Minority rules: Credible state ownership and investment risk around the world

Research in management and related fields largely assumes that host-country state ("state") ownership in investment projects raises risk for private coinvestors. We question that assumption in theorizing that minority state ownership may actually decrease investment risk in host countries where policy stability is low. Noncontrolling but still substantial state ownership signals to private coinvestors that states will maintain initial investment project terms yet limit interference in project management under those same initial terms. Analyses of 1,373 investment projects announced in 95 host countries from 1990 to 2012 support this proposition: (1) low policy stability in the host country increases investment risk, measured as the percentage of equity comprising all project capital funding on the announcement date, but (2) minority state ownership diminishes the risk-increasing impact of low policy stability, and (3) the risk-diminishing effect is greatest when policy stability is low and the state holds from 21% to 40% of investment project equity. Where permitted, private investors can use state ownership as a risk-reducing strategy in response to low policy stability. Our study highlights where these "minority rules" hold and state ownership signals credible assurance to private coinvestors in less stable policy environments.