007. Moreover, this
chosen period encompasses the 2008 crisis that exerted an exogenous effect on
the other variables in the model and that is the period of greatest growth in
the internationalization of Latin American companies, according to United
Nations Conference on Trade and Development (UNCTAD, 2011United Nations Conference on Trade and Development. (2011).
World investment report 2011: trends and determinants. New
York, NY. Retrieved from
http://unctad.org/en/docs/wir2011_embargoed_en.pdf
http://unctad.org/en/docs/wir2011_embarg...
).
From this company database population, we exclude those companies with negative equity and asset values and those of the financial sector because of their specificities. From the dependent variables, we exclude those with missing values and extreme values (outliers). Our criterion for defining outliers is every case that is located more than 1.5 interquartile ranges (IQRs) below the first quartile or above the third quartile (Gujarati, 2006Gujarati, D. N. (2006). Econometria básica. Rio de Janeiro: Elsevier Brasil.).
For absent information, we collect data from reports on company websites and the respective countries’ stock exchanges. For cases with few missing values, we contact the firms’ relationship investor departments and request the missing data. Where expansion of the data was not possible, we exclude those cases from the final sample of this study. Furthermore, as it was not possible to obtain reliable and consistent data on the ownership structure of Mexican, Colombian and Venezuelan companies, we exclude companies from these countries. The majority of Mexican, Colombian and Venezuelan companies do not provide ownership concentration data or the names of major shareholders, which constitute our dependent variables.
We obtain data on internationalization (the degree of internationalization and entry modes) from the Worldscope, Economatica and Compustat databases. Because of the missing values in these databases, we also collect information from publications that are available on the websites of the companies, the stock exchanges on which the companies are listed, the ECLAC (Economic Commission for Latin America and the Caribbean) and the UNCTAD (United Nations Conference on Trade and Development). For Brazilian companies, we also use internationalization data contained in the reports prepared by Fundação Dom Cabral. In some cases, we also establish contact with the investor relationship department to collect internationalization data for companies that still had missing values after conducting the previous procedures.
We obtain data on ownership identity (OWNT), the classification of the major shareholder of the companies, primarily from Economatica, and we classify the data according to the annual financial information reports disclosed by companies on their websites and on the stock exchanges.
We begin with a total of 3,985 company-year observations, but after the adjustments, we obtain a final sample of 1,776 company-year observations representing 415 companies from Argentina, Brazil and Chile. Table 1 shows the number of observations according to countries and companies’ international conditions.
It is noteworthy that most of the observations that we analyze are from Brazil. There are also a larger number of domestic companies in the sample, and among multinational companies, most report non-equity entry modes.
Description of variables
The test variables of this study are related to the ownership structure and company internationalization status.
For ownership structure, we use two variables: (a) the level of concentration (OWN1), which measures the concentration percentage of common shares of the main shareholder of the company, and (b) the ownership identity (OWNT). We consider six types of ownership identity as described in the literature (La Porta et al., 1999; Leal et al., 2002), and we transform them into five dummy variables: financial institution ownership, professional/business group, family/individual, investment funds, government and other types of ownership (such as shareholder agreements, management and employees).
Table 2 shows the ownership identity of the sample according to each company’s international condition.
Most of the companies observed in the sample are controlled by professional companies/business groups, followed by family businesses/individuals. The other classifications of ownership identity are found much less frequently. This same distribution is also observed in domestic and multinational companies, whether their entry mode is predominantly equity or non-equity.
Table 3 summarizes the variables used, presenting the form of measurement, source, expected effects according to the theory and authors who have used the measurement.
We also use two variables for internationalization: (a) the DOI, measured by the average foreign assets to total assets ratio, the exports to total sales ratio and the ratio of employees abroad to the total number of employees according to UNCTAD methodology (2011) and (b) entry modes (EMODT). Two entry modes are considered in this study, as in the work of Hill and Jones (2009)Hill, C., & Jones, G. (2009). Strategic management: an integrated approach. Mason: South Western Cengage Learning.: equity entry modes (joint ventures, acquisitions and new investments) and non-equity modes (exports, franchise licensing, and research and development agreements). The categorization by this variable is the result of the difference between the total value of equity entries (the sum of the amount spent on joint ventures, acquisitions and new investments during the period) and the total value of non-equity entries (the sum of the total amount spent on exports, franchise licensing, and research and development agreements) out of total entry expenditures. Positive values for these calculations represent companies with predominantly equity entry modes, which are assigned the value 1. Negative values indicate a predominance of non-equity entries, and the value 2 is assigned to these companies. Companies that have no predominant entry mode (i.e., domestic companies) are classified as 0. Using three entry mode categories, we create two dummy variables: the equity entry mode (EMODT = 1) and the non-equity entry mode (EMODT = 2).
