With growing concerns from governments and civil society about the enforcement of fundamental human rights, multinational enterprises (MNEs) increasingly face new societal demands (Kolk 2016). These developments have given rise to studies on the non-market environment of international business, which considers the impact of issues such as climate change, child labor and access to health on global and local MNE strategies (Doh and Lucea 2013). Much of the research on MNEs and human rights is concerned with intra-organizational policies and MNE misconduct, particularly in developing countries (Scherer and Palazzo 2011). Yet, in contrast to the considerable amount of literature on MNE strategy and host country corruption prevalence (Collins et al. 2009; Cuervo-Cazurra 2006), studies examining similar effects of the human rights context remain sparse (Giuliani and Macchi 2014; Wettstein et al. 2019). In this paper, we consider human rights as one of the societal concerns which can influence internationalizing firms' ownership strategy.
Human rights have been in the spotlight in recent decades, with the efforts of social movements and global governance initiatives such as the UN Global Compact, or the Corporate Human Rights Benchmark. By directly engaging with businesses, they are increasingly drawing the attention of managers to local human rights concerns (Garriga 2016; Maggioni et al. 2019; Orentlicher and Gelatt 1993; Spar 1998). As a result, a number of scholars have recently argued for the need to understand how MNEs from both developed and developing markets, engage with human rights issues in their foreign operations (Giuliani et al. 2016; Wettstein et al. 2019). Our study focuses on how the under-researched area of human rights as one of the dimensions of the non-market environment within a country, impacts strategic choice in ownership by MNEs, and whether there is a difference between the strategic choice in ownership adopted by the developed country multinational enterprises (DMNEs) and that of emerging-market multinational enterprises (EMNEs).
Ownership decisions require "significant resource commitments, including managerial expertise and coordination time, and, once established, have long-term consequences for the company" (Di Guardo et al. 2016, p. 4225). Hence, in cross-border mergers and acquisitions, investors have been shown to adjust the extent of control in target companies in response to the challenges posed by the host country environment and the associated strategic and operational considerations (Anderson and Gatignon 1986; Uhlenbruck et al. 2006). Our baseline assertion is that MNEs will acquire higher ownership stakes in host countries with clarity in the human rights governance as this helps managers align their strategies with the local human rights concerns effectively, thus reducing uncertainty regarding potential future challenges to their foreign operations.
At the same time, it is crucial to consider the role of the MNEs' home country context as there is an inherent difference between the MNEs that originate from the developed markets as compared to those from the emerging markets that generally develop from locations where non-market environment is comparatively volatile (Cuervo-Cazurra et al. 2018; Khanna and Palepu 1997). We argue that these dissimilar home country contexts will likely be associated with differences in, not only strategic aspirations (Buckley 2018), but also stakeholder expectations and capabilities to deal with challenges in the non-market environment which, in turn, have implications for their internationalization strategies. Many of EMNEs' home countries are characterised by limited development and implementation of human rights governance, and they might lack both experience and external credibility in engaging with human rights practices (Fiaschi et al. 2017). Yet, these aspirant EMNEs have proactively engaged in catch-up activities (Liou and Rao-Nicholson 2019; Luo and Tung 2007), including building their skills and targeting countries with good governance (Deng and Yang 2015; Han et al. 2018). Similar to views presented by Chikhouni et al. (2017), we therefore propose that since prior understanding of internationalization and ownership have largely been derived from studies on DMNEs, when considering the role of the non-market environment in MNE ownership decisions, it is useful to adopt a comparative approach that is sensitive to potential differences between the strategies of EMNEs and DMNEs. Specifically, we expect that EMNEs will be less deterred by challenges in human rights governance than their DMNE counterparts.
