State Control and Corporate Governance in Transition Economies: 25 Years on from 1989
| DOI | http://doi.org/10.1111/corg.12145 |
| Published date | 01 May 2016 |
| Date | 01 May 2016 |
| Author | Anna Grosman,Ilya Okhmatovskiy,Mike Wright |
State Control and Corporate Governance in
Transition Economies: 25 Years on from 1989
Anna Grosman*, Ilya Okhmatovskiy and Mike Wright
ABSTRACT
Manuscript type: Review
Research Question/Issue: Which forms of state control over corporations have emerged in countries that made a transition
from centrally-planned to marked-based economies and what are their implications for corporate governance? We assess the
literature on variation and evolution of state control in transition economies, focusing on corporate governance of state-
controlled firms. We highlight emerging trends and identify future research avenues.
Research Findings/Insights: Based on our analysis of more than 100 articles in leading management, finance, and economics
journals since 1989,we demonstrate how research on state control evolved from a polarized approach of public–private equity
ownership comparison to studying a variety of constellations of state capitalism.
Theoretical/Academic Implications: We identify theoretical perspectives that help us better understandbenefits and costs as-
sociated with variousforms of state control over firms. We encouragefuture studies to examine how context-specific factorsde-
termine the effect of state control on corporate governance.
Practitioner/Pol icy Implications: Investors and policymakers should consider under which conditions investing in state-
affiliated firms generates superior returns.
Keywords: Corporate Governance, Transition Economies, State Capitalism, China, Russia
INTRODUCTION
Over a quarter ofa century since the fall of the BerlinWall,
former communist regimes have transitioned to demo-
cratic or semi-democratic regimes, although the process of be-
coming market economies has advanced at different rates and
directions across countries. Transition economies represent a
large sub-category of emerging economies (Hoskisson, Eden,
Lau, & Wright, 2000; Hoskisson, Wright, Filatotchev, & Peng,
2013). Given the 25 years since 1989, it is timely to review
how means of state control have changed in these transition
economies.
While developed economies have seen a gradual demise of
state-owned enterprises (SOEs) and there has been extensive
privatizationin emerging economies,state capitalism is a pop-
ular choice among transition economies (Wooldridge, 2012).
Accordingly, we address the following research question:
“Which formsof state control over corporationshave emerged
in countries that made a transition from centrally planned to
marked-based economies and what are their implications for
corporate governance?”To address this question, we suggest
a taxonomy of state control used to structure our literature
review.
We consider the transformation of state controlin transition
economies focusing on the emergenceof contemporary forms
of state capitalism following privatizations of the 1990s. Ear-
lier reviews focusedon privatization comparing performance
of state-owned and privatized companies (Djankov &
Murrell, 2002; Estrin & Wright, 1999; Megginson & Netter,
2001), but interactions between state and private sector have
evolved and new forms of state control have emerged. Our
motivation is driven by a lack of comprehensive reviews
encompassing the evolution and variety of state control over
firms and their governance implications. We fill this gap by
bringing together studies scattered across several disciplines
and identifying relevant theoretical perspectives that suggest
positive and negative effects of state control, as summarized
in Table 1.
We searched for studies that exa mine state control a nd
corporate governance of firms in transition economies. The
first category of studies considered various mechanisms of
state control: partial ownership, board of directors, veto
rights, managerial incentives, loans, and regulation. The
second category analyzed relationships between state con-
trol and corporate governance. We did not cover studies
about performance implications of state control; these im-
plications have been discussed by Musacchio, Lazzarini,
and Aguilera (2015).
We analyzed more than 100 articles published since 1989,
focusing on peer-reviewed studies (Pugliese, Bezemer,
*Address for correspondence: Anna Grosman, Aston BusinessS chool, AstonU niversity,Aston
Triangle,Birmingham B47ET, UK. Tel:+44 121 204 3815; E-mail: a.grosman@aston.ac.uk
© 2015 JohnWiley & Sons Ltd
doi:10.1111/corg.12145
200
Corporate Governance: An International Review, 2016, 24(3): 200–221
TAB L E 1
Positive and Negative Effects of State Control According to Different Theoretical Perspectives
Theoretical
perspective
Negative effects of state
control
Forms of state control
that can minimize its
negative effects
Positive effects of state
control
Forms of state control
that can maximize its
positive effects
Agency theory State as principal
provides weak
monitoring. Not clear
who acts as principal on
behalf of state. Soft
budget constraintscreate
weak incentives for
managers as agents.
Active state involvement
in Corporate Governance
(CG). Creation of asset
management companies
to manage state assets
defines principal
responsible for
monitoring. Firms with
partial state ownership
benefit from diligent
monitoring by private
investors.
Under conditions of
entrenched
management and
diffused ownership,
state shareholders can
exercise influence over
management even with
relatively small stake.
State ownership
accompanied by CG
mechanisms enabling
effective control.
Tra n sa ct i on
cost economics
State control increases
costs of transacting by
increasing risk that firm
may not fulfill contract
obligations due to
politically motivated
interference.
Partial state ownership
gives private
shareholders enough
influence to prevent
unilateral decision-
making by state
shareholders. Indirect
state ownership isolates
political actors from
direct involvement in CG.
State control decreases
costs of transacting by
reducing risk of
fraudulent behavior on
behalf of firms.
State ownership
accompanied by CG
mechanisms enabling
active involvement of
state shareholders in
monitoring.
Institutional
theory
Performing
simultaneously
functions of regulator
and owner of economic
actors creates conflicts of
interest.
Isolating state agencies
acting as shareholders
from state agencies
acting as regulators.
State control solves
some problems
associated with
institutionalvoids. State
leverages control over
firms when acting as
“institutional
entrepreneur.”
State ownership
accompanied by CG
mechanisms enabling
monitoring. Reg ulations
enabling “institutional
entrepreneurship”by
state-controlled firms.
Industrial
policy
perspective
More opportunities for
corruption. Obstacles
created for independent
firms competing with
state-supported industry
champions.
Partial state ownership
gives private
shareholders influence to
prevent unilateral
decision-making by state
shareholders. Regulations
that protect private firms
in industries dominated
by state-supported firms.
State control enables
implementation of
industrial policy
through coordination of
investments made by
state-supported
industry champions.
Transparent CG
mechanisms to be used
by the state for
coordinating firms
receiving state support.
Resource-
based view
Endowment with state
resources makes state-
controlled firms
reluctant to develop
skills to obtain these
resources without state
support.
Providing managers of
state-controlled firms
with sufficient
autonomy and creating
strong incentivesto focus
on increasing
competitiveness o f their
firms.
State-controlled firms
benefitfromaccessto
valuable resources
belonging to the state.
CG mechanisms
engaging state as
shareholder increase
chances of gainingaccess
to state resources.
Regulation that
constrains potential
corruption associat ed
with distributionof these
resources.
(Continues)
201STATECONTROL IN TRANSITION ECONOMIES
© 2015 JohnWiley & Sons Ltd Volume 24 Number 3 May 2016
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