Chinese Multinational Enterprises in Europe and Africa: How do They Perceive Political Risk?

VerfasserHan, Xia

1 Introduction

Outward foreign direct investment (FDI) by emerging economy multinational enterprises (EEMNEs) has become one of the most researched topics in international business (IB). The political risk faced by EEMNEs in international marketplaces has also received increasing attention. Extant research has commonly defined political risk as the unexpected change of the 'rules of the game' by host-country governments that can adversely affect business operations (Butler and Joaquin 1998; Casson and Lopes 2013). While this line of enquiry has generated insights regarding how EEMNEs respond to and manage host-country political risk (Buckley et al. 2007; Liu et al. 2016), extant research implicitly assumes that political risk is universal, and EEMNEs face the same types of political risk as developed-country MNEs (DMNEs). Thus, our knowledge about how political risk is conceived from the viewpoint of these new players remains limited.

Existing literature in this field can be divided into two streams. The first stream of research looks at the impact of political risk on EEMNEs when venturing into other developing host countries. Drawing on conceptual models of DMNEs, this stream of research assumes that these new players are tempted by, and show greater competitiveness, in risker political environments (Cuervo-Cazurra and Gene 2008). A second, small but growing stream of research concerns EEMNEs expanding into more advanced economies. Although these countries are renowned for their well-established market systems and institutions, this does not imply that firms operating in these contexts are shielded from changing external circumstances (Bremmer 2014). However, extant literature has mainly applied the established concept of political risk based on DMNEs. Little attention has been devoted to the fundamental issues of how EEMNEs perceive political risk in overseas marketplaces, given substantial home-government involvement in their international activities (Peng 2012). Thus, this study explicitly examines the question as to how EEMNEs perceive political risk when operating in diverse institutional environments, including developed and developing host countries

To address the above research question, we adopt a qualitative case study approach to examine the political risk perceived by Chinese MNEs operating in the EU and in African countries. While much has been reported about the political obstacles faced by Chinese MNEs in international marketplaces (Globerman and Shapiro 2009; Liu et al. 2016), the EU as the world largest single market, and Africa as an increasingly important economic power, have not been thoroughly investigated. Therefore, our research focuses on these two regions.

This study makes several contributions to the literature on political risk in IB. First, we depart from existing studies which assume that political risks faced by EEMNEs are consistent with traditional definitions drawn from the experience of DMNEs by systematically unpacking the concept of political risk from EEMNEs' perspective (Liu et al. 2016; Quer et al. 2012). Second, taking Chinese MNEs' FDI as our research object, we find that the political risks faced by these new players are multidimensional and rooted in a number of home country, host country, industry and firm-behaviour sources. This finding is in stark contrast to the traditional conceptualization of political risk which has mainly focused on the host-country environment and industry characteristics. Third, by comparing Chinese MNEs' perceived political risks in different institutional settings, we find that the perception varies depending on the external institutional environment. In more developed European market settings, the country-of-origin, EU industrial regulations, and Chinese firms' own behaviour are the main sources of political risk, while in the less developed African markets, political risks are rooted in host-country conditions and firms' own behaviour. Thus, our study suggests that the boundaries of political risk perceived by EEMNEs are much broader than those based on DMNEs.

2 Literature Review

2.1 What is Risk?

While scholars have generally recognized the critical role of risk in affecting MNEs' international operations, little agreement has been reached with regard to the conceptualization and scope of risk (Buckley 2016; Liesch et al. 2011). Extant literature has offered various definitions. One stream of research uses a statistical probability approach to define risk as the quantifiable probability that events will occur and influence business operations (Knight 1921; Liesch et al. 2011). The other looks at the potential loss vis-a-vis the potential gain of a decision, and frames risk as the negative variation in business outcomes (March and Shapira 1987). Yet, another group of researchers focuses on the unknowability of the external environment and defines risk as significant contingencies that reduce performance predictability (Miller 1992, 2007).