The control variables in this study refer to the levels of company variables (size,
growth opportunity, bankruptcy risk, the level of tangibility of assets, total debt
and dividend payments), industry variables (19 industries transformed into 18 dummy
variables) and country variables (4 countries transformed into three dummy
variables), as indicated in Table 3. These
variables are used in other works, such as Annavarjula and Beldona (2000)Annavarjula, M., & Beldona, S. (2000).
Multinationality–performance relationship: a review and reconceptualization.
International Journal of Organizational Analysis, 8(1),
48–67. doi: 10.1108/eb028910
https://doi.org/10.1108/eb028910...
; Hennart
(2007)Hennart, J.-F. (2007). The theoretical rationale for a
multinationality–performance relationship. Management International
Review, 47(3), 423–452. Retrieved from
http://link.springer.com/article/10.1007%2Fs11575-007-0023-3#page-1
http://link.springer.com/article/10.1007...
; Brouthers and Hennart
(2007)Brouthers, K. D., & Hennart, J.-F. (2007). Boundaries of the
firm: insights from international entry mode research. Journal of
Management, 33(3), 395-425. doi:
10.1177/0149206307300817
https://doi.org/10.1177/0149206307300817...
; Jandik and Makhija (2005)Jandik, T., & Makhija, A. K. (2005). Can diversification create
value? Evidence from the electric utility industry. Financial
Management, 34(1), 61-93. doi:
10.1111/j.1755-053X.2005.tb00092.x
https://doi.org/10.1111/j.1755-053X.2005...
;
Denis, Denis and Sarin (1997)Denis, D. J., Denis, D. K., & Sarin, A. (1997). Agency problems,
equity ownership, and corporate diversification. The Journal of Finance,
52(1), 135-160. doi:
10.1111/j.1540-6261.1997.tb03811.x
https://doi.org/10.1111/j.1540-6261.1997...
; UNCTAD (2011)Wright, F. W., Madura, J., & Wiant, K. J. (2002). The
differential effects of agency costs on multinational corporations.
Applied Financial Economics, 12(5), 347-359. doi:
10.1080/09603100210124984
https://doi.org/10.1080/0960310021012498...
; Wright, Madura and Wiant (2002)Wright, F. W., Madura, J., & Wiant, K. J. (2002). The
differential effects of agency costs on multinational corporations.
Applied Financial Economics, 12(5), 347-359. doi:
10.1080/09603100210124984
https://doi.org/10.1080/0960310021012498...
; Lien et al. (2005)Lien, Y.-C., Piesse, J., Strange, R., & Filatotchev, I. (2005).
The role of corporate governance in FDI decisions: evidence from Taiwan.
International Business Review, 14(6), 739-763. doi:
10.1016/j.ibusrev.2005.08.002
https://doi.org/10.1016/j.ibusrev.2005.0...
;
Bhaumik et al. (2010)Bhaumik, S. K., Driffield, N., & Pal, S. (2010). Does ownership
structure of emerging-market firms affect their outward FDI? The case of the
Indian automotive and pharmaceutical sectors. Journal of International
Business Studies, 41(3), 437-450. doi:
10.1057/jibs.2009.52
https://doi.org/10.1057/jibs.2009.52...
; and Hill and Jones (2009)Hill, C., & Jones, G. (2009). Strategic
management: an integrated approach. Mason: South
Western Cengage Learning.. We also control for the year (from 2007
to 2011; thus, five years were transformed into four dummy variables).
Models and methods
The general objective of this study is to analyze the effects of internationalization on ownership structure. Therefore, we analyze the effects on the concentration of the major shareholder in common shares, OWN1 (Model 1), and on the ownership identity, OWNT (Model 2). The effects of internationalization that we test for are DOI and EMODT.
First, we use preliminary descriptive analyses of partial correlation between numerical variables and tests of differences between means using the ANOVA technique to describe the data.
