St. Petersburg University
Graduate School of Management
Master in International Business Program
FORMS AND DIRECTIONS OF GOVERNMENT
INVOLVEMENT IN INTERNATIONALIZATION OF
Master’s Thesis by the 2nd year student
Concentration — International management
[Professor, Andrei Yu. Panibratov]
ЗАЯВЛЕНИЕ О САМОСТОЯТЕЛЬНОМ ХАРАКТЕРЕ ВЫПОЛНЕНИЯ
ВЫПУСКНОЙ КВАЛИФИКАЦИОННОЙ РАБОТЫ
Я, Гладышева Мария Игоревна, студентка второго курса магистратуры направления
«Менеджмент», заявляю, что в моей магистерской диссертации на тему «Формы и
направления влияния государства на интернационализацию российских компаний»,
представленной в службу обеспечения программ магистратуры для последующей передачи
в государственную аттестационную комиссию для публичной защиты, не содержится
Все прямые заимствования из печатных и электронных источников, а также из
защищенных ранее выпускных квалификационных работ, кандидатских и докторских
диссертаций имеют соответствующие ссылки.
Мне известно содержание п. 9.7.1 Правил обучения по основным образовательным
программам высшего и среднего профессионального образования в СПбГУ о том, что «ВКР
выполняется индивидуально каждым студентом под руководством назначенного ему
научного руководителя», и п. 51 Устава федерального государственного бюджетного
государственный университет» о том, что «студент подлежит отчислению из СанктПетербургского
квалификационной работы, выполненной другим лицом (лицами)».
STATEMENT ABOUT THE INDEPENDENT CHARACTER OF
THE MASTER THESIS
I, Maria Gladysheva, second year master student, program «Management», state that my
master thesis on the topic «Forms and directions of government involvement in
internationalization of Russian firms», which is presented to the Master Office to be submitted to
the Official Defense Committee for the public defense, does not contain any elements of
All direct borrowings from printed and electronic sources, as well as from master theses,
PhD and doctorate theses which were defended earlier, have appropriate references.
I am aware that according to paragraph 9.7.1. of Guidelines for instruction in major
curriculum programs of higher and secondary professional education at St. Petersburg University
«A master thesis must be completed by each of the degree candidates individually under the
supervision of his or her advisor», and according to paragraph 51 of Charter of the Federal State
Institution of Higher Education Saint-Petersburg State University «a student can be expelled from
St. Petersburg University for submitting of the course or graduation qualification work developed
by other person (persons)».
Гладышева Мария Игоревна
Название магистерской диссертации
Формы и направления влияния государства на
интернационализацию российских компаний
Высшая Школа Менеджмента
Панибратов Андрей Юрьевич
Описание цели, задач и основных результатов Данное исследование фокусируется на изучении
корпораций и изучает влияние государства на их
магистерской диссертации является анализ
взаимосвязи между уровнем государственного
политической аффилированности и степенью их
интернационализации. Для выполнения этой
задачи был проведен регрессионный анализ.
Результаты статистического анализа показали,
что количество политиков в составе совета
государственные контракты, характеризуются
более высокой степенью интернационализации.
исследования на практике.
компании, политическая аффилированность,
совет директоров, Россия.
Master Student’s name
Master Thesis Title
Forms and directions of government involvement
in internationalization of Russian firms
Graduate School of Management
Academic Advisor’s Name
Andrey Yu. Panibratov
Description of the goal, tasks and main results The following work is focused on researching the
phenomenon of Russian multinational enterprises
(MNEs) and studying the government influence
on their internationalization. The main goal of this
master thesis is to investigate and analyze the
correlation between government involvement/
political connectedness and internationalization
process of Russian firms. For this aim five
hypotheses were proposed and regression analysis
was conducted. The findings showed that the
amount of politicians among board members and
their personal connections positively influences
positively related to international activities. The
Internationalization, Russian MNEs, political
connectedness, board of directors, government
List of tables
Table 1. Measures of internationalization process ........................................................................ 14
Table 2. Positive and negative effect of political connections...................................................... 23
Table 3. Developed hypotheses .................................................................................................... 29
Table 4. Variables ......................................................................................................................... 34
Table 5. Average numbers of political connectedness.................................................................. 38
Table 6. Descriptive statistics ....................................................................................................... 38
Table 7. Correlation ...................................................................................................................... 41
Table 8. Results of T-tests. Differences in Number of Countries means between companies with
political connections and without them ........................................................................................ 42
Table 9. Result of regression analysis: Number of countries model ............................................ 44
Table 10. Results........................................................................................................................... 46
List of contents
INTRODUCTION ........................................................................................................................ 9
CHAPTER 1. RUSSIAN MNES AND THE GOVERNMENT AND POLITICAL
INFLUENCE ON THEIR INTERNATIONALIZATION ..................................................... 12
1.1 Theoretical context of the research ................................................................................. 12
1.2 Role of the state in internationalization process of MNEs ................................................. 16
1.3 Mechanisms of government influence on MNEs................................................................ 19
1.4 Political connectedness ....................................................................................................... 22
1.5 Political connections and internationalization .................................................................... 24
1.6 Russian institutional context ............................................................................................... 26
CHAPTER 2. RESEARCH METHODOLOGY...................................................................... 30
2.1 Research objectives ............................................................................................................. 30
2.2 Research questions .............................................................................................................. 30
2.3 Research method ................................................................................................................. 30
2.4 Data collection process ....................................................................................................... 31
2.5 Regression model and variables.......................................................................................... 31
2.6 Limitations .......................................................................................................................... 35
CHAPTER 3. FINDIGNS AND ANALYSIS ........................................................................... 36
3.1 Descriptive statistics ........................................................................................................... 36
3.2 Hypotheses testing .............................................................................................................. 41
CHAPTER 4. SUMMARY AND DISCUSSION ..................................................................... 47
4.1 Summary ............................................................................................................................. 47
4.2 Implications for theory and practice ................................................................................... 47
4.3 Suggestions for the furture research ................................................................................... 47
CONCLUSION ........................................................................................................................... 49
References .................................................................................................................................... 50
Appendix 1. Model summary ..................................................................................................... 57
Gross domestic product
Outward foreign direct investment
Foreign direct investment
Foreign sales to total sales
Initial Public Offering
Ordinary least squares
Return on assets
United Nations Conference on Trade and Development
International expansion of Russian multinational enterprises (MNEs) has significantly
increased since the early 2000, but this theme has interested a small number of scholars. Despite
the fact that today not a few research papers and articles are dedicated to the theme of multinational
enterprises in emerging economies, only a small part of them are focused on international
enterprises in Russia. The interest of scientists of MNEs could be explained by the growth of
importance emerging market multinationals. Multinational companies from India, China, Brazil
and Russia use different internationalization strategies, entry and consolidation models that help
them to become the leading players on the foreign markets.
The internationalization of companies from emerging economies is fairly new phenomenon
and rapid development of multinational companies for several decades has been leading to a new
wave of business studies that try to answer the interesting question: how can companies that do
not have strong brand names and rarely own a lot of resources and technological capabilities
compete with large multinational companies from developed countries?
It is not correct to utilize the same criteria for analysis of multinationals from emerging
economies and MNEs from developed countries because of the following reasons. Firstly, MNEs
from developing countries typically do not have strong resources and unique technological and
other capabilities that ultimately make them the market leaders. Secondly, emerging multinationals
since their foundation were forced to operate in under-developed environment which is
characterized by high level of government ownership, instability and feeble market mechanisms.
Therefore, multinational companies from emerging countries in most cases depend on domestic
state that takes part in the strategy formation and also controls their activities within the country
and abroad. These factors lead to the situation when MNEs need to competently build relations
with the state that is able to provide the compensation for companies’ weaknesses (Wang, 2012).
This master thesis is devoted to the topic of forms and directions of government
involvement in internationalization process of Russian MNEs. In the context of Russian
institutional environment this topic is very important because the role of Russian government in
business is extremely high, especially in the case of MNEs that represent the strategic interest for
the state in international arena. Thus, it is important to understand the relationship between
government and the largest Russian companies in order to understand the pattern and peculiarities
of their internationalization process.
Research gap and topicality
This study is important because it covers the topic of internationalization process of
Russian multinationals and the role of the domestic state in this process. The work is focused on
the research of Russian multinational companies for some reasons. The first one is that Russia was
included into the list of 20 largest home economies in the world (UNCTAD report, 2015).
