Shared Governance: Institutional Investors as a Counterbalance to the State in State Owned Multinationals

State owned multinational enterprises (SMNEs) are entities that are partly or wholly owned by the state and that engage in foreign direct investment. SMNEs with partial state ownership share equity ownership with private investors, some of which may be institutional investors. We argue that equity ownership by institutional investors can provide a counterweight to state ownership, and their shared governance can improve SMNE strategic decision making on international diversification. Institutional investors, however, need strong formal institutions to perform their shared governance role effectively. Because formal institutions are typically weaker in developing countries, institutional investors likely play a less effective role in SMNEs located in developing countries. We test our arguments on the international diversification decisions of 253 listed SMNEs from 42 home countries over the 2002-2007 period, finding substantial support for our hypotheses. Our study offers new insights on the role of institutional investors in the international diversification of state owned multinationals.