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Influence of state ownership of oil&gas companies equity on the level of participation in foreign projects
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Introduction 7
l.Internationalization of oil&gas companies in the context of state ownership and emerging market specifics 10
1.1 Review of relevant internationalization theory frameworks 10
1.2 Comparison of oil&gas companies internationalization in the upstream sector 16
1.3 Characteristics of national oil companies as a major type of state-owned enterprises 21
1.4 Internationalization idiosyncrasies of emerging market SOEs and recent empirical research
findings 24
1.5 Proposition statement 40
2. Empirical research design 43
2.1 Empirical setting 43
2.2 Method and variables 44
3. Empirical research results 46
3.1 Linear regression 46
3.2 Binary logistic regression 49
3.3 Results discussion and research limitations 51
4. Theoretical and managerial implications 54
Conclusion 58
References 59
l.Internationalization of oil&gas companies in the context of state ownership and emerging market specifics 10
1.1 Review of relevant internationalization theory frameworks 10
1.2 Comparison of oil&gas companies internationalization in the upstream sector 16
1.3 Characteristics of national oil companies as a major type of state-owned enterprises 21
1.4 Internationalization idiosyncrasies of emerging market SOEs and recent empirical research
findings 24
1.5 Proposition statement 40
2. Empirical research design 43
2.1 Empirical setting 43
2.2 Method and variables 44
3. Empirical research results 46
3.1 Linear regression 46
3.2 Binary logistic regression 49
3.3 Results discussion and research limitations 51
4. Theoretical and managerial implications 54
Conclusion 58
References 59
The internationalization of state-owned companies has become a prominent phenomenon in the global economy. Although developed countries mostly decided to privatize their state companies, governments of emerging economies not only retained them, but urged such companies to go international. State multinationals invest abroad to receive knowledge, technological and managerial capabilities, brands and other strategic assets they lack. One of the most important assets they seek are natural resources, hydrocarbons in particular. This was one of the reasons why state enterprises in the oil&gas sector - national oil companies - were established. Other reasons - strategic importance of the sector for country economy, desire to maximize rent - urged government to nationalize assets of foreign companies or build national oil champions from scratch.
National oil&gas companies go abroad to secure stable supplies through acquisitions of upstream assets if their home country lacks them, or to keep up with international competition and become a global player. They are increasingly important players in the global oil&gas markets. In particular, national oil companies possess the absolute majority of proved oil reserves and more than half of undiscovered reserves. Moreover, they account for three-fourths of global crude oil production. Thus, the understanding of their internationalization patterns is essential for both oil&gas researchers, as well as for industry players.
However, the general theory was initially developed to explain the internationalization of privately owned companies from developed counties. As such, it misses important idiosyncrasies of state multinationals, such as distinct kind of firm-specific advantages, other strategic intents and location preferences. To overcome this drawback, scholars have developed a specialized internationalization theory for state-owned multinational companies from emerging markets. It helped to address issues not covered by general theory by taking into consideration the effects of state ownership and weak institutional environment context in the emerging markets.
At the same time, a separate stream of research is dedicated to the study of national oil companies. Scholars have thoroughly investigated the reasons behind the establishment of national oil champions. Also, the comparison of state and private oil companies efficiency is a major point for discussion. As regards internationalization, the researchers have focused on firm-specific, or ownership advantages - access to capital lending at below market rates, information support from government, state political backing and experience of operating in an uncertain environment, stemming from their origin in emerging markets. Researchers have also pointed at the ‘national purpose’ of state oil companies - the set of non-commercial goals, which change market based decision making patterns. This set is defined by the government and can include a broad range of goals - bilateral trade promotion, geopolitical power projection or national energy security enhancement.
One particular part of internationalization process of state oil companies - internalization - have received scarce attention. In particular, ownership level choice in a foreign subsidiary is one of the most important strategic decisions in internationalization because it determines the reward a company would get, as well as the amount of risk it has to bear. It is a well-established fact in the literature that choosing the right level of participation determines long-term viability and success of a joint venture (or a wholly-owned subsidiary). Coupled with the role of national oil companies in the industry and global economy, it means, that the understanding of this aspect of internationalization is essential for academic theory and industry professionals. At the same time, one of the factors that influence the choice of ownership in a foreign subsidiary is state participation in a company equity capital, as established by the researchers of state multinationals.