Secondly, Russia is one of the most prominent representative of the countries with emerging
economy that today play a vital role in the development of world economy. Finally, today Russian
economy is one of the less studied and examined in worlds business literature: for this reason, the
research of the theme of Russian MNEs will significantly increase the existing poll of knowledge.
Research problem can be identified as «How does Russian state influence the
internationalization process of domestic firms and which mechanisms does it use during
interaction with them». Previous research studies do not consider internationalization and
institutional theory together: this study covers this gap by analyzing the role of government and
political connections in internationalization process of Russian firms.
In addition, most of research papers that focused on role of political connections in
internationalization process usually are too general and do not pay attention to level or degree of
political connections in the companies and do not account for differences between companies that
have different levels of political connections. This study approaches this gap by dividing political
connections into several levels and analyzing how each of them impacts internationalization.
The master thesis is based on deductive approach. The first step in the research was the
analysis of previous empirical research dedicated to the topic of forms and directions of
government involvement in internationalization of domestic firms. Theoretical articles and other
foundations consider different aspects of research problem. The statement of hypotheses was
included into literature review because each hypothesis is supported by the theory and explained
circumstantially. Acceptance or rejection of hypotheses helped to consider research problem,
achieve the research goals and objectives and answer on research questions that are formulated in
the second chapter.
Structure of the paper
The remainder of the following research is divided into four sections. The first section is
dedicated to the review of the literature relating to internationalization of Russian MNEs,
indicators of internationalization, direct and indirect mechanisms of government influence on
domestic firms, role of political connections in internationalization process of companies. The
second part includes description of research design and methodology, main goals of the master
thesis and research questions. The third part consists of the explanation about conducted research
and description of the results of the analysis. The forth part consists of summary and discussions
and suggestions for further studies and finally, practical managerial recommendations.
CHAPTER 1. RUSSIAN MNES AND THE GOVERNMENT AND POLITICAL
INFLUENCE ON THEIR INTERNATIONALIZATION
1.1 Theoretical context of the research
Defining multinational companies
Despite the fact that globalization for a long time was driven by multinational companies
from countries with developed economies, multinationals from emerging countries have recently
begun to operate in new markets typically through outward foreign direct investment (OFDI).
According to the definition of Dowling, Liesch, Gray and Hill (2009, p.123), MNE is «any
business that has productive activities in two or more countries». In other words, multinational
firms are companies that have shown their ability to operate and play role in the global scene.
Proof of the international status can be found in such types of characteristics as the considerable
scope of companies’ operations, big-league profits, the employment of large multinational
workforce, globalized customers in international market (Panibratov, 2012a).
Russian multinational enterprises (MNEs) are well-known leaders in their home market,
but only a few of them has been accepted onto the world stage as equal partners. However, it is
explainable: the internalization of Russian companies became possible only in 1991, the period of
appearance and development of private business in the post-communist period (Panibratov,
2012b). Therefore, most of Russian multinational firms are quite young, not highly experienced
and weaker according to some indicators than their foreign counterparts. Nevertheless, today
Russian companies have a lot of opportunities to achieve recognition in the international arena. A
lot of MNEs now have sufficient funding in order to make some significant foreign investments
and show their ambition and competitiveness in international market.
There is no consensus on the exact number of Russian MNEs. Their number directly
depends on the approach and methodology. According to Institute of World Economy and
International Relations, there are 20 top Russian multinational firms relied on their foreign assets
(2013). Panibratov (2012a) considers 160-170 Russian MNEs that consist of the companies with
the largest revenue operating in the Russian market and abroad without companies which are
foreign subsidiaries or companies with more than 50% of foreign ownership, companies which
had not begun the internationalization process yet and companies which did not disclose any
information to public on their foreign activities. Deloitte (2008) supposes that there are
approximately 5,000 Russian multinational firms. In general, non-transparency and concealment
of information promote the lack of reliable data about this topic.
Emerging Russian multinational companies vary from state-owned giants to privately
owned conglomerates keeping former government assets and newly established companies with
shareholders from foreign countries. But it would be incorrect to divide Russian multinationals
only into private and state-owned. For instance, private companies simultaneously consist of
dynamically developing business groups and «rent-seeking empires of the oligarchs» (Kuznetsov,
2011, p.67 ). As for state-controlled enterprises, they include both market-oriented companies and
ineffective firms that can not exist without government support.
Despite the fact that internationalization is a widely used term in academic literature
researches have not yet create a universal definition of this process. There are different approaches
that consider internationalization process from different perspectives. According to classical
definition, internationalization is the process when the companies gradually increase their
international involvement (Johanson, Vahlne, 1977). Another internationalization concept
considers internationalization as the process through which the companies raise their awareness of
the impact of international operations on their future and «establish and conduct transactions with
companies from other countries» (Beamish, 1997, p.36). The main forms of internationalization
process are exports, foreign direct investment (FDI) and international contacts (Conconi, Sapir,
Zanardi, 2010). This study is based on the classic definition given by Johanson and Valhne.
Another fundamental question of international business literature is what determines the
internationalization and how it should be measured (Dörrenbacher, 2000). Internationalization
may be analyzed and measured by three categories of internationalization that include structural,
performance and attitudinal (Dörrenbacher, 2000; Sullivan, 1994).
Structural indicators provide the representation about international expansion of the firm
at a given time (Dörrenbacher, 2000). This type of indicators includes the following parameters
(Gomes, Ramaswamy, 1999; Dörrenbacher, 2000):
Number of countries where the company affiliates;
Ratio of foreign assets to total assets;
Proportion of foreign affiliates;
Proportion of foreign assets;
Number of cases of non-capital involvement abroad;
Proportion of sourcing abroad;
Number of foreign employees/ ratio of foreign employees to total employees;
Amount of shares owned by foreigners;
Number of stock markets on which a company listed.
The second group is performance indicators that show how well the firm operates in the
foreign markets. These indicators consist of 5 main parameters (four of them represent foreign
sales, the last one - operating income abroad):
Amount of foreign sales by customer location;
Amount of sales of foreign affiliates and revenues of foreign affiliates;
Exports from home country;
Sum of revenues of foreign affiliates;
Sum of operating income of foreign affiliates.
As for attitudinal indicators, they provide reflect on the relationship between the domestic
country of the company that internationalizes and its foreign operations (Curwen, Whalley, 2006).
This type of indicators includes (Dörrenbacher, 2000):
Ethno, poly, region and geocentric management styles in accordance with
authority, decision making process, organizational complexity, communication
flows, recruiting, control, staffing.
International experience of top officials of the company that measured by counting
number of the years that top managers spent working in foreign countries weighted
by the total years of their work experience.
Jankowska (2001) distinguished measures of the company internationalization based on
different features of internationalization such as exports of products; international contacts; foreign
direct investment; employment; deliveries of materials, fixed assets and services; companies with
ownership share of foreign capital; foreign sources of financing operational activity; foreign
portfolio investment. Measures of internationalization are summarized in the Table 1.
Table 1. Measures of internationalization process
Feature of internationalization
Indicator of internationalization
- Share of revenue from export sales in total
volume of revenues
Exports of products
- Share of profit from exports in total volume
- Share of foreign clients in total number of
- Share of sales revenues from sales through
foreign partners in total volume of revenues
- Share of profit from sales through foreign
partners in total volume of profits
- Share of foreign clients attracted through
foreign partners in total number of company
- Number of production process links located
in other countries in relation to total number
of links in the company value chain
- Value of assets (fixed capital and current
assets) constituting foreign direct investment
in the total value of company assets (fixed
capital and current assets)
Foreign direct investment
- Number of branches located abroad in
relation to the total number of company
- Share of revenue from sales of products
manufactured in factories being foreign direct
investment in total volume of revenues
- Share of profit earned on sales of products
manufactured in factories being foreign direct
investment in total volume of profits
- Share of deliveries of raw materials, parts
and components by foreign suppliers in total
amount and value of deliveries
Deliveries of materials, fixed assets and
- Share of machines and equipment bought
from foreign companies in total value of
machine and equipment purchases
- Value of purchased services of foreign
subcontractors in relation to total value of
Share of foreign start-up capital in total value
Companies with ownership share of
of company start-up capital
Share of foreign start-up capital in total value
Share of foreign capital (loan, leasing,
Foreign sources of financing operational
subsidy) used to finance operational activity in
total sum of company capital
- Ratio of people employed abroad to total
number of employed people
citizenship in relation to total number of
Source: summarized by author based on Jankowska (2001)
1.2 Role of the state in internationalization process of MNEs
Domestic governments play a crucial role in internalization of multinational companies
from emerging countries (Michailova, Panibratov, 2012). They have actively involved in OFDI
and encouraged it through often expensive and quite controversial public policy and economic
regulations (Johnson, Mitton, 2003). Governmental policies in emerging countries that aim to
foster OFDI can be considered as development strategy because in the perspective these policies
can lead to economic growth (Knoerich, 2012; Caseiro, Masiero, 2014). Therefore, the more
international activity of the domestic companies sets the goal to secure scarce assets for the home
economy, the more is its potential to facilitate to national development and for this reason it should
be supported through public policies (Caseiro, Masiero, 2014). In addition, the strategy of global
promotion of domestic companies can be used in order to prevent foreign multinationals from
taking full control over home industries and sectors at the same time as raising connections with
global flows of resources, capabilities and technologies are generated (Knoerich, 2012).