Thus, Models 1 and 2, whose control variables were extracted from the literature, serve as the basis for the regressions with the panel data. In the case of Model 2, as the dependent variable in question, OWNT, is categorical, we use logistic panel data regression from the dummies created for this variable. To identify whether fixed or random effects would be more appropriate, we employ the Lagrange multiplier of the Breusch and Pagan test, which analyzes the hypothesis that the variance of the transverse cutting units is equal to zero and only varies in time, according to Gujarati (2006)Gujarati, D. N. (2006). Econometria básica. Rio de Janeiro: Elsevier Brasil.. Accordingly, we employ the Hausman test. For these two tests, we consider 0.05 as the significance level. After completing these tests, we run the models, analyze the estimated coefficients and compare the results to the hypotheses of this study.
Finally, in response to the secondary objective, we test the effects of ownership structure on the degree of internationalization and the effects of the degree of internationalization on ownership structure.
According to the literature, especially the works of Lien et al. (2005)Lien, Y.-C., Piesse, J., Strange, R., & Filatotchev, I. (2005).
The role of corporate governance in FDI decisions: evidence from Taiwan.
International Business Review, 14(6), 739-763. doi:
10.1016/j.ibusrev.2005.08.002
https://doi.org/10.1016/j.ibusrev.2005.0...
and Bhaumik et al. (2010)Burgman, T. A. (1996). An empirical examination of multinational
corporate capital structure. Journal of International Business Studies,
27(3), 553-570. doi: 10.1057/palgrave.jibs.8490143
https://doi.org/10.1057/palgrave.jibs.84...
, a system of regression equations
that simultaneously determines ownership concentration and internationalization is
postulated. Following these authors, who do not analyze the effect of entry modes
(EMODT), the present study does not consider this variable for comparison. The
control variables used in previous models are maintained. These equations are
estimated using three-stage least squares (3SLS), considering (DOI) and (OWN1) to be
endogenous variables with respect to the model and considering the other variables
to be instrumental. For the DOI equation, we exclude PAYOUT because there is no
tested association of this variable in the literature.
The 3SLS method is preferable to ordinary least squares (OLS), as the latter leads to
biased estimates and inconsistent parameters when a system has interdependent
endogenous variables (Coles, Lemmon, & Meschke,
2012Coles, J. L., Lemmon, M. L., & Meschke, J. F. (2012). Structural
models and endogeneity in corporate finance: the link between managerial
ownership and corporate performance. Journal of Financial Economics,
103(1), 149-168. doi:
10.1016/j.jfineco.2011.04.002
https://doi.org/10.1016/j.jfineco.2011.0...
; Gujarati, 2006Gujarati, D. N. (2006). Econometria básica. Rio de
Janeiro: Elsevier Brasil.), as is the
case for both DOI and OWN1.
The system of equations is represented mathematically by Model 3.
Moreover, unlike OLS, 3SLS allows us to determine how ownership structure decisions affect DOI and how DOI affects ownership structure, both simultaneously and in isolation. This determination is achieved by separating the estimation results in the equation processes.
A commonly reported problem of 3SLS is the presence of multicollinearity (or almost perfect correlation) between the regressors, which leads to inflated standard error estimates and reduced statistical test values. To verify the existence of this problem, we use the variance inflation factor (VIF). A maximum VIF value of 1 indicates that no multicollinearity is present, whereas maximum values above 10 indicate that multicollinearity may unduly influence the regression estimates and that independent variables with high correlations with one another should therefore be excluded (Gujarati, 2006Gujarati, D. N. (2006). Econometria básica. Rio de Janeiro: Elsevier Brasil.).
Empirical Results and Discussion
We observe that the associations between the variables are weak, which indicates the absence of autocorrelation between the explanatory variables of the model. Table 4 shows the correlation matrix of scalar numerical variables used in the study.
The association between DOI and OWN1 is negative and thus indicates that in a preliminary analysis, internationalization is negatively associated with ownership concentration. This result is not as expected, as this association suggests that agency theory applies to the influence of ownership structure on internalization. However, this relationship is close to zero, indicating the need for further investigation with a control variable.
Table 5 shows the means, standard deviations and variance analysis for the study’s test variables (DOI and OWN1), divided into four groups according to the companies’ international conditions (domestic, multinational, multinational with equity entry mode and multinational with non-equity entry mode companies).
