Do We Need to Bring the State Back In? Politics in the

International Business Literature

Lorraine Eden Professor of Management

Texas A&M University

leden@tamu.edu

For presentation at the conference, “The Politics of Foreign Direct Investment”

Niehaus Center for Globalization and Governance, Princeton University

September 23-24, 2011

Framing Questions for the Panel

• Are there blind spots in the international business (IB) literature – does IB treat politics in host countries as exogenous to investor strategies?

• Is the obsolescing bargain model an appropriate starting point for analysis of the politics of FDI?

• Has research on the politics of FDI taken account of the “dark side” of the MNE (motivations that are not welfare enhancing)?

• What questions about FDI are political scientists best situated to answer? What questions have they overlooked?

• How does political science research inform the panelists’ research? Is there cross-disciplinary communication and/or collaboration between PS and IB? How can this be improved?

My Remarks Address Three Questions

Are there blind spots in the international business (IB) literature – does IB treat politics in host countries as exogenous to investor strategies?

Is the obsolescing bargain model an appropriate starting

point for analysis of the politics of FDI?

• Has research on the politics of FDI taken account of the “dark side” of the MNE (motivations that are not welfare enhancing)?

• What questions about FDI are political scientists best situated to answer? What questions have they overlooked?

How does political science research inform the panelists’ research?

• Is there cross-disciplinary communication and/or collaboration between PS and IB?

How can this be improved?

1. Politics – A Blind Spot in the IB Literature?

Question: Are there blind spots in the international business (IB) literature – does IB treat politics in host countries as exogenous to investor strategies?

Answer: Yes and No.

5

Typical Model in International Business Research

Firm Characteristics

Firm Strategies • Location • Mode of entry • Int’l Diversification • Product

Diversification

Performance

• Parent • Subsidiaries

Home Country Characteristics

Host Country Characteristics

Industry Characteristics

6

Politics in International Business Research

Firm Characteristics

Firm Strategies • Location • Mode of entry • Int’l Diversification • Product

Diversification • Political strategies

Performance • Parent • Subsidiaries

Home Country • Gvt regulations • Institutions

Host Country • Gvt regulations • Institutions

Industry Characteristics

Where is political science in IB research?

Domain of International Business Studies

• MNE activities, strategies, structures & decision-making processes

• MNE interactions with other actors, organizations & institutions

• Cross-border activities of firms

• Impact of the international environment on the activities, strategies, structures & decision-making processes of firms

• Cross-country comparative studies of businesses, business processes & organizational behavior

• International dimensions of organizational forms & activities

7

Domain of International Business Studies

• MNE activities, strategies, structures & decision-making processes (how change in response to gvt policies)

• MNE interactions with other actors (gvts), organizations & institutions

• Cross-border activities of firms (as affected by gvts)

• Impact of the international environment on the activities, strategies, structures & decision-making processes of firms

• Cross-country comparative studies of businesses, business processes & organizational behavior (national borders matter)

• International dimensions of organizational forms & activities (how borders & gvts make local different from international)

8

Where is political science in the domain of IB?

The IB “Kindergarten” Questions: OLD Who / What?

Unit of Analysis • MNE - organizational form (OLI, internalization) • MNEs from different countries (US, Japan, Europe) • Born globals (JIBS 1996)

Why? Motivation /causes

• Why go abroad? • Market/resource/efficiency/SA seeking FDI

Where? Location / distance

• What affects FDI location? (ESP factors) • Political risk & FDI • Cultural distance & FDI

How? Mode / process • Mode of entry (X vs L vs FDI) – what explains MOE • The “swollen middle” (quasi-hierarchy)

With Whom? Alone/with Partner

• International joint ventures • Parent-subsidiary relationships

When? Timing / static vs dynamic

• Internationalization (Johanson & Vahlne) • Product life cycle

What happened?

Outcomes • Effects of FDI on host countries • Location decisions

9

The IB “Kindergarten” Questions: NEW Who / What?

Unit of Analysis

• MNEs from different countries (emerging market MNEs, metanationals)

• State owned MNEs

Why? Motivation /causes

• Exploration/Exploitation / Learning • Awareness/Motivation/Capability (AMC)

Where? Location / distance

• Geography and IB • LOF and Institutional distance

How? Mode / process

• Multiple modes • Intermediate modes (licensing, franchising, tech)

With Whom?