There are a lot of questions about ideal relationship between government and domestic
companies. According to Evans (1995, p. 124), «long-term successful industrial policy is usually
implemented within an embedded autonomy-type of relationship between state and companies» It
means that the government should build close links with domestic firms and be aware of their main
challenges and capabilities. At the same time government should be autonomous and avoid
situations when it can be captured by firms’ short-term interests, formulated and implemented
policies that fulfill the needs of national development through a consistent set of institutions and
instruments (Caseiro, Masiero, 2014).
Resource-based, industry-based and institutional concepts
There are three different views on internationalization process of companies from countries
with emerging economies – resource-based, industry-based and institutional concepts.
Resource-based theory that is based on the idea that distinctive features of MNEs
international expansion can be explained by the differences between companies’ special resources
and capabilities. This concept considers internationalization as the process when the company
wants to use its competitive advantages (resources, technological capabilities, strong brand name)
in international markets or try to get new resources and assets (Buckley, Clegg, Kafouros, 2012).
In recent academic literature government support and political connectedness of the
companies is considered as a really influential managerial resource especially in the countries with
emerging level of economy (Li, He, Lan, Yiu, 2011). It happens because formal institutional
framework is not fully formed in countries with developing economies and in this situation
government and political connections are more important in contributing economic exchange (Fan,
Huang, Morck, Yeung, 2009). In these countries in many cases the state has strategically important
resources and allocates them, takes part in approving different projects and intervenes in business
operations. For this reason, politicians within the company can provide insider important
information about government motives and plans and the receipt of strategically important
resources and administrative affirmations (Peng, Lee, Wang, 2005). The government often has the
impact on companies through people that belong to companies’ board members or top
management and perform as government informants (Peng, Lee, Wang, 2005).
The government in emerging countries often creates the rigorous administrative procedures
of OFDI approval and strictly controls domestic companies' international activities and at the same
time tries to support them through subsidizing OFDI by firm in strategic industries and negotiating
state contracts and auspicious conditions for OFDI in host countries (Child, Rodrigues, 2005). In
this political context politicians within the company and political connections can help the
company to receive licenses, financing, resources and technologies that are essential in entering
the international market (Guillen, 2000).
Thus, political connections can be considered as a powerful competitive advantage of the
company especially when the company wants to enter new markets or develop its
internationalization process. The company’s ability to enter new markets directly depends on the
assess to necessary resources and assets. As was mentioned before, markets in emerging
economies are not well developed and therefore, the state intervention in the activities of the
company can be estimated as significant advantage. The government can support domestic MNEs
by providing access to strategically important resources, better public provision and ensuring
insider hidden information. Therefore, the following hypothesis was stated:
Hypothesis 1. Number of former and present politicians among top officials of the company
positively influences the internationalization.
Not a single one organization can be considered alone, without institutional context (Scott,
2008). Therefore, in the case of internationalization of MNEs from developing countries rather
than merely considering their international expansion as the result of distinctions in position of
resources and capabilities, it would be appropriate to view their internationalization as a result of
their relationship with government agencies.
As for institutional theory, it states that internationalization as a part of firm strategy is
driven not only by special company’s resources but also largely by different «isomorphic pressures
and the need to meet environmental demands» (Hong, Wang, Kafouros, 2015, p.50). Multinational
companies perform in fragmented institutional context and force to face complex institutional
pressures (Saka-Helmhout, Deeg, Greenwood, 2016). Institutions play a vital role in operation of
MNEs from emerging economies that «experience political and institutional reforms and
institutional voids» (Dunning, Lundan, Cantwell, 2010, p. 570).
There is no doubt that the role of the government in internationalization process of
multinational companies is extremely important both for firms from developed and emerging
countries. Nevertheless, the government is much more influential in countries with developing
economies. This fact can be explained by the following reasons. The first reason is that the state
in developed countries rarely directly intervenes in the internal operations of the company and
controls the activities in the international markets. In the emerging countries we can the opposite
situation: local government not only actively involved in the company's operations, in many cases
the state owns a lot of MNEs (Hong, Wang, Kafouros, 2015).
The influence of the government on internationalization process of MNEs can be seen both
as advantage and disadvantage (Panibratov, 2012a). On one hand, the state can act as a market
regulator and support national firms through special tax rebates, foreign exchange and financial
assistance. Furthermore, the state can create international agreements in order to defend OFDI.
Nevertheless, one should accept that government in a lot of cases puts pressure on national
companies and limits their international expansion.
The state also impacts on internationalization process by means of direct ownership in
companies. For instance, when the government is the main shareholder of the company, it can
determine what strategy should the firm choose and how should it perform in international market.
In this situation the risk that the firm will receive not economically beneficial solutions but those
that accommodate political goals becomes high. Managers of state-owned enterprises often
internationalize in order to enhance geopolitical standing (Wang, Hong, Kafouros, Boateng, 2012).
From these facts, one may conclude that the state has an impact on the ability of multinational
companies to operate in foreign markets (Hong, Wang, Kafouros, 2015). Moreover, previous
empirical researches proved that the government gives much more support for state-owned
enterprises rather than private companies (Fan, Huang, Morck, Yeung, 2009). Therefore, it is
logical to create the following hypothesis.
Hypothesis 2. Government ownership positively influences internationalization.
The third concept is industry-based theory that states that companies’ activities and
performance are largely determined by the industry in which the company operates. Structure of
the industry, its characteristics and competition within each industry influence the probability of
gaining the success on international market.
Regarding to internationalization, industry concept considers that internationalization
process of the companies directly depends on the competition inside the industry in which it
operates (Hyrner, 1976; Botter, Holmquist, 1996). Sometimes a lot of competitors in the domestic
market encourage the companies to go abroad. According to Delios and Beamish (2001) the firm
is more likely to start internationalization process if its industry is characterized by high
Another important point related to internationalization and industry-based concept is the
idea that different industries have different potential for globalization (Yip, 1992). Klevorick,
Levin, Nelson and Winter (1995) argue that companies that produce standardized products have
more chances to be successful in international market than firms that produce consumer products
and highly impacted by differences in preferences.
The previous studies have shown that the companies that represent strategic sectors of
economy (oil and gas, electricity, military and mining industries) are most state-controlled. Some
industries such as education, media and sport sphere are not strictly controlled by the government
but are of strategic interest to the state.
1.3 Mechanisms of government influence on MNEs
The state usually affects the internationalization of domestic firm in the following
directions (Wang, Hong, Kafouros, Wright, 2012):
companies’ strategic goals and decisions;
the availability and cost of different resources and capabilities;
the ways how these resources and capabilties are used;
the procuring of important knowledge, information and valuable services;
transaction costs connected with transborder expansion.
The government influences national multinational companies using formal and informal
mechanisms (Bazuchi, Zacharias, 2013). Formal mechanisms are visible actions that government
use to control multinational companies through the executive, legislative and judiciary branches
while informal mechanisms are invisible actions mediated by personal networks and informal
institutions that penetrate the public sphere. Developing countries and economies are also
characterized by direct and indirect involvement of the state in the domestic companies’
operations. The state usually uses ownership rights, mechanisms of control and regulations (Peng,
Emerging economy governments can offer direct support providing OFDI promotion
policies that include such tools as trade shows and inter-government agreements in order to directly
assist and regulate exports and OFDI (Hoskisson, Wright, Filatotchev, Peng, 2013). Moreover,
emerging governments provide direct support in internationalization ensuring a low cost of capital
for domestic MNEs (Buckley, 2010) or indirect support through «negotiation of bilateral treaties
with host country governments to protect OFDI» (Hoskisson, Wright, Filatotchev, Peng, 2013, p.