Hence, the purpose of this paper is to identify the influence of state ownership on the level of participation in foreign upstream projects of oil companies. Upstream sector comprises exploration, development and production projects of oil&gas reserves, i.e. it includes activities from the initial search for resources to their extraction. This paper concentrates on the upstream sector because its capital and technological intensity makes it one of the most difficult types of foreign investments and differentiates it from other sectors (Cheon 2015). To achieve this goal the following objectives should be met:
• Identify the differences in the internationalization of state and privately owned oil&gas companies according to the eclectic paradigm
• Establish the applicability of state-owned multinational companies literature findings to national oil companies in regard to participation level choice in foreign subsidiaries
• Test the influence of state ownership on the level of participation in foreign subsidiaries using two different specifications - linear and logistic regression
This paper is structured according to these objectives. We start by looking at the three dimensions of eclectic paradigm - ownership, location and internalization advantages, and explaining how the framework is usefully complemented by bundling theory of foreign market entry modes. Next, the comparison of state and privately owned oil companies internationalization is provided in all three dimensions of the eclectic paradigm with an aim to demonstrate the difference between two types of oil companies, especially at the third part of the model - internalization - as it comprises subsidiary ownership level choice. In this way, we demonstrate that general theory needs adjustments to explain strategic choices of state oil companies in regard to the level of participation in their projects abroad.
Next, we show the relevance of literature on state-owned companies to national oil companies by looking at their distinctive features. We then move to the discussion of findings on internationalization of state companies, particularly in regard to internalization advantages. It is then coupled with emerging markets context - a separate theory was already generalized for state-owned multinational from developing countries. Thus, using the empirical evidence (for all state enterprises) on the influence of government ownership on company internalization decisions, a proposition is developed about the same process in the oil&gas industry. It is empirically tested using two types of regression on a sample of foreign upstream subsidiaries of 25 leading oil&gas companies according to Platts global ranking. Finally, empirical research results are interpreted using state enterprises theory, as well as practical relevance is explained.
National oil&gas companies go abroad to secure stable supplies through acquisitions of upstream assets if their home country lacks them, or to keep up with international competition and become a global player. They are increasingly important players in the global oil&gas markets. In particular, national oil companies possess the absolute majority of proved oil reserves and more than half of undiscovered reserves. Moreover, they account for three-fourths of global crude oil production. Thus, the understanding of their internationalization patterns is essential for both oil&gas researchers, as well as for industry players.
However, the general theory was initially developed to explain the internationalization of privately owned companies from developed counties. As such, it misses important idiosyncrasies of state multinationals, such as distinct kind of firm-specific advantages, other strategic intents and location preferences. To overcome this drawback, scholars have developed a specialized internationalization theory for state-owned multinational companies from emerging markets. It helped to address issues not covered by general theory by taking into consideration the effects of state ownership and weak institutional environment context in the emerging markets.
At the same time, a separate stream of research is dedicated to the study of national oil companies. Scholars have thoroughly investigated the reasons behind the establishment of national oil champions. Also, the comparison of state and private oil companies efficiency is a major point for discussion. As regards internationalization, the researchers have focused on firm-specific, or ownership advantages - access to capital lending at below market rates, information support from government, state political backing and experience of operating in an uncertain environment, stemming from their origin in emerging markets. Researchers have also pointed at the ‘national purpose’ of state oil companies - the set of non-commercial goals, which change market based decision making patterns. This set is defined by the government and can include a broad range of goals - bilateral trade promotion, geopolitical power projection or national energy security enhancement.
One particular part of internationalization process of state oil companies - internalization - have received scarce attention. In particular, ownership level choice in a foreign subsidiary is one of the most important strategic decisions in internationalization because it determines the reward a company would get, as well as the amount of risk it has to bear. It is a well-established fact in the literature that choosing the right level of participation determines long-term viability and success of a joint venture (or a wholly-owned subsidiary). Coupled with the role of national oil companies in the industry and global economy, it means, that the understanding of this aspect of internationalization is essential for academic theory and industry professionals. At the same time, one of the factors that influence the choice of ownership in a foreign subsidiary is state participation in a company equity capital, as established by the researchers of state multinationals.
Hence, the purpose of this paper is to identify the influence of state ownership on the level of participation in foreign upstream projects of oil companies. Upstream sector comprises exploration, development and production projects of oil&gas reserves, i.e. it includes activities from the initial search for resources to their extraction. This paper concentrates on the upstream sector because its capital and technological intensity makes it one of the most difficult types of foreign investments and differentiates it from other sectors (Cheon 2015). To achieve this goal the following objectives should be met:
• Identify the differences in the internationalization of state and privately owned oil&gas companies according to the eclectic paradigm
• Establish the applicability of state-owned multinational companies literature findings to national oil companies in regard to participation level choice in foreign subsidiaries
• Test the influence of state ownership on the level of participation in foreign subsidiaries using two different specifications - linear and logistic regression
This paper is structured according to these objectives. We start by looking at the three dimensions of eclectic paradigm - ownership, location and internalization advantages, and explaining how the framework is usefully complemented by bundling theory of foreign market entry modes. Next, the comparison of state and privately owned oil companies internationalization is provided in all three dimensions of the eclectic paradigm with an aim to demonstrate the difference between two types of oil companies, especially at the third part of the model - internalization - as it comprises subsidiary ownership level choice. In this way, we demonstrate that general theory needs adjustments to explain strategic choices of state oil companies in regard to the level of participation in their projects abroad.