Alone/with Partner

• International strategic alliances ( > 2 partners) • Outsourcing/offshoring • Intrafirm networks

When? Timing / static vs dynamic

• Sequential FDI • Endogenous vs exogenous uncertainty – real options • Dynamic vs static – life cycle histories

What happened?

Outcomes • Performance/Survival • Social impacts

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OLD IB QUESTIONS • Political risk and IB • Sovereignty at Bay • Obsolescing bargain model of MNE-state relations • Government regulation of FDI NEW IB QUESTIONS • Political strategies of MNEs • Impact of political violence on MNE strategies & performance • How MNEs cope with public corruption/bribery • State owned multinationals • Regional multinationals • Varieties of capitalism • Institutional distance, MNE strategies & performance

POLITICAL SCIENCE IN IB RESEARCH: BLIND SPOTS?

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Recent IB Papers examining political capability/connection/strategy

• Holburn, G. L. F., & Zelner, B. A. 2010. Political capabilities, policy risk, and international investment strategy: Evidence from the global electric power generation industry. SMJ, 31(12): 1290-1315.

• Feinberg, S. E., & Gupta, A. K. 2009. MNC subsidiaries and country risk: Internalization as a safeguard against weak external institutions. AMJ, 52(2): 381-399.

• Chen, C. J. P., Ding, Y., & Kim, C. F. 2010. High-level politically connected firms, corruption, and analyst forecast accuracy around the world. JIBS, 41(9): 1505-1524.

• Sun, P., Mellahi, K., & Thun, E. 2010. The dynamic value of MNE political embeddedness: The case of the Chinese automobile industry. JIBS, 41(7): 1161-1182.

• Ma, X., & Delios, A. 2009. Host-country headquarters and an MNE's subsequent within-country diversifications. JIBS, 41(3): 517-525.

Recent IB Papers using an MNE-state bargaining perspective

• Nebus, J., & Rufin, C. 2010. Extending the bargaining power model: Explaining bargaining outcomes among nations, MNEs, and NGOs. JIBS, 41(6): 996-1015.

• Hennart, J.-F. 2009. Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets. JIBS, 40(9): 1432-1454.

• Eden, Lorraine, Stefanie Lenway and Douglas Schuler. 2005. From the Obsolescing Bargain to the Political Bargaining Model. In Robert Grosse (ed.) International Business-Government Relations in the 21st Century. Cambridge, UK: Cambridge University Press.

Recent IB Papers on war/terrorism/corruption and FDI

• Czinkota, M. R., Knight, G., Liesch, P. W., & Steen, J. 2010. Terrorism and international business: A research agenda. JIBS, 41(5): 826-843.

• Li, Q., & Vashchilko, T. 2010. Dyadic military conflict, security alliances, and bilateral FDI flows. JIBS, 41(5): 765-782.

• Lee, Seung-Hyun, Kyeungrae Oh and Lorraine Eden. 2010. Why do firms bribe? Insights from residual control theory into firms’ vulnerability and exposure to corruption. Management International Review, 50: 775–796.

Recent IB Papers using an institutional approach

• Meyer, K. E., Estrin, S., Bhaumik, S. K., & Peng, M. W. 2009. Institutions, resources, and entry strategies in emerging economies. SMJ, 30(1): 61-80.

• Spencer, J., & Gomez, C. 2011. MNEs and corruption: the impact of national institutions and subsidiary strategy. SMJ, 32(3): 280-300.

• Chan, C. M., Makino, S., & Isobe, T. 2010. Does subnational region matter? Foreign affiliate performance in the United states and China. SMJ, 31(11): 1226-1243.

• Luo, X., Chung, C. N., & Sobczak, M. 2009. How do corporate governance model differences affect foreign direct investment in emerging economies. JIBS, 40(3): 444-467.

• Chen, D., Paik, Y., & Park, S. H. 2009. Host-country policies and MNE management control in IJVs: Evidence from China. JIBS, 41(3): 526-537.

• Oh, C. H., & Oetzel, J. 2011. Multinationals' response to major disasters: how does subsidiary investment vary in response to the type of disaster and the quality of country governance? SMJ, 32(6): 658-681.

• Miller, S.R., D. Li, L. Eden and M. Hitt. 2008. Insider Trading and the Valuation of International Strategic Alliances in Emerging Stock Markets. JIBS¸ 39.1.