The type of mechanisms that the state uses influencing internationalization of MNEs
directly depends on two factors: the degree of state ownership in a given company and the level at
which company is affiliated to the state (Wang, Hong, Kafouros, Wright, 2012). The degree of
state ownership related to the government's share in the ownership of the company and the number
of officials in the board of directors or supervisory board. The second one refers to situations
when the state impacts international expansion of domestic firms by establishing links with the
companies (Wank, 1995). The institutional inclusion of the firm also depends on hierarchical rank
of the government that affects their actions (Wang, Hong, Kafouros, Wright, 2012).
The role of state ownership and governmental affiliation level
These two dimensions differ greatly and influence decision-making process of MNEs
differently. When the government is the owner or shareholder of the company, it uses direct
mechanisms of influence MNEs but the influence the state affiliation on companies is indirect, it
usually happens through networks.
The framework that explains how government ownership in the company and state
affiliation level affect companies was created by Wang, Hong, Kafouros and Wright (Figure 1)
(2012). The main idea of the matrix is to show that when the degree of the government ownership
in the company is high (Cells 2 and 4) the state directly influences companies’ international
operations by assigning executives and creating regulations related to government-owned assets.
In this situation the firms need to balance political aims and desires of the state and market demand
and chose the strategy consistent with government policy. It is also critical to mention that
managers that work in the companies with high degree of government’s share chose
internationalization strategy in accordance with the position of the official structures because
career growth depends on whether they succeed in implementation state’s objectives (Ramamurti,
2001). In other words, decision about the internationalization of state-owned enterprises or
companies with high level of state’s ownership are driven by political goals. Nevertheless, such
type of companies often receives governmental contracts that in many cases contribute their
internationalization (Ramamurti, 2001). Thus, the following hypothesis was created.
H3. Government contracts positively influence internationalization.
Speaking about government affiliation, it is important to mention that it can be at a high
(state/provincial) or low (city/country) levels. When the companies deal with high level (Cells 3
and 4), they receive more support from the governmental official structures during their
internationalization. State’s affiliation mirrors greater status that enhances the trust of a focal
company and decreases the uncertainty that their prospective international partners may feel about
the company (Jensen, 2003). Moreover, in comparison with low level of affiliation (Cells 1 and 2)
where the main goal of local government is to increase local economy output and revenue (Liu,
Sun, Woo, 2006), government at high level set up more strategic goals, it is more concerned with
integration of the country into world economy and therefore encouraging companies to invest
overseas is one of their main priorities (Child, Rodrigues, 2005).
In addition, state government in many cases reallocates surplus labor and other assets
towards new initiatives; one of this strategic initiatives can be international expansion (Wang,
Hong, Kafouros, Wright, 2012). State government provides domestic companies special resources
that related to foreign markets while local government usually has limited resources and
capabilities in most situations related only to local markets (Sun, Mellahi, Thun, 2010).
Figure 1. Matrix of state ownership and government affiliation level
Government affiliation level
Source: Wang, Hong, Kafouros, Wright, 2012
In general, emerging economy governments are often criticized for inadequate property
rights and ineffective laws (Sun, Peng, Lee, Tan, 2015). In the context of internationalization of
MNEs legal system and its enforceability are extremely important because they contribute
transactions and resolve conflicts and help companies to expand their business abroad (Zhou,
1.4 Political connectedness
Measurement of political connectedness
Political connectedness relates to the situation when the officials of the companies are
former or present politicians or have personal contracts with the state and government structures.
According to Faccio (2006), the firm can be called politically connected or related to the
government if at least one of its members of board of directors or top management belongs to the
following groups: parliament member, politician, deputy, minister, governor, major. In this
research similar classification was used.
It is also important to mention that a lot of researches pay attention to both former and
present experience in politics because people from governmental institutions usually save
important contacts and can use them during the whole career. In the research conducted by Fan,
Wong and Zhang (2007) the company has political connections if its general director is the present
or former official of the central or local government and military structure. This research is based
on China institutional environment where militaries are close related to the government. Boubakri,
Cosset and Saffar (2012) also take into consideration both former and present politicians and prove
the same argument that officials with political past can retain their connections and receive some
bonuses from them after resign.
Based on the previous researches the criteria for classification of firms according to their
political connectedness were created. The company can be called politically connected in the
Members of board of directors are present or former politicians.
Top management of the company includes present or former politicians.
Members of board of directors have personal connections with government.
Top management of the company has personal connections with present or former
President, prime minister or other politicians.
In addition to former or present politicians among companies’ officials, the level of
political affiliation can be measured through amount of government contracts, level of state
ownership in the company.
The role of political connectedness
The researches do not reach the consensus about the effect of political connections on the
companies. Most of the empirical studies related to this topic prove the idea that political
connections are a really powerful competitive advantage that can bring the company a lot of
bonuses such as access to strategically important resources, economically beneficial government
contracts, access to insider secret information. The overview of role of political connections on
the companies is represented in the Table 2.
Table 2. Positive and negative effect of political connections
Access to strategically
and an intention to satisfy
(Goldman, Rocholl, So,
the social service’s
2009; Boubakri, Cosset,
objectives (Fan, 2007;
Low taxes (Faccio, 2010)
often internationalize in
Role of political
order to enhance
Access to credits (Khwaja, Political objectives are
Mian, 2005; Leuz,
more important than
strategic economic goals
Claessens, Feijen, Laeven,
(Hong, Wang, Kafouros,
2008; Boubakri, 2012)
Benefits during the IPO
(Francis, Hasan, Sun,
policies adopted in the
state (Agrawal, Knoeber,
Access to insider hidden
information (Wang, 2012)
Source: developed by author
The table shows that from one hand, political connections can be considered as a
company’s resource that can become strong competitive advantage. On the other hand, political
connections and government intervention can be harmful for company’s economic prosperity
because political purposes become more important than economic goals.
Most of the studies examined correlation between political connections and different
company’s indicators are focused on countries with developing economies. It can be explained by
the fact that the role of the state is more important in countries with emerging economy rather than
in developed countries. Internationalization process of MNEs from developed countries is marketdriven while internationalization of MNEs from developing countries largely depends on
institutions and home government.
One should note here that economic, institutional and market development, state structure
of various countries with emerging economies may differ significantly. Thus, the role of the
government can be more visible and important in one countries with developing economies than
in others. For instance, some scholars ague that large countries with emerging economies such as
China, Russia, India are characterized by a high level of state involvement in their operations
(Hong, Wang, Kafourous, 2015).
1.5 Political connections and internationalization
In developing markets unstable political and economic structure significantly increases
uncertainty and unpredictability of business operations that may create some difficulties for
companies’ operations and international expansion. In this situation one of the solution can be
establishment of network connections (Önder, Simga-Mugan, 2006; Heath, Peng, 1996). If the
company is not able to build partner relationship with domestic government the chances of failure
of this company in international arena will significantly increase (Hong, Wang, Kafourous, 2015).
In contrast, companies that interact with local state closely often receive a lot of bonuses
that can be classified as firms’ intangible assets (Hoskisson, Eden, Lau, Wrighy, 2000). Previous
researches can come to conclusions about advantages that can bring cooperation with government.
For instance, Faccio (2006) concluded that companies with political connections receive more
credits and loans and more assistance from the state during period of adversity. Another researches
Wu, Chongfeng, Zhou, Wu (2012) found that firms with connections with the government in many
cases acquire favorable tax rate and high level of market share.
These facts lead to dissemination of idea that the crucial element of company’s success in
countries with emerging economy is the ability to shape and maintain connections with the state
by appointing managers and board members with political connections or background (Peng, Luo,
2000; Khanna, Palepu, Sinha, 2005).
Speaking about internationalization strategy it is essential to mention that companies
usually use two ways of international expansion – export and foreign direct investment (FDI). The
choice of the strategy requires the compromise between high variable trade costs related to export
strategy and high fixed set-up costs related to FDI (Conconi, Sapir, Zanardi, 2010). In general, the
choice of internationalization strategy is extremely difficult because internationalization usually is
accompanied by a high level of uncertainty about performance and operations in foreign markets.
