Gaining legitimacy or exploiting opportunities? MNCs’ response to the belt and road initiative in China

Abstract

PurposeThis study aims to investigate whether and why multinational corporations (MNCs) seek to reduce institutional costs of foreign direct investments (FDIs) by aligning with transnational political frameworks.Design/methodology/approachThis study uses the Chinese Belt and Road Initiative (BRI) to test whether MNCs’ subsidiaries in China increase FDI into BRI-affiliated countries after the BRI’s launch. This study compares FDIs by Chinese subsidiaries of foreign MNCs in the year before and two years after the BRI’s announcement. Hypotheses are tested for two explanations of why foreign MNCs seek to exploit the BRI.FindingsInvestments into BRI-affiliated countries increased after the announcement of the BRI, and this increase is positively moderated by institutional distance between the MNC home country and the BRI-affiliated target country. This shows that the greater the institutional costs of investing in a BRI-affiliated country, the more responsive the MNCs’ Chinese subsidiary will be to the BRI.Research limitations/implicationsThis study demonstrates that MNCs respond to transnational political frameworks. This study only studies the immediate response because the BRI is an infrastructure project. Better infrastructure will, over time, lead to more investments; however, the immediate response is due not to infrastructure but political structure.Originality/valueThe results show how MNCs use transnational political frameworks. The idea that MNCs can channel FDI through existing subsidiaries for this purpose has not previously been discussed in the literature.