Conclusion

Question 1: Are there blind spots in the international business (IB) literature – does IB treat politics in host countries as exogenous to investor strategies?

Conclusion/Answer:

Yes – most IB researchers look at impact of gvt regulations on firm strategy – the state is exogenous to the model.

No - some researchers “bring the state back in”– but not many.

2. Is the Obsolescing Bargain Model Obsolete?

Question: Is the obsolescing bargain model an appropriate starting point for analysis of the politics of FDI?

Answer: Yes and No.

Yes: The model can and has been updated to incorporate insights from institutional theory, transaction cost economics, and the resource based view.

No: The model still tends to treat the state as exogenous.

The Obsolescing Bargain Model

MNE Host Country Government

Goals MNE-HC goals are conflictual but the bargain is potentially positive sum (both parties can gain).

Market or resource seeking goals. Economic, social and political goals, focusing on national welfare.

Resources FSAs of the MNE. FDI is a bundle of capital, technology and managerial skills.

CSAs of the host country (economic, social and political) that attract FDI.

Constraints Economic and political constraints, both domestic and international.

Bargaining Bargain over MNE entry. Subsequent bargains with same firm(s) over access to HC resources, contribution to HC and ability to repatriate profits.

MNE Strategies

Focus on preventing opportunistic behavior by the host government.

Outcomes Outcomes measured by percent of ownership retained by the MNE. Outcome depends on relative goals, resources and constraints. Initial bargains favor MNE and then obsolesce over time.

The Political Bargaining Model (Eden, Lenway, Schuler)

3. How Does Political Science Inform My Research?

Question: How does political science inform the panelists’ research?

(Subtext question: Is politics a blind spot in my research?)

Answer: Yes and No. Three examples:

1. CSR activities of MNEs in host countries as affected by the institutional distance between the home and host countries (yes – blind spot).

2. MNE strategies in war zones (mostly – but political strategies are a coping mechanism).

3. State owned MNEs (no blind spot – interaction between MNE and state owners/managers)

Institutional Distance and CSR Activities of MNEs in Host Countries (Campbell, Eden & Miller)

• Culture Distance

• Administrative Distance

• Geographic Distance

• Economic Distance

CSR activities

by the

foreign

affiliate

in the

host country

Foreign

affiliate

performance

Home Country

Host Country

Home Country

Home Country

RQ: How does institutional distance between home and host countries affect CSR activities of MNEs in a host country?

Timing Mode

Pre-war Early Late Whole Partial

Labor Capital

Exposure

Resources

Coping Mechanisms

Exit

Vulnerability

Stay or Go? Foreign MNEs in War Zones (Li & Eden)

RQ: How does war affect the strategies of MNEs?

State Owned Multinationals (He & Eden)

RQ: How does state ownership affect the strategies and performance of multinational enterprises? How is the hybrid organizational form – the SMNE -- different from its parents?

Firm Characteristics • State ownership • Multinationality •Industry •Size

Firm Strategies • Location • Mode of entry • Int’l Diversification • Product

Diversification

Performance

• Parent • Subsidiaries

Home Country • Econ development • Institutional quality

Host Country • Econ development • Institutional quality

Conclusion

• Yes, there is a blind spot. IB researchers – for the most part --- do treat states as exogenous.

• The obsolescing bargain model has been updated, but is not regularly used by today’s IB researchers.

• My own research is a mix of blind and not-so-blind spots

– which is disconcerting since I am an outlier among IB scholars (e.g., have taught IPE, read IO and ISQ, go to ISA meetings).

My conclusion is most IB scholars pay little attention to political science and treat it as exogenous.

B

Conclusion

It’s important to end by noting that:

• IB research is interdisciplinary. Many IB concepts came from other disciplines when IB scholars asked “How does this apply cross-border?” or “What happens when we increase the number of countries?” IB scholars know that interdisciplinary work matters.

• But, the unit of analysis is the FIRM, not the STATE so there is an unconscious bias to treat the state as exogenous.

• Political scientists can help IB scholars bring the state back into IB research, but it means crossing disciplinary boundaries and engaging the “other” in dialogue. Would this be another example of Susan Strange’s dialogue of the deaf or might the collaboration benefit both sides?

B