Majority of the researchers believes that companies in order to receive market-specific knowledge
should begin their internationalization through export or in some situations switching to regional
subsidiary sales (Johanson, Vahlne, 1997; Conconi, Sapir, Zanardi, 2010).
However, the company internationalization strategy can be changed significantly if the
government supports it through access to credits, special contracts with foreign governments,
reduction in tariffs or taxes, providing government contracts (Goldman, 2009; Faccio, 2010;
Boubakri, 2012; Wang, 2012).
In the case of state support the company can begin its
internationalization with establishing foreign subsidiaries. Therefore, it is reasonable to propose
the following hypothesis:
H4: High level of political connectedness is positively related to foreign direct investments.
As was mentioned above, political connections can bring a lot of bonuses for the companies
in terms of their operations, performance, access to strategically important resources and other.
After detection of these factors, the researchers decided to go further and identify how political
connectedness can impact on internationalization process. The first researchers that found the
correlation between internationalization and political connections or government support were
Agrawal and Knoeber (2001). They found that the more former or present politicians among
member of board of directors, the more international activity company has. Moreover, they noticed
that high amount of board members with political experience significantly increases the size of
sales to the state and lobbying activities.
Other researchers Wang, Hong, Kafouros and Boateng (2012) identified that government
support is positively related to FDI. The researcher focused on China market and examined 667
Chinese companies; state ownership was chosen as independent variable and amount of FDI
represented dependent variable.
The results of both studies showed that government involvement correlates with
internationalization performance of the companies. The more amount of political connections of
official of the company and the more government support, the more the company internationalized.
Thus, it is logical to propose the following hypothesis:
H5: High level of political connectedness of board members and CEOs positively influences
1.6 Russian institutional context
The relationship between multinational companies and Russian government has attracted
much attention from scholars. The firms in strategic industries such as oil and gas are responsible
for a large part of OFDI; for this reason, a lot of researchers argued that international expansion
and activities of Russian companies should not be explain only by the economic motives. Some
scholars noticed that companies in strategic sectors of Russian economy may be operating in
foreign countries to serve the interest of Russian state and its foreign policy (Vahtra, Liuhto, 2004;
Vahtra, 2005). Government controls companies from strategic important industries and supports
them making these firms «national champions». Through laws, regulations and institutions, state
impacts on multinational companies and in some cases dominates transactions within an economy.
Consequently, the role of Russian government should be taken into consideration in the questions
related to internationalization of Russian MNEs.
Evaluation of government influence on internationalization process
Government influence on MNEs operations and internationalization process can be
evaluated using two categories: control (the stake of the government in the company’s ownership)
and interest (the number and quality of incentives provided to the companies) (Panibratov, 2013).
The previous studies have shown that the companies that represent strategic sectors of Russian
economy (oil and gas, electricity, military and mining industries) are most state-controlled. For
their regulation the government tries to retain at least partial control in the private firms in such
industries as oil, gas, transportation, telecommunications, mining, steel (Boubakri, Cosset, Saffar,
Some industries such as education, media and sport spheres are not strictly controlled by
the government but are of strategic interest to the state. Banking, metallurgy and telecom industries
have a big impact on state's image; therefore, the government is interested in their development.
For the last few years Russian government is also highly interested in development in IT market
and support internationalization of other industries such as education and scientific research
(Panibratov, 2015). In addition, Russian state set the goal to greatly increase the share of IT
industries in the Russia’s gross domestic product (GDP) (RF Government, 2012).
These examples prove the suggestion that there are essential institutional variations across
different sectors of Russian economy. OFDI is fostered and subsidized in some sectors (oil, gas,
electricity, military), but other industries (fast food, automotive, logistics) are not a priority for the
state. It can be explained by the fact that heavy sector is the largest contributor to the government’s
budget and at the same time the most significant token of the state’s productive power (Panibratov,
2012b). These variations are significant source of competitive advantages and different
internationalization results of MNEs (Hong, Wang, Kafouros, 2015).
Influence on internationalization of state-owned and privatized companies
State-owned companies receive support from the government such as access to resources,
capabilities and important information, loans and credits from the central bank, administrative
support that facilitate their international expansion (Panibratov, Kalotay, 2009). At the same time
state influence remains in private companies or firms with partial government share.
The major amount of Russian export and foreign direct investments (FDI) are made by
group of natural resources. «Raw materials account for two thirds of Russian exports and Russian
energy and metal companies have a strong leverage in many of their target markets» (Vahtra,
Liuhto, 2005). The leading companies in gas, oil and metal sectors are the subject of national
interest of Russian government and because of it these companies are often influential bearers of
political power abroad. In other words, the role of the state in international performance of Russian
firms can be described as industry-driven and the extent of the control and involvement of the
government differs across sectors of Russian economy (Panibratov, 2012). For instance, in gas,
atomic and oil industries, multinational companies receive essential financial and administrative
support from the state. For those industries that do not represent the national interest for the state,
the government provide support and control through administrative mechanisms.
While excessive control and dependency can be regarded as a disadvantages that limit
companies’ activities, it provides MNEs financial and political security and the access to resources
that gives the companies opportunity to perform and compete in foreign markets (Jormanainen,
Koveshnikov, 2012; Panibratov, Latukha, 2014) and develop the economy in home country. This
is extremely important for Russian companies because they are the most morbidly feeling the
effects of the crisis compared with firms from other developing countries such as Brasil, India and
China (Andreff, 2015). During the global economic crisis in 2008 Russian OFDI stock was the
most unstable and decreased by 20% and in 2011 17% down but during the recovery in 2010, it
showed the highest rate of growth (74%) in comparison with other BRICS countries (UNCTAD,
Another direction considering the state's influence on international expansion of domestic
firms is the negative role of the government in internationalization process (Globerman, Shapiro,
2009; Lewin, Witt, 2007). Among them are bureaucratic regulations, corruption and heavy
taxation on domestic earnings (Hoskisson, Wright, Filatotchev, Peng, 2013). In addition, a lot of
managers in Russia are really concerned about political and economic instability which may lead
to expropriation of assets (Hoskisson, Wright, Filatotchev, Peng, 2013). In general, political
instability and weak institutional development became the reason why a lot of Russian companies
turns their activities at home into subsidiaries of foreign companies that registered in other
countries such as Cyprus, British Virgin Islands, Mauritius.
Russian economy needs a structural reform and enhancement of competitiveness in order
to transform Russia from the country with natural-resource economy to innovation-oriented
country (Vahtra, Liuhto, 2006). Nowadays the lack of transparency and corruption do not allow
Russia to achieve its full potential. Russia’s problem and challenges can be traced to its incapacity
to create sustainable formal institutions that will overcome its institutional voids (Puffer,
McCarthy, Jaeger, 2016).
Overall, the literature review helps to understand the topic in detail and provide material
that helps to build the hypotheses based on the results of previous empirical studies. All hypotheses
are presented in the Table 3.
In general, literature review provides important information about measurement of
internationalization and political connections, direct and indirect mechanisms of government
influence on domestic firms and their internationalization process, existent theories that consider
internationalization process from different perspectives – resource-, institution- and industrybased concepts.
Literature review also includes overview of different views on the role of government from
emerging markets on domestic firms. This generalization was very important for the deep
understanding of the topic and development of hypotheses. Overview of previous empirical studies
helps to choose appropriate statistical method for the further analysis and understand that variables
should be chosen for the consideration.
Table 3. Developed hypotheses
Hypothesis 1. Number of former and present
Guillen, 2000; Child, Rodrigues, 2005;
politicians among top officials of the
Peng, Lee, Wang, 2005; Fan, Huang, Morck,
company positively influences the
Yeung, 2009; Li, He, Lan, Yiu, 2011.
Hypothesis 2. Government ownership
Fan, Huang, Morck, Yeung, 2009;
positively influences internationalization.
2012; Hong, Wang, Kafouros, 2015.
Hypothesis 3. Government contracts
Ramamurti, 2001; Wang, Hong, Kafouros and
positively influence internationalization.
Hypothesis 4. High level of political
Goldman, 2009; Faccio, 2010; Boubakri,
connectedness is positively related to foreign
2012; Wang, 2012.
