Antecedents and Innovation Performance Implications of MNC Political Ties in the Chinese Automotive Supply Chain.
| Verfasser | Jean, Ruey-Jer'Bryan' |
| Posten | RESEARCH ARTICLE - Multinational corporations - Report |
1 Introduction
Economic reforms, the opening up of the economy to foreign direct investment and substantial growth over the past decades have made China an attractive destination for multinational corporations (MNCs). In line with its 5-year plan to move the country from 'Made in China' to 'Created in China' (Zhou et al. 2017), the Chinese government has welcomed the activities of MNCs, especially with respect to technology transfer and the technological upgrading of domestic firms, as an essential ingredient of its development, innovation and growth strategy (Gu et al. 2016; Hu 2017; OECD 2007).
For a foreign MNC, doing business in China may prove challenging due to the specific characteristics of the Chinese business system (Redding and Witt 2009; Witt 2010), which involves specific roles and behaviour on the part of local partners and competitors, the government and the broader institutional setting. Zhang and Zhang (2014) argue that the socialist market-economy system in China requires companies not only to engage in market-related strategies in order to be successful, but also to pursue political strategies and thus to establish and maintain political ties to the Communist-Party-led government authorities (Lawton and Rajwani 2015; Wang et al. 2017; Zhang, Zhao et al. 2016b).
The recent literature has increasingly picked up on the topic of corporate political activities as part of a non-market strategy (Mellahi et al. 2016; Sojli and Tham 2017). Extant research on the antecedents and outcomes of corporate political strategies and political ties in China has mostly focused on economic and operational performance measures (Arnoldi and Villadsen 2015; Luo et al. 2015; Sheng et al. 2011; Zhang and Zhang 2014). While some research shows that political ties can enhance firms' performance (Li and Zhang 2007), the empirical analysis by Ridge et al. (2017) shows that there may be positive but diminishing returns related to lobbying breadth. Other researchers argue that political ties can generate some negative effects due to over-embeddedness and a lock-in effect (Sun et al. 2012). A meta-analysis by Luo et al. (2015) of the existing empirical research on the link between political ties and performance shows that the benefits for firms depend on the characteristics of the political ties, i.e. the relevant level of government support, and are thus closely linked to the specific form of political economy of China.
In recent years, research has moved towards analysing the impact of political ties on corporate-level innovation performance, establishing a link between political ties and innovation ambidexterity (Zhang and Cui 2017), emphasizing the role of political networks for absorptive capacity (Kotabe et al. 2017) and highlighting the relevance of political ties to the local Communist Party committees for innovation performance (Zhang, Liang et al. 2016a). However, research on the link between the political ties and corporate innovation performance, including product innovation, of foreign-owned firms in China is largely missing. This neglect is especially surprising considering that the role of foreign subsidiaries in China has gradually shifted from a focus on manufacturing to an increasing engagement in innovation activities (Zhou et al. 2017). The China Innovation Survey 2014, conducted by the Benelux Chamber of Commerce in China, shows that more than two-thirds of the foreign MNCs there are engaged in innovation activities and are conducting research and development (R&D) for their global markets (Veldhoen et al. 2014).
Many of the MNC subsidiaries engaging in innovation activities face significant challenges due to China's 'weak' or 'underdeveloped' institutional system (Hitt and Xu 2016) with respect to knowledge management and intellectual property protection (Brander et al. 2017; Wang 2016). Sheng et al. (2011) claim that firms can leverage their political connections and ties with different levels of government to acquire political legitimacy and resources, which, in turn, help enforce business contracts or stop unlawful competition, and protect their knowledge and intangible resources. The China Innovation Survey also shows that a major strategy for MNCs in managing their innovation processes in China is to develop government relationships (Veldhoen et al. 2014).