This analysis provides evidence that it may be important to include entry modes (EMODT) in the ownership concentration (OWN1) analysis. Multinational companies that choose to internationalize via non-equity entry modes are 16% ([53.18 - 43.83] / 43.83) more concentrated and 83% ([22-12] / 12) more internationalized than multinational companies that opt for equity entry modes. Again, the ANOVA outcome does not support hypothesis 2; i.e., companies whose internationalization occurs predominantly via equity entry modes have higher levels of ownership concentration.
After completing the descriptive analyses, we conduct a panel data analysis. Models 1 and 2 include three groups of control variables: company characteristics, industries and countries. Model 1 tests the influence of internationalization (DOI and EMODT) on the level of ownership concentration (OWN1).
The effect observed in Table 6 is that the level of internationalization (DOI) negatively and significantly determines ownership concentration (OWN1). Given the type of entry mode, this result not only rejects hypothesis 1 but also suggests a negative relationship between the degree of internationalization and the level of ownership concentration.
For Latin American publicly listed companies, this outcome suggests that internationalization does not require major shareholders to increase their ownership position to influence MNE managers to align with the interest of parent company shareholders. The perception of the risk of outward investment could help to explain this phenomenon, as companies in Latin American countries typically expand their overseas operation to developed countries that have better institutional environments.
We then consider the entry modes in our analysis. Companies that chose to internationalize predominantly via equity entry mode (EMODT = 1) tend to be less concentrated (OWN1) than other companies. This evidence rejects hypothesis 2, which indicated that higher levels of internationalization lead to higher levels of ownership concentration. Although the companies with a non-equity entry mode (EMODT = 2) have a positive coefficient, the lack of significance prevents further analysis.
Our results suggest that instead of the effect of internationalization on ownership
that we hypothesized, principal-agent theory explains the effect of ownership on
internationalization. Even when we observe that the perception of risk for an
international venture is clear based on intensive cash flow investment in equity
entry modes (joint ventures, acquisition and new investments), the relationship is
significantly negative. Minority shareholders do not sell back to a company after an
internationalization decision is announced, and major shareholders do not
consequently increase their positions. Our results also support the approach (Bhaumik et al., 2010Bhaumik, S. K., Driffield, N., & Pal, S. (2010). Does ownership
structure of emerging-market firms affect their outward FDI? The case of the
Indian automotive and pharmaceutical sectors. Journal of International
Business Studies, 41(3), 437-450. doi:
10.1057/jibs.2009.52
https://doi.org/10.1057/jibs.2009.52...
; Oesterle, Richta, & Fisch, 2013Oesterle, M.-J., Richta, H. N., & Fisch, J. H. (2013). The
influence of ownership structure on internationalization. International
Business Review, 22(1), 187–201. doi:
10.1016/j.ibusrev.2012.03.007
https://doi.org/10.1016/j.ibusrev.2012.0...
) in which
lower ownership concentration results in a higher degree of internationalization
because of the conflict between shareholders and managers.
Model 2 of Table 6 presents the analysis of the effects of internationalization (DOI and EMODT) on the forms of ownership (OWNT). The DOI is significant only for companies whose main shareholder is a financial institution (OWNT = 1). The effect generated by the DOI of companies with this type of ownership is positive. Thus, the evidence suggests that more internationalized companies are more likely to have a financial institution as their largest shareholder. For other ownership forms (OWNT = 2, 3, 4 and 5), the significance of the relationship is unclear.
Finally, a mutual effect between ownership concentration and internationalization is not rejected. In Table 7, the results obtained when simultaneously running the equations from Model 3 suggest that DOI and OWN1 are simultaneously determined.
The simultaneous analysis supports the agency theory predicting the effects of
ownership concentration on the degree of internationalization as analyzed by Lien et al. (2005)Lien, Y.-C., Piesse, J., Strange, R., & Filatotchev, I. (2005).
The role of corporate governance in FDI decisions: evidence from Taiwan.
International Business Review, 14(6), 739-763. doi:
10.1016/j.ibusrev.2005.08.002
https://doi.org/10.1016/j.ibusrev.2005.0...
and Bhaumik et al. (2010)Burgman, T. A. (1996). An empirical examination of multinational
corporate capital structure. Journal of International Business Studies,
27(3), 553-570. doi: 10.1057/palgrave.jibs.8490143
https://doi.org/10.1057/palgrave.jibs.84...
. It is
also important to note that hypothesis 1 remains rejected through the simultaneous
estimation by 3SLS. That is, even if the variables are simultaneously determined,
the higher degree of internationalization reduces the level of ownership
concentration.