Hypothesis 5. High level of political
Agrawal, Knoeber, 2001; Wang, Hong,
connectedness of board members and CEOs
Kafouros and Boateng, 2012.
positively influences internationalization.
CHAPTER 2. RESEARCH METHODOLOGY
2.1 Research objectives
The aim of the study is to develop the understanding of the government role in
internationalization process of Russian multinational enterprises. This study has three main
to investigate empirically the role of home government in internationalization process
of Russian MNEs.
to evaluate the extent of government influences on internationalization process of
to find relationship between political connections of top officials (board members and
top management) and internationalization strategy of Russian MNEs.
2.2 Research questions
The study aims to answer on the following questions:
What demarcates the involvement of the government in the internationalization
process of Russian MNEs?
How the internationalization process of Russian MNEs depends on the type of the
What is the effect of political connections on internalization process of Russian
How the strength of political connection influences international strategy (form of
expansion and geographical presence) of Russian firms?
Answers on these questions can help to overview the topic in detail and achieve the main
goal of this research. Theoretical aspects of the issues were considered in the first chapter, in the
second part practical aspects of the problem will be discussed.
2.3 Research method
This research consists of several scientific methods that help to investigate the problem
deeply and achieve the main goal of the research. Generally, this work is a quantitative study that
based on the secondary data from databases, Russian and international journals and corporate
websites. The current study follows the positivism concept that involves the hypotheses creation
that should then be systematically tested. This approach was chosen because it allows to conduct
the objective research through precise control and measurement.
In order to investigate the correlation between government role and political connections
of top officials and internationalization process of Russian firms the explanatory type of research
was used. This type of the research helps to explain why something is happened and forecast
similar phenomenon in the future.
The main model that was used in this study is regression analysis because this method
allows to statistically estimate relationships between variables.
2.4 Data collection process
The empirical setting of the current work is Russian largest companies. The sampling of
Russian multinational companies for the current research was obtained from the annual ranking
Expert 400 that consists of the largest Russian companies in terms of sales and revenues. Purely
domestic companies, Russian subsidiaries of foreign multinationals and companies where foreign
ownership exceeds 50 percent were excluded in order to make sample more homogeneous. The
main purpose of this work is to assess the influence of government and political connections of
CEOs and board of directors on internationalization process of Russian MNEs, therefore
companies which have not started their internationalization were also excluded. As a result, the
final sample includes 157 firms.
The study was conducted with usage of secondary data that was collected through such
sources as Spark and Skrin databases, Interfax Center for the disclosure of information,
companies’ official websites, annual reports, Russian and international newspapers, magazines
and other media (New York Times, Bloomberg, Wall Street Journal, Forbes, Financial Times,
Kommersant, Lenta, Ria Novosti). The databases were used in order to receive information about
age, industry where companies operate, members of board of directors and CEOs, financial
indicators. Most of corporate websites include firms’ annual reports and biography of CEOs and
board members that were also important for this study. Interfax Center includes information about
companies’ annual financial indicators. As for Russian and international media, these sources
provide information about political connections of board members and some biographical facts
that for different reasons do non mention on the corporate websites.
2.5 Regression model and variables
One of the objectives of this research is to explain the correlation between government
influence/ political connectedness on internationalization process of Russian largest firms.
Therefore, the main method of this study is regression analysis that helps to predict one variable
from other variables. The study consists of three types of variables: control, dependent and
independent variables (Table 4). Further, each variable will be discussed in more detail.
Control variables: firm size, board size, total sales, intangible assets, industry, ROA
Following previous researches (Lemmon, Lins, 2003), we decided to control some risk
factors that might impact on the objectivity of the research. The first control variable is firm size
that measured by the logarithm of total sales. Firm size was chosen as control variable because
larger companies may be better positioned to access resources in the international markets and
have more opportunities (financial and others) in their internationalization.
The second risk-
control variable is board size that also might have affect on companies’ s financial indicators and
internationalization process (Hermalin, Weisbach, 2003; Dalton, Dalton, 2005; Vo, Phan, 2013).
The last one is total sales that measures the total revenue of the company in 2014.
Another control variable is administrative expenses that show how Russian companies use
operation expenses; intangible assets that represent non-physical long-term resources of an entity
and ROA that shows how profitable a firm is relative to its total assets. These indicators represent
the effectiveness of the company at a certain level of government influence (ROA), the expenses
that include costs on board of directors and CEOs (administrative expenses), intangible value of
the company, which is also formed by top officials of the company (intangible assets).
The last control variable is the industry where the company operates. As was mentioned in
theoretical part, in many cases type of the industry determines company’s performance. The final
sample consists of 12 industries to which companies from the sample belong.
Dependent variables: FSTS, foreign countries, characteristic of foreign countries,
FDI, international activity
The second group is dependent variables that include the international degree. In the first
chapter several indicators of internationalization were discussed. In this study such criteria as ratio
of foreign sales total sale (FSTS) was used in order to measure companies’ internationalization. In
order to answer on the question about the influence of political connections of top officials on
geographical choice of the number of countries where the firm operates was used as dependent
variable. In addition, FDI was chosen as a dependent variable that shows which
internationalization strategy the company uses.
Independent variables: government ownership, politicians on the board of directors
and among CEOs, level of political connections, government contracts
The third group is independent variables that show the level of political connections in
Russian companies. The first independent variable is the percentage of government ownership in
the company. There are different views on the impact of government impact researcher. Some of
them ague that high percent of government ownership is detrimental to company value (Borisova,
Fotak, Holland, Megginson, 2012) while other believe that government ownership can help the
companies to handle with external difficulties and uncertainties (Agrawal, Knoeber, 2001;
Hillman, Withers, Collins, 2009). The previous research papers measure government ownership
by calculating total percentage of shares that directly owned by the state or government companies
(Luo, Yao, 2006). The same measurement was used in this research.
The second independent variable is the number of politicians that now work in different
governmental structures. Members of the board and CEOs that are politically connected should
held such posts as minister, deputy minister, governor, major. The data that helped to access the
political connectedness was found on the companies’ corporate websites, Russian and
international journals and magazines.
The third independent variable is the degree of political connections. Based on previous
researches we decided to use four scoring system in order to assess the rank of these connections.
The highest level of political connection is attributed to those who have held top positions in the
central government (Du, 2011). In this case we gave 3 points those who have close connections
with former and present Presidents and prime-ministers of Russian Federation. The close ties
include friends, classmates and colleagues that can be considered as members of the team of
president or prime-minister – for example, advisors (Fisman, 2001). If the person has present
connections on the federal or high regional (exmp., governors) levels, the variable equals to 2. In
the situation when the person has political connections on the federal or regional level in the past
or political connections on municipal level (majors) it equals to 1 point. In the case when political
connections were not found, the variable equals to 0 points.
The last one is amount of governmental contracts and revenue that the companies received
form them. This variable helps to assess the level of government interest in the company, state’s
support and financial results that the companies receive from it. Access to state contracts, that
measured by the total sum of contracts awarded by a company during the study period, is taken as
indicative of close relationships to politicians.
Table 4. Variables
1) Firm size (logarithm of
1) FSTS (the ratio of foreign
1) Government ownership
sales to total sales)
(dummy variable; does state
has the shares in the company
2) Board size (total amount
2) Foreign countries
of board members)
(number of countries where
the firm operates)
3) Firm age (age of the
2) Politicians on the board
of directors and among top
3) Characteristics of foreign
management (number of
countries (CIS, Europe, Asia, present politicians in board of
3) Total sales (total revenue
Pacific Region, Offshore)
of the company)
directors and top
3) Level of political
3) Intangible assets
(the amount of foreign direct
connections (3 points – top
(intangible value of the
investment during one year)
positions on the central
government; 2 points federal or high regional
4) Administrative expenses
levels; 1 point - federal or
(total amount on costs on
regional level in the past or
political connections on
municipal level; 0 points – no
5) Return on assets
(expressed as a percentage)
4) Government contracts
6) Firm industry (industry
(dummy variable; 1 was
where the company operates)
given to the company which
revenue from government
contracts exceeds 1 percent of
the total sales)
With the help of regression model it will be possible to identify which factors have the
most influence on internationalization process. As for the models that were used in this study it
consists of different kind of analysis that perform different goals. T-test helps to evaluate the
differences in the means of FSTS and number of counties where firm operates in order to test
whether there exists any difference between the means of these two variables with independent
variables assembled in two groups based on their corresponding level of government involvement.
