Political strategies of multinational enterprises in emerging economies: A theoretical model

Abstract

Introduction During the latter part of the twentieth century the global business environment changed significantly, owing to drastic economic reforms in China in the late 1970s, the neoliberal wave that swept Latin America in the 1980s, and the decade of reform that followed the opening up of Central and Eastern European countries, along with India, in the 1990s. This trend of economic liberalization in the emerging economies gathered further momentum in the 2000s as more countries have opened up their markets to the majority of the world’s multinational enterprises (MNEs). For example, in 2006, emerging economies received approximately $448.40 billion in foreign direct investment (FDI) inflows, registering a growth rate of 26.13 percent over the 2005 figure (UNCTAD, 2007). This change was brought about by the government policies of these countries favoring pro-market reforms ranging from international policy (international trade, exchange regime and foreign investment) to the macroeconomic environment (price liberalization, labor markets and fiscal policy), and finally to privatization in specific sectors. For conceptual clarity an emerging economy is defined as a low-income country that satisfies two criteria: a rapid pace of economic development, and government policies favoring economic liberalization and the adoption of a free-market system (Arnold and Quelch, 1998). A list of sixty-four such emerging economies was identified by Hoskisson et al. (2000).1 Moreover, Dunning has defined an MNE as a firm that “engages in foreign direct investment and owns or controls value-adding activities in more than one country” (1992: 1). The growing importance of FDI inflows in these emerging economies is reflected in an upsurge of international business (IB) research on this topic. However, most of the published scholarship addresses the interdependencies between the MNEs and the economic environment of the emerging economies and pays relatively less attention to theories that can explain interdependencies between MNEs and the political environment of emerging economies. Nevertheless, a well-managed MNE must deal effectively with the political and legal dynamics of its environment as well as the more traditional product-and marketfocused variables (Baron, 1995). Vernon (1971) suggests that MNEs have strongincentives to influence host-country government policies on an ongoing basis to safeguard their often substantial investments, particularly given the threat of repatriation of earnings, immigration laws, trade laws and investment laws. Similarly, Dunning asserts that “any theory of MNE activity which does not explicitly seek to understand and explain the role of governments, not just another variable, but, like the market, as an organizational entity is, in its own right, bound to be deficient” (1993: 49). Failure to understand this political angle might lead to over-simplistic models of MNEs. Therefore, there is a need to conduct research on the factors that determine the choice of political strategies by MNEs operating in an emerging economy context. Note that these political strategies are not an end in themselves, but rather a means for an MNE to achieve public policy outcomes that are favorable for its economic success. This theoretical study aims to fill this gap in the literature by first discussing the existing work on the political strategies of MNEs and then presenting a theoretical framework with specific propositions that predict the effect of different variables on the choice of these political strategies. Institutional theory is the focused theoretical framework in constructing the propositions because it emphasizes the relationship between the MNE and its “institutional environment,” including government actions and the way through which this relationship shapes the MNE’s internal structures and processes (Westney, 1993). Institutional theory is also appropriate for the emerging economies’ contexts since it emphasizes contextual factors influencing both market and non-market forces (Peng et al., 2008; Oliver, 1991). Since the environment faced by an MNE is characterized by high uncertainty and multiple demands, institutional theory provides a suitable theoretical framework with which to study MNEs’ strategies, especially when one seeks to understand how MNEs attempt to reshape institutional environments (Xu and Shenkar, 2002). Given that the government is a major source of uncertainty for MNEs (Brewer, 1992), and political strategies by definition (Baysinger, 1984) are attempts to reshape a firm’s opportunity set, or that of its rivals, institutional theory is particularly considered as relevant to the study of MNEs’ political strategies. Moreover, in line with calls for research using multiple levels of theoretical explanation (Klein et al., 1994), factors at firm, industry and institutional level are considered in the theoretical framework. This has enabled us to develop a holistic model for political strategy formulation. Some of the practical implications of this model, along with suggestions for future research, are explored in the concluding remarks.