The Lower Returns on Political Spending for MNEs

Abstract

We integrate the research on liability of foreignness (LOF), corporate political activity, and positive political theory to argue that campaign contributions offer fewer economic benefits to multinational enterprises (MNEs) than to domestic firms. Using a matched sample of MNEs and domestic firms in India, we found that campaign contributions produced relatively smaller gains for MNEs than for domestic firms. Local political discrimination against MNEs emanated from fewer direct favors in the form of legislative concessions as well as weaker political influence on the judiciary. Our findings explain that politicians play a central role in the enactment of LOF. Their marginal aversion towards MNEs propagates across the host environment and makes it easier for other governmental agencies and the market to impose higher economic costs on foreign firms. Thus, rather than mitigating, campaign contributions exacerbate LOF.