The following regression models were created:
FSTS = β0+β1*FS + β2*Industry+ β3*TS + β4*Int. A. + β5*Adm. Ex.+ β6*ROA+ β7*GO
β8*GO + β9*POBDT + β10*PC + β11*GC + e
Foreign Count. = β0+β1*FS + β2*Industry+ β3*TS + β4*Int. A. + β5*Adm. Ex.+ β6*ROA+
β7*GO β8*GO + β9*POBDT + β10*PC + β11*GC + e
FDI = β0+β1*FS + β2*Industry+ β3*TS + β4*Int. A. + β5*Adm. Ex.+ β6*ROA+ β7*GO
β8*GO + β9*POBDT + β10*PC + β11*GC + e
Models above are created for each dependent variable, such as foreign sales to total sales,
number of foreign countries and ratio of exports to FDI. Each model includes all control variables,
which are firm size, board size, firm age, total sales, intangible assets, administrative expenses,
return on assets and firm industry.
There are some limitations of this research, among them are:
1) lack of transparency of Russian companies – some information about political
connectedness of companies may be non-public and carefully hiding (Liuhto, Vahtra,
2) difficulties in generalization of information and full usage of results and
recommendation for the companies from other countries because the research considers
only Russian companies and Russian institutional context;
3) the sample list includes 157 Russian MNEs, however, sample consists of not all of the
representatives of this type of company.
CHAPTER 3. FINDIGNS AND ANALYSIS
3.1 Descriptive statistics
As can be observed from the Figure 2, the majority of the companies have affiliates in
between 1 and 5 countries. In general, the data is normally distributed with a long right tail. It is
also important to mention that the most popular destinations for the internationalization of Russian
companies are Europe and CIS countries that can be explained by close geographical location and
similar culture. In turn, less popular destinations for international activities of Russian companies
have become Pacific region that also quite logical: the countries from this part are located far from
Russia and its culture differs significantly that can create difficulties in conducting business.
A considerable number of Russian companies also operates in offshore countries such as
Cyprus, Luxemburg, British Virgin Islands. The most common area for offshore is Cyprus that
has extremely low taxes, similar culture and convenient geographical position for Russian
companies. However, according to consulting agencies, Cyprus will soon lose its urgency because
the head of state of Russia and the Republic of Cyprus signed an agreement according to which
the registration of legal persons in Cyprus becomes possible only if the entity has the Cypriot
founders and (or) operates in Cyprus, but not in Russia (PwC, 2014).
Figure 2. Distribution of quantity of foreign countries where Russian companies have
Source: developed by author
Descriptive statistics showed that average number of members of board of directors in
Russian companies equals 7,5 that means that the amount of board members varies from 7 to 8
people (Figure 3). The number of former and present politicians among members of board of
directors and top management varies from 0 to 11 persons with the mean of 2,23. It means that on
average, the companies has 2 current or former politicians among its officials. Regarding to the
level of political connections, it has a mean of 1,31. Therefore, it can be concluded that on average,
the level of political connections in the companies varies between 1 and 2.
Figure 3. Distribution of the amount of members of board of directors
Source: developed by author
Statistics also depicts that the number of politicians among board of directors and top
management connects with the level of political connectedness. A large number of politicians
among board of directors and top management usually accompanied by the existence of the
connections on the presidential level. As for the level of political connections, statistics shows that
the most common levels of political connectedness for Russian companies is federal, regional and
municipal levels; connections on the presidential level are not very common for Russian
companies. Forty companies among 157 do not have political connections at all.
The study also has two dummy variables – government ownership (does Russian state
shares in the company) and government contracts (does revenue received from government
contracts exceeds 1 percent of the company’s total sales). Regarding to these variables, descriptive
statistics shows 28 percent of the companies has the government as a shareholder. As for the
overnment contracts, it was shown that only 15 percent of the companies receive these contracts
from the government and get revenue from them. However, it is important to mention that there is
no single database containing information on all government contracts and the companies that
have received then in a given year. Information about state contracts was collected from different
sources, therefore, probably some data was missing.
The overview of average numbers regarding to political connectedness is represented on
the Table 5.
Table 5. Average numbers of political connectedness
Indicators of political connections
Politicians on the board of directors and
among top management
The level of political connections
28% of the companies has the state as a
15% of the companies receive state contracts
Source: developed by author
In general, the total amount of observations for all variables was 157 with the exception
of dependent variable FSTS (101 observations) that can be explained by inaccessibility of
information or even intentionally hidden facts about export and revenue from activities in
international market. Overall, the results of descriptive statistics for all variables are presented on
the Table 6.
Table 6. Descriptive statistics
Source: developed by author
In order to generalize information Russian companies were distributed in accordance with
industries to which they belong. As well as a lot previous studies (Doerrenbacher, 2000; Conconi,
Sapir, Zanardi, 2010), the descriptive statistics shows that the most internationalized companies in
Russia in terms of ratio of foreign sales to total sales (FSTS) are from oil and gas, pharmaceutical,
banks and metallurgy industry. It can be explained by the fact that oil and gas and metallurgy
industries are strategically important for the country, therefore, they were the first among Russian
companies that have begun the process of internationalization. Nevertheless, as was mentioned
above, the research is based only on 101 observations because unavailability of information about
companies’ foreign sales. Thus, it is reasonable to assume that these conclusions are not definite
and perhaps not very representative.
As for amount of total sales and intangible assets, the large amount of these financial
indicators belongs to companies from oil and gas, metallurgy and banks industries. This fact can
correlate with the level of internationalization. Firms that actively operate in international markets
usually have larger sales than domestic companies. Moreover, one of he most common strategies
of entering into new market is purchasing of assets. Companies that operate in the foreign markets
and buy assets have intangible assets in their balance sheets.
Descriptive statistics also depicts that companies that do not actively internationalize and
even do not well-known in the domestic markets do not have intangible assets in their balance
sheets. In addition, companies with low level of political connections usually do not have or have
smaller amount of intangible assets that can be explained by the fact that intangible value of the
firm is also formed by its officials (members of board of directors and top management team).
Regarding to administrative expenses that show the amount of money that a company
spends not directly tied to a specific function or generally speaking, on operations. Administrative
expenses also include expenses that the firm spends on board of directors and top management
team. Descriptive statistics shows that companies with larger amount of board members have
higher administrative expenses than other firms whose board of directors included few people. In
addition, high administrative expenses have companies from oil and gas and metallurgy industries;
companies from these industries also usually have quite large in size board of directors.
As for return on assets (ROA) that represents how efficiently management of the company
uses its assets in order to generate earning, descriptive statistics does not show any visible
The industries that are characterized by high amount of government ownership are banks
and transportation. The companies from oil and gas industry have much high amount of politicians
in the board of directors in comparison with other companies despite the fact that they almost do
not have government share. The same situation can be observed from the example of metallurgy
industries that also characterized by high level of politicians among board members. Moreover,
companies from oil and gas and metallurgy industries have the highest level of political
connections – almost all of them have among board members or top management team people who
have held top positions in the central government or have close connections with former or present
Russian presidents and prime minsters. These observations lead to the conclusion that the
government in order to control strategically important industries instead of using direct
mechanisms of influence such as share in the companies, tend to choose indirect mechanisms that
help to impact on the companies through people closed to the government.
It was also found that the companies that have a large amount of government contracts are
firms that belong to machinery and construction industries. This fact can be explained by the
important role that military has in Russia. Most of these companies produce different military
equipment. In addition, some of these companies relate to space industry that also represents high
interest for Russian government. From these observations the following conclusion can be made:
industries that represent the high strategic interest for the state and influences state image are under
a greater state control. This results correlate with official policy of Russian government that has
repeatedly stressed that the main priority of the foreign policy of the country is to ensure national
3.2 Hypotheses testing
Correlation coefficients presented in the Table 6 show that the majority of variables are scarcely
correlated with others, without multicollinearity issues and without exceedingly large coefficients that
can show that some variables are excessive and duplicate the existing ones.
Table 7. Correlation
Politicians Level of
Firm Total Intang Adm.
№ of count.
sales . assets Exp. ROA
T-test was conducted in order to understand how the means of dependent variables FSTS and
Number of Countries differ with the government involvement measured by the following variables: size
of the board of directors, government contracts, political connectedness and government ownership.