Next, we show the relevance of literature on state-owned companies to national oil companies by looking at their distinctive features. We then move to the discussion of findings on internationalization of state companies, particularly in regard to internalization advantages. It is then coupled with emerging markets context - a separate theory was already generalized for state-owned multinational from developing countries. Thus, using the empirical evidence (for all state enterprises) on the influence of government ownership on company internalization decisions, a proposition is developed about the same process in the oil&gas industry. It is empirically tested using two types of regression on a sample of foreign upstream subsidiaries of 25 leading oil&gas companies according to Platts global ranking. Finally, empirical research results are interpreted using state enterprises theory, as well as practical relevance is explained.
This paper aimed at investigating the influence of one of the most influential factors - state ownership - on the level of participation in foreign upstream projects. To achieve this goal, we looked at the deficiencies of general internationalization theory when applied at internalization of foreign upstream assets by national oil companies. These shortcomings were addressed by applying emerging market SOE internationalization theory findings, namely the impact of an alternative set of firm-specific advantages (cheap capital, relational asset and home country embeddedness), government political backing, and the pursuit of national mission on ownership level of foreign subsidiaries. The theory predicted, that these factors would make national oil companies to have a higher share in their upstream projects abroad as compared to privately-owned companies.
This proposition was tested by applying two different specifications - linear and logistic regressions - to a sample of 441 foreign upstream project of 25 leading oil&gas companies, as defined by Platts ranking. The data for empirical research was collected from annual reports and official websites of companies in the sample. Also, consistent with the literature a control variable was introduced - economic freedom index as a proxy for institutional environment strength. The reason is that institutional environment is one of the most important factors for companies when deciding on the location of foreign investments.
Results of empirical research confirmed the proposition - national oil companies indeed prefer a higher share in their foreign upstream projects than privately-owned oil companies. The possible interpretation is provided by emerging markets SOMNC literature - state companies measure rewards in a different way - they include non-commercial benefits in this notion. Also, they are more risk tolerant because of the home country government support. Apart from that, we found that minority state ownership is not a significant predictor of participation level in foreign subsidiaries. Thus, more research is required to clearly establish whether it is an insignificant factor alone, or interaction effects are present. Finally, institutional environment was found to be a negligible factor in determining the level of subsidiary ownership. It can be explained by pre¬determined geographical distribution of hydrocarbon reserves, that limits choice of oil&gas companies of where to invest in the upstream. Findings of this paper can be used by industry professionals to devise strategies of dealing with NOC specifics in regard to establishing foreign subsidiaries: either leveraging strengths (for state company managers), or pressing on weaknesses (for private-company managers).
This proposition was tested by applying two different specifications - linear and logistic regressions - to a sample of 441 foreign upstream project of 25 leading oil&gas companies, as defined by Platts ranking. The data for empirical research was collected from annual reports and official websites of companies in the sample. Also, consistent with the literature a control variable was introduced - economic freedom index as a proxy for institutional environment strength. The reason is that institutional environment is one of the most important factors for companies when deciding on the location of foreign investments.
Results of empirical research confirmed the proposition - national oil companies indeed prefer a higher share in their foreign upstream projects than privately-owned oil companies. The possible interpretation is provided by emerging markets SOMNC literature - state companies measure rewards in a different way - they include non-commercial benefits in this notion. Also, they are more risk tolerant because of the home country government support. Apart from that, we found that minority state ownership is not a significant predictor of participation level in foreign subsidiaries. Thus, more research is required to clearly establish whether it is an insignificant factor alone, or interaction effects are present. Finally, institutional environment was found to be a negligible factor in determining the level of subsidiary ownership. It can be explained by pre¬determined geographical distribution of hydrocarbon reserves, that limits choice of oil&gas companies of where to invest in the upstream. Findings of this paper can be used by industry professionals to devise strategies of dealing with NOC specifics in regard to establishing foreign subsidiaries: either leveraging strengths (for state company managers), or pressing on weaknesses (for private-company managers).