The Effect of Interpersonal Political Embeddedness on Firm Internationalization Scope

Abstract

AbstractHow does a firm's political embeddedness affect its internationalization strategy? Extant research shows conflicting effects, treating embeddedness as a unitary construct. We contend that interpersonal relational political embeddedness (IPE) is distinct from the structure of embedded ties and focus on IPE's consequences for firm internationalization. IPE refers to dyadic, interpersonal relationships of trust, loyalty and reciprocity between individuals. We theorize that IPE increases firm susceptibility to dependence asymmetry, which increases as the power of the political actor increases. Dependence asymmetry increases political encroachment in firm decision‐making. Because political actors prefer domestic investments, greater dependence asymmetry in IPE reduces firm foreign direct investment (FDI) scope. Political preferences for domestic investments may be reduced for host countries that have cooperative relationships with the home country, which reduces the negative effect of greater dependence asymmetry in IPE on FDI scope. IPE may also reduce firm motivation and ability to develop political risk management capabilities. Thus, host country political risk increases the negative effect of greater dependence asymmetry in IPE on FDI scope. Our empirical analysis of a sample of 285 firms – examining the political experience and relationships of 1,521 directors and 311 top managers in Russia – supports this theory. We contribute to the theory regarding firm political embeddedness and internationalization strategy.