After analyzing the results of t-test it was found that there are significant differences among means
of Number of countries variable and all independent variables, except for government ownership. Also
it was found that the FDI decreases with increasing level of political connectedness, which means that
hypothesis 4 is rejected.
As it can be seen from the results, higher means of the Number of Countries are displayed for the
companies that have:
politicians among members of the board of directors and top management
However, the hypothesis 2 which states that government ownership positively influences
internationalization is rejected, since no significant difference was found between the means of the
quantity of countries which have government ownership and which do not.
Table 8. Results of T-tests. Differences in Number of Countries means between companies
with political connections and without them
diff = mean (0) – mean (1)
Ho: diff = 0
[95% Conf. Interval]
t= -2, 6031
Politicians on board of directors
diff = mean (0) – mean (1)
Ho: diff = 0
Ha: diff < 0
diff = mean (0) – mean (1)
Ho: diff = 0
diff = mean (0) – mean (1)
Ho: diff = 0
With regards to the testing of dependent variable FSTS, T-test conducted with this dependent
variable did not show any significant results. This can be possibly explained by the lack of available
data on foreign sales of the companies.
OLS Regression model
In order to understand how independent variables measuring government involvement influence
the level of internationalization of companies, regression models were used. The dependent variable in
the first model is the number of countries in which firms have affiliates, with the following control
variables, which are the size of the firm, administrative expenses, intangible assets and total sales.
Independent variables are state ownership, number of politicians on the board of directors, level of
political connectedness of the members of the board and the presence of the government contracts.
The model summary, presented in the Appendix 1 shows that overall the model is significant.
However, we may infer from the model summary below, that influence of control variables on the model
As for individual contribution of independent variables, it can be inferred that not all variables are
significant to internationalization process. By looking at the results of regression analysis, it can be
inferred that the number of politicians on the board of directors is the most important factor in explaining
internationalization to other countries, followed by government contracts and level of political
connections. Among the least influential factors is governmental ownership. Based on the obtained
results, it can be concluded that the quantity of politicians on the board of directors is more important
than the perceived influence of the individual politically-affiliated members.
In order to test other hypotheses hierarchical OLS regression was conducted. The results of the
analysis are presented in the Table 7. As can be seen from the table, model 1 includes all variables and
other models consist of only statistically important variables. As expected, not all variables are
significant for measuring internationalization process. Nevertheless, the OLS regression model helps to
indicate that the number of former and present politicians among board of directors and level of political
connections have positive correlation with internationalization of Russian firms.
Thus, hypothesis 1 («number of former and present politicians among top officials of the company
are positively influence the internationalization») and hypothesis 5 («high level of political
connectedness of board members and CEOs positively influence internationalization») were proved.
These results correspond to the result of the recent empirical research related to the topic of influence of
political connections and government involvement on internationalization process in other emerging
The hypothesis 2 («government ownership positively influences internationalization») was
rejected, the correlation between government shares and FSTS of the companies was not found. It can
be explained by the fact that nowadays the government tend to impact on domestic companies not
through direct mechanism (ownership) but through various indirect mechanisms. For instance, as was
mentioned above, the state controls firms using people resource. People closed to the government belong
to companies’ members of board of directors or top management team. This strategy works more
effective than traditional direct mechanisms (Boubakri, Cosset, Saffar, 2012).
Table 9. Result of regression analysis: Number of countries model
Adj. R sq.
Oil and Gas
-7, 61 (0,000)
members of board of
Level of political
Finally, the main results of the analysis are represented in the table 8. The analysis proved
the fact that the government involvement and political affiliation play an extremely important role.
This study showed that political connections among companies’ members of board of directors
and top management and the level of these connections todays represent the powerful mechanism
through which the government controls firms’ activities or even has the impact on them.
Table 10. Results
Hypothesis 1. Number of former and present politicians
among top officials of the company positively influences
Hypothesis 2. Government ownership positively
Hypothesis 3. Government contracts positively
Hypothesis 4. High level of political connectedness
more positively relates to foreign direct investments
rather than export
Hypothesis 5. High level of political connectedness of
board members and CEOs positively influence
Source: developed by author
CHAPTER 4. SUMMARY AND DISCUSSION
This study investigates different forms and directions of government involvement in
internationalization process of Russian firms. The research was conducted gradually. First of all
the research goals, objectives and questions were formulated. After this, the analysis of literature
related to this topic was conducted. It helped to understand the topic of the role of government in
internationalization process of Russian firms in detail, consider previous empirical researches
dedicated to this theme, create the list of variables and finally, develop the hypotheses. After the
data collection process the statistical analysis was conducted. The analysis fulfilled the goals and
helped to investigate such forms of government involvement as number of people with political
background or closed to the state among companies’ official, level of these connections and
provision of government contracts highly impact the internationalization process of Russian
4.2 Implications for theory and practice
This master thesis contributes to the business literature by complementing the resourcebased theory that states that political resource factor is an important tool that can become a strong
competitive advantage for the companies. The findings of the current study demonstrate how
political background of members of board of directors and top management team can become a
powerful resources that facilitates companies’ activities and particularly the internationalization
In addition, the results have important practical managerial implication. Firstly, the
shareholders during the process of formation of board of directors should take into account the
importance of political background of board members that can bring a lot of bonuses for the
company; for instance, facilitate internationalization process. Moreover, top managers that work
in the companies from developing countries should take into consideration that in addition to
achievement of corporate and economic goals political connections of company’s officials are also
able to facilitate the internationalization.
4.3 Suggestions for the furture research
The present study considers such ways of government involvement in internationalization
process of domestic firms as provision of government contacts, state ownership and political
connections of officials of the companies – member of board of directors and top management
team. However, other ways of state influence on domestic firms exist; among them are provision
of government credits and loans and access to strategically important resources; decrease of taxes;
granting benefits during IPO; provision of lobbying regulatory policies adopted by the
government; government bailout.
Another interesting mechanism is related to the foreign policy of the state. The government
interested in international expansion of particular companies can negotiate with foreign countries
where these companies plan to operate and sign special documents and agreements facilitated the
enter into new market or operations there. It is especially important for companies from developing
economies because in many cases they do not have enough resources and capabilities to enter new
markets and need support from the domestic government. This direction of government role in
internationalization process can also significantly contribute to the existence pool of knowledge
dedicated to the topic of government impact on internationalization of domestic firms.
As can be seen from these enumeration, there are a lot of different variables that can also
have an impact on internationalization process of companies and impact them in different
directions. For these reason further researches may focus on these variables, investigate their
correlation with internationalization process of Russian and other multinational firms from
countries with emerging economies and create a developed framework that can fully explain all
forms and directions of state involvement in international activities of companies.
The main goal of this research was to develop the understanding of the government role in
internationalization process of Russian multinational enterprises. The statistical analysis helped to
achieve this goals and showed that political connections and government involvement are one of
main forces that impacts internationalization process of MNEs in Russia. This fact is undeniable,
however, it is necessary to pay attention to the specific mechanisms by which the state has an
impact on domestic firms. The analysis has shown that not all mechanisms of state involvement
are effective measures of influence on the process of internationalization.
The statistical analysis helps to investigate that the number of politicians among members
of board of directors and top management team is positively related to internationalization while
government ownership does not have any effect on internationalization process. These
investigations led to the conclusion that Russian government tends to use informal mechanisms of
influence rather than direct. The state involves in the companies’ activities through less obvious
ways such as people. For example, companies from oil and gas industry are characterized by high
internationalization level and have much high number of politicians among its officials in
comparison with firms from other industries despite the fact that they almost do not have
In general, the results have shown that the more number of people that are former or present
politicians, closed to the government or have personal contacts with officials the more company
In addition, the statistical analysis revealed a positive relationship between amount of
government contracts and internationalization. That also proved the suggestions that Russian
government influences the internationalization process of domestics firms and supports some of
them through provision of government contracts and other bonuses.
Regarding to FDI internationalization strategy, the regression analysis showed that
political connections do not influence FDI. Thus, this hypothesis is considered not to be confirmed.
To sum up, in this master thesis it was investigated that Russian companies as majority of
firms from emerging countries highly depend on the domestic government that in turn, uses
different types of mechanisms – formal and informal in order to impact companies activities and
operations. Nowadays informal mechanisms in many cases are more effective and afford the state
to be involved in different firms’ activities such as internationalization.
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Appendix 1. Model summary
Sig. F Change