Against this background, we investigate the antecedents of political ties of MNCs and how these foster or hinder product innovation. Empirically, the study is situated within foreign automotive-supply MNCs in China. Our analysis draws on semi-structured in-depth interviews with 15 senior product and project managers or directors of supplier MNC subsidiaries, which feeds into questionnaire and survey data from 170 supplier MNCs collected in 2010. Foreign MNC subsidiaries supplying automotive parts in China offer an excellent setting for this study for the following reasons:
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China is one of the world's fastest-growing automotive markets. MNC automotive makers, including vehicle assemblers and component suppliers, have been striving to enter the Chinese markets. For example, General Motors (GM), Ford, Toyota and Volkswagen (VW), have all established joint ventures with Chinese original equipment manufacturers (OEMs). In order to earn permission to enter China, MNCs must commit to bringing in modern product and process technologies, and help to develop the indigenous R&D capabilities of their Chinese OEMs in their local operations. Performing this type of task requires a large amount of supplier involvement with the Chinese OEMs, in functions such as design, manufacturing, prototyping and testing.
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For MNCs, the emerging market environment involves new firms and institutions based in complex and dynamic settings. New product development is a critical and particularly challenging task for these MNCs, essential to achieving greater local responsiveness to their host countries' markets. Multinational subsidiaries and joint ventures in the Chinese automotive industry have tried to adapt existing product designs to local conditions, regulations and consumer tastes. Accordingly, the unique empirical setting of this study provides a good opportunity to investigate the product innovation process under a volatile institutional environment.
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The business culture in China emphasizes guanxi, the phenomenon of "cultivating intricate and pervasive personal ties" (Peng and Luo 2000, p. 487), which governs attitudes towards social and business relationships and plays a critical role in business operations in China (Barnes et al. 2011). Foreign MNCs have tried to develop governmental relationships to enhance their legitimacy and gain the resources necessary for doing business in China. Hence, this context provides a great opportunity for investigating the role of political ties in MNCs' success in emerging markets.
We expect to make the following contributions: First, we develop an integrated analytical framework, which zooms in on the importance for MNCs to develop political ties in China, while at the same time balancing the dual requirements of protecting their products/innovations from imitation and making relationship specific investments. Second, we link political ties with product innovation, an important but under-researched area (Kotabe et al. 2017). Third, we offer empirical evidence regarding external environmental factors, competition-related and technological, that dynamically interact with the aforementioned dimensions in China.
2 Conceptual Framework and Hypotheses
Political ties are defined as firms' informal social connections with government officials at various levels, including central and local government, and officials in regulatory agencies, such as tax or stock market administrative bureaus (Li and Zhang 2007; Sheng et al. 2011). Political ties are types of social networks, which rely on personal interaction instead of formal contracts or markets for the acquisition of information and promotion of cooperation between firms and government.
The research model in this study (as shown in Fig. 1) introduces antecedents of political ties and product innovation as consequences thereof. The model is underpinned by the institutional perspective (Peng et al. 2008). In line with the institutional perspective, establishing and maintaining strong political ties can help the firm to obtain legitimacy and government support in a weak institutional environment. Political ties serve the function of a relational governance mechanism, which minimizes opportunistic behaviour by external actors in relation to product innovation. In line with resource-based theory, which argues that the firm's competitive advantage is a function of its resources and capabilities, political ties can provide the firm with the non-market capability of gaining access to necessary information and resources (Zhou and Li 2010).
The research model includes organizational and environmental factors. As far as the antecedents of political ties are concerned, we conceptualize protection orientation as a strategic-choice-related internal factor and relationship-specific investment as a relational factor. With respect to environmental factors, we draw on the literature on environmental uncertainty (Duncan 1972; Miller 1993; Werner et al. 1996) and distinguish and include (1) factors related the technological environment, i.e. technological dynamism, and (2) factors related to competitors, who behave opportunistically and thus modify the market outcomes to their advantage, in the analysis. Both competitor opportunism and technological dynamism also affect the link between political ties and product innovation, as moderator variables. In addition, we include several control variables in the model, namely firm size, years of operation in China and mode of operation (joint venture vs. wholly owned subsidiary), country of origin and past performance. Many of these variables...
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