The lack of rejection of simultaneity shows that the works of Lien et al. (2005)Lien, Y.-C., Piesse, J., Strange, R., & Filatotchev, I. (2005).
The role of corporate governance in FDI decisions: evidence from Taiwan.
International Business Review, 14(6), 739-763. doi:
10.1016/j.ibusrev.2005.08.002
https://doi.org/10.1016/j.ibusrev.2005.0...
and Bhaumik et al. (2010)Bhaumik, S. K., Driffield, N., & Pal, S. (2010). Does ownership
structure of emerging-market firms affect their outward FDI? The case of the
Indian automotive and pharmaceutical sectors. Journal of International
Business Studies, 41(3), 437-450. doi:
10.1057/jibs.2009.52
https://doi.org/10.1057/jibs.2009.52...
may present the
endogeneity problems that are commonly found in finance research, as reported by
Coles et al. (2012)Coles, J. L., Lemmon, M. L., & Meschke, J. F. (2012). Structural
models and endogeneity in corporate finance: the link between managerial
ownership and corporate performance. Journal of Financial Economics,
103(1), 149-168. doi:
10.1016/j.jfineco.2011.04.002
https://doi.org/10.1016/j.jfineco.2011.0...
. The
reasoning of these authors based on agency theory may have led to the assumption
that the decision of ownership structure is the a priori decision
and that the decision to internationalize is the a posteriori
decision and, thus, that it is not possible for these two variables to be determined
simultaneously.
Conclusions
The hypothesized positive effect of internationalization on ownership concentration
is rejected. Our results support the negative relationship that is predicted by
principal-agent theory when analyzing the effect of ownership on the degree of
internationalization (Bhaumik et
al., 2010Burgman, T. A. (1996). An empirical examination of multinational
corporate capital structure. Journal of International Business Studies,
27(3), 553-570. doi: 10.1057/palgrave.jibs.8490143
https://doi.org/10.1057/palgrave.jibs.84...
; Lien et
al., 2005Lien, Y.-C., Piesse, J., Strange, R., & Filatotchev, I. (2005).
The role of corporate governance in FDI decisions: evidence from Taiwan.
International Business Review, 14(6), 739-763. doi:
10.1016/j.ibusrev.2005.08.002
https://doi.org/10.1016/j.ibusrev.2005.0...
; Oesterle,
2013Oesterle, M.-J., Richta, H. N., & Fisch, J. H. (2013). The
influence of ownership structure on internationalization. International
Business Review, 22(1), 187–201. doi:
10.1016/j.ibusrev.2012.03.007
https://doi.org/10.1016/j.ibusrev.2012.0...
).
Higher degrees of internationalization predominantly based on the equity entry mode are associated with lower levels of ownership concentration. The conflict of interest between shareholders and managers and ownership structure are relevant issues for the internationalization of Brazilian, Argentine and Chilean MNEs. The cost–benefit analysis of monitoring activities is negative because monitoring becomes a public good: each small shareholder benefits from the monitoring activities of others. As a consequence, in a pulverized ownership structure, shareholders do not have incentives to influence management; thus, executives have greater freedom to pursue their own interests in moving toward internationalization.
However, the different forms of relationships regarding the internationalization process are unclear. The degree of internationalization is significant only for companies whose main shareholder is a financial institution. Higher degrees of company internationalization are associated with a greater likelihood that such companies are owned by financial institutions. However, this interpretation is limited by the small number of observations from financial institutions.
Finally, as the simultaneous effect between ownership concentration and DOI is not rejected, the results of simultaneous analysis estimated by 3SLS also provide evidence that is consistent with agency theory. Therefore, the optimal ownership concentration not only mitigates the potential agency problem between shareholders and managers but also helps Latin American companies undertake value-adding activities in foreign countries.
In future research, our analysis can be applied to MNEs in other Latin American countries and can be compared to the results obtained for MNEs in developed countries. Other international degree indicators and means of ownership classification can be discussed in future investigations of the relationship between ownership structure and internationalization.
Acknowledgments
Hsia Hua Sheng would like to thank grant #12/12302-9, São Paulo Research Foundation (FAPESP). We also would like to thank the editor and two anonymous referees for the careful review and valuable comments, which provided insights that helped improve the paper.
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Publication Dates
-
Publication in this collection
Sept 2014
History
-
Received
16 May 2013 -
Reviewed
11 Mar 2014 -
rev-request
18 Mar 2014 -
Accepted
1 July 2014