Confusion about the notion of risk goes further as research has often used the terms, risk and uncertainty, in an interchangeable manner (Buckley et al. 2016). Some studies have treated risk and uncertainty as a composite variable and label them as synonymous (Alvarez and Barney 2005). This has resulted in misconceptions about their roles in IB as risk and uncertainty are related but distinct concepts (McKelvie et al. 2011). While both can arise from firms' external environments, their underlying assumptions and their impact on MNEs' international operations are different (Buckley 2016).

Under Knight (1921) statistical metaphor, risk refers to a set of possible outcomes, and the likelihood of each occurring can be calculated, whilst uncertainty refers to outcomes where the likelihood of each taking place is unknown. Yet, this approach has been challenged due to its neglect of the role of decision makers (Miller 2007). Hence, the emphasis of human judgement in the decision-making process has given rise to research that distinguishes risk and uncertainty by drawing on transactional cost economics (TCE). Studies anchored within TCE assume that decision-makers are bounded-rational, and the lack of information makes them hesitate to make decisions or act under uncertain situations (Buckley and Carter 2004; Williamson 1985).

Additionally, another group of researchers drawing on the real option (RO) theory assumes that decision-makers are rational and risk-averse, thus being able to choose among a set of future states with relevant information (Billitteri et al. 2013). It has been suggested that decision-makers are not strictly rational since they are bounded by cognitive limitations, but it does not imply that they are irrational (Miller 2007; Payne et al. 1993). Rather, when decision-makers have accumulated more information they can convert some uncertainties to risk, hence allowing them to make decisions and take action (Sarasvathy 2001). This evolving view of managerial rationality is a key step which can help bridge the existing research on risk and uncertainty, drawing on the seemingly contradictory TCE and RO perspectives. Hence, the conversion from uncertainty to risk may be moderated by the possession of information (Buckley 2016). When there is more information available, firms can make investment decisions. Thus, it may be more appropriate to conceive of uncertainty as a general environmental phenomenon, whilst risk is investor and investment specific (Liesch et al. 2011; March and Shapira 1987). As Friedmann and Kim (1988) suggested, risk cannot exist without the presence of an organizational entity or activity in a host country, but uncertainty as an environmental character can. This corresponds to Kobrin (1979) argument that research on political risk in MNEs' international operations should focus on the impact of political events upon firms rather than the events per se. Thus, in this study we follow previous research (Casson and Lopes 2013; Friedmann and Kim 1988) by focusing exclusively on political risk.

2.2 What is Political Risk?

Although the term 'political risk' appears frequently in the literature, agreement about its definition remains limited (Darendeli and Hill 2016; Kobrin 1979). The literature can be generally divided into two groups. The first group assumes an adversarial relationship between the government and business (Alon and Herbert 2009). Research built upon this assumption has offered a variety of definitions. For example, political risk has been defined as host government interference with MNEs' operations (Butler and Joaquin 1998), as constraints imposed on firms from specific countries or industries (Desbordes 2010; Robock 1971), and as discontinuities occurring in the business environment due to political changes (Fitzpatrick 1983).

More recent literature tends to assume a co-operative relationship between MNEs and host-country governments by underscoring the potential for mutual gain (Darendeli and Hill 2016; Jimenez et al. 2015), as political interference in MNEs' operations, tempted by short-term gains, may jeopardize the government's own objectives, such as economic growth generated as a result of FDI (Luo 2001). This group of researchers suggests that perceived political risk by MNEs depends on whether their business objectives are consistent with the host government's long-term political, economic and social agendas (Stevens et al. 2015). Firms may perceive a lower degree of political risk when their activities are more aligned with the government's long-term goals (Henisz and Zelner 2005). Thus, this strand of research regards political risk as a complex and multidimensional phenomenon that may arise from a variety of host- and home-country sources (Click 2012; Stevens et al. 2015). MNEs are not only affected by governmental actions and political changes in host countries, but are also increasingly under scrutiny from host-country stakeholders...

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