Gul Berna Ozcan --Do not circulate or quote without the permission of the author POLITICALLY CONNECTED FIRMS, ELITE TIES AND INTERNATIONALISATION: THE CASE OF ENRC Working paper to be presented at: Emerging Multinationals: Outward Investment from Emerging Economies Copenhagen Business School 27-28 October 2016 Gül Berna Özcan, PhD School of Management, Royal Holloway University of London Egham, Surrey TW20 OEX Tel : +44 (0)1784 443476 E-Mail: [email protected] 1 Gul Berna Ozcan --Do not circulate or quote without the permission of the author POLITICALLY CONNECTED FIRMS, ELITE TIES AND INTERNATIONALISATION: THE CASE OF ENRC Abstract In this paper we argue that location or firm based understanding is insufficient to conceptualize the process of internationalisation. The main argument is that elite ties and political space exert significant influence over corporate activity within and beyond national context. The empirical evidence is based on the internationalisation process of the Eurasian Natural Resources Corporation (ENRC) in the UK’s financial markets. We follow a novel approach: rather than taking internationalisation as a rationalized process of organisational deployment, our analysis shows how individual actors, political connections and financial institutions play a paramount role through complex web of opaque relations. These networks form new geographies and are in constant contact with formal institutions with varying degrees of cooperation and conflict. The preliminary evidence presented here points out that international elite networks override firm boundaries, weave pull dynamics to new locations and help maximize diverse individual benefits at the expense of good governance and the public interest. 2 Gul Berna Ozcan --Do not circulate or quote without the permission of the author 1. INTRODUCTION The dissolution of the USSR’s supranational political structure terminated an era of interconnected enterprises and brought about new strategies for internationalisation. Diverging trade and customs rules, privatisation policies and public finances have deepened the spatial disintegration of former Soviet markets and its inter-connected sectors and enterprises. Throughout this process the ruling elites and oligarchs consolidated their command over large enterprises mostly in mining, energy and heavy industries. In a study of Russia’s largest oligarchs, Guriev and Rachinsky (2005) illustrate how concentration of ownership of large industrial establishments served a highly corrupt political regime in which neither oligarchs nor the bureaucracy were interested in implementing policies that would open the economic regime to broader participation, fair allocation and competition. Over the past two decades London has became a business base for many Russian oligarchs as they amassed large private and business investments in the city and the UK economy (such as the metals tycoon Oleg Deripaska, oil tycoons Boris Berezovsky and Roman Abramovich, construction and power supplies oligarch Roman Rotenberg, and Andrei Guriev, a fertiliser baron)i. The corporate activity of Russian companies also increased over the years through the stock listings at the London Stock Exchange (LSE). First, Gazprom joined in 1996, followed by Lukoil in 1997, and by 2014, the number of LSE listed companies from Russia reached 29.ii In a similar pattern, Kazakh energy and mining companies closely linked to the ruling elite began to establish themselves as global players in London in the mid-2000s. This happened in two ways. First, they consolidated their positions in home markets by acquiring additional mining resources. Second, they sought to improve their corporate image and access to new financial assets through mergers and acquisitions and foreign listings. Kazakhstan has large reserves of iron ore, coal, gold, chromite, lead, zinc, manganese, titanium, cadmium and uranium; including the world’s second-largest reserves of manganese and chromite ore and 45 per cent of the former Soviet Union’s uranium reserves (estimated to be around 439,000 tones). Its zinc and lead reserves are the 3rd and 4th largest in the world, respectively. The World Coal Institute reports (2009) that Kazakhstan is the 9th largest coal exporter and producer in the world, and there has been further consolidation and expansion of mining operations (Peck, 2003). Kazakhstan’s vast resources, the rapid growth of demand from China and other emerging economies, and favorable global financial markets, prior to the 2008 financial crisis, were the main driving forces for international expansion. With its direct or indirect control over corporate activity, the Kazakh government has been encouraging its mining companies to get listed in Hong Kong as well as London. The country’s