To test our hypotheses regarding the influence of human rights governance in the host country on ownership decisions, we use a matched sample of 2802 deals conducted by DMNEs and EMNEs in 79 target destinations. The findings of our study contribute to two streams of literature. Our main contribution is to the debate on the role of the non-market environment in strategic choices made by MNEs (Di Guardo et al. 2016; Uhlenbruck et al. 2006), namely the role of host country human rights regimes in MNE ownership strategies. By examining this relationship, we contribute to the emergent literature on the complex relationship between MNEs and human rights (Hsieh 2015; Sullivan 2017; Wettstein et al. 2019) where evidence remains largely anecdotal, and the broader debate on the links between MNEs and the non-market context of their activities (Puck et al. 2018). The results of our study show that the non-market environment within a host country, specifically human rights governance, has a significant impact on the ownership levels adopted by the MNEs. We show that firms prefer countries with better human rights governance when it comes to acquiring higher stakes in their targets.
Secondly, our study supports the view that there is a need to further qualify the discussion of the non-market environment implications for MNEs (Voinea and van Kranenburg 2018) by considering the appeal of better human rights governance to DMNEs and EMNEs. We extend the studies of foreign direct investment (FDI) by MNEs and especially comparative work examining FDI strategies of DMNEs and EMNEs informed by the non-market environment (Cuervo-Cazurra 2012; Gaffney et al. 2016; Malhotra et al. 2016) by explicating how host country context and home country conditions combine to influence the strategic choices of these firms. By focusing on host country human rights governance as a source of challenges for MNEs, we add a further nuanced view on how DMNEs and late-internationalizing EMNEs perceive environmental challenges in host countries. Our findings show that human rights governance is of higher salience to DMNEs as compared to EMNEs, thus indicating that DMNEs are particularly reluctant to engage in host countries with potentially more challenging non-market environments. Importantly, however, we find that although to a lesser extent, human rights governance considerations are nevertheless also noteworthy to EMNE investors. These results, therefore, inform the debate on the differences between internationalization strategies of EMNEs and DMNEs (Chikhouni et al. 2017; Estrin et al. 2018) and draw our attention to the idea of potential convergence between the EMNEs' and DMNEs' approach to dealing with host country human rights.
2 Theoretical Background and Hypothesis Development
2.1 Host Country Non-market Environment, Human Rights Governance, and MNEs
According to Baron (1995, p. 47-48), the non-market environment spans "the social, political and legal arrangements that structure the firm's interactions outside of, and in conjunction with, markets." Our understanding of the non-market environment is informed by institutional theory, according to which these arrangements can be conceptualised as encapsulated in formal and informal institutions (De Villa et al. 2015), the "humanly devised constraints" or "the rules of the game in a society" (North 1990, p. 3). Whereas formal rules consist of codified rules and regulations, informal institutions include unwritten rules such as values, beliefs, norms and behaviors (ibid). Both formal and informal institutional environments can pose substantive challenges to MNEs, particularly at the point of entry when investors are less familiar with the local context (Slangen and van Tulder 2009), and institutions might therefore affect investors' risk perceptions (De Villa et al. 2015). Although political risk, policy instability and regulatory constraints on market transactions are a well-studied area of international business (Delios and Henisz 2003), studies of the non-market environment and its implications for MNEs have focused on a relatively narrow set of issues (Doh and Lucea 2013; Voinea and van Kranenburg 2018). The majority of these insights into the role of non-market context in MNE strategy comes from the work on corruption (Duanmu 2011; Karhunen and Ledyaeva 2012). As such, there is a gap in the literature on other non-market factors that might influence the MNEs' internationalization activities (Voinea and van Kranenburg 2018). We propose human rights governance in the host country to be one such issue.
Ang et al. (2015) considered human rights in aggregate, as a subset of governance matters, alongside civil rights, political stability and law enforcement. They suggest that this group of institutions is, in fact, not always explicitly codified and thus can also represent a challenge in cross-border business transactions. From a more fine-grained perspective, as a dimension of non-market environment, human rights typically encompass a host of physical integrity rights (such as freedom from politically-motivated imprisonment, murders and torture) as well as civil and political liberties (including the ability to freely practice religion, travel within and outside the country and participate in...