rich resources attracted the appetite of investors around the world. Most Kazakh companies chose to come to London while the relations between Prime Minister Tony Blair’s close circle and the Kazakh government were deepening. The London Stock Exchange listing of Kazakmys 3 Gul Berna Ozcan --Do not circulate or quote without the permission of the author and KazakhGold in 2005, KazMunaiGas (KMG) in 2006 and ENRC in 2007 aroused further interest on initial public offerings (IPO) from investors as well as business groups. Other Kazakh companies followed suit: ShalkiyaZinc, a regional mining company, and two of the three largest banks, Kazkommertsbank and Halyk Bank (2006), three relatively smaller companies, Alliance Bank, a mid-size, retail-oriented bank, Kazakhstan Kagazy, an industrial group, and Chagala, a real estate developer all went public in London. More recently, Central Asia Metals Plc went public and raised $60m in 2010. In this working paper we examine the internationalisation process of the Eurasian Natural Resources Corporation (ENRC) in the UK’s financial markets. We argue that location or firm based understanding is insufficient to conceptualize the process of internationalisation. The main argument is that political space and elite ties exert significant influence over corporate activity within and beyond the national context. We follow a novel approach: rather than taking internationalisation as a rationalized process of organisational deployment, our analysis shows how individual actors, political connections and the financial institutions play a paramount role in shaping the complex web of opaque relations through a case study approach (Eisenhardt, 1991). In this alternative narrative of internationalisation, we show how elite networks form new geographies and are in constant contact with formal institutions with varying degrees of cooperation and conflict. The preliminary evidence presented here points out that international elite networks (in politics, business and finance) override firm boundaries, weave pull dynamics to new locations and help maximize diverse individual benefits at the expense of good governance and the public interest. Politically connected firm (PCF) studies offer a starting point for our analysis. A close analysis of ENRC’s entry to and its exit from the LSE displays a range of interesting features on how a politically connected firm internationalizes and how elite ties get re-territorialised through evolving relations among business and political actors, overriding the perceived divisions between host and home geographies and much stressed aspect of liability of foreignness. Instead, London emerges as a nodal point of powerful ties and financial benefits whilst major mining assets lie in Kazakhstan. These findings have important implications for: i) firm internationalization studies; ii) broader wealth/sustainability impact of PCFs in listed companies; iii) searching novel methodologies to examine the nature and impact of ties between business and politics in multiple geographies. Our evidence here comes from business and media reporting, secondary sources and company annual reports. We systematically sieved data from Factiva search engine to develop a repository on ENRC and corroborated the evidence with other sources as listed in relevant discussions. In the following section we introduce the literature while highlighting the lack of understanding on the significance of political space in internationalization studies. This is followed by an 4 Gul Berna Ozcan --Do not circulate or quote without the permission of the author analysis of ENRC and the ties associated with its entry to London. The paper will end with a discussion of the findings and their implications. 2. THE MISSING LINK IN INTERNATIONALISATION: POLITICAL SPACE AND ELITE NETWORKS In the IB literature, the “Uppsala”, “innovation” and “network” models have been the three most influential theoretical perspectives that conceptualize internationalisation as a firm level accumulation of capabilities (Bilkey and Tesar, 1977; Cavusgil, 1980; Johanson and Vahlne, 1977). Based largely on data from western manufacturing firms, the Uppsala and innovation models perceive internationalization as a gradual learning process of evolving capabilities. The network model, in contrast, moves slightly away from the others by emphasizing the significance of relationships between a parent company and its affiliates (Johanson and Mattsson, 1988; Easton, 1992). However, these models have been criticized for their linear, often incremental and deterministic approach. McCann and Mudambi (2004) contend that FDI has made Dunning’s influential ownership, location and internalisation (OLI) formula inappropriate for discussing the spatial