Dealing with Trust Deficit and Liabilities of Foreignness in Host Countries: Chinese Multinational Enterprises in Australia. (RESEARCH ARTICLE)

1 Introduction

Understanding cross-national activities of multinational enterprises (MNEs) and their strategic responses to the institutional environment of host countries is a central topic of international business studies (Henisz & Swaminathan, 2008; Regner & Edman, 2014. Saittakari et al., 2023). The defining trait of MNEs is that they operate across different markets and are more likely to encounter favourable and unfavourable institutional environments. Especially in this turbulent world, anti-globalization forces, geopolitical conflicts, and sociocultural stereotypes have intensified the difficulty of operating in the international market (Lu et al., 2022). How MNEs handle challenging institutional environments in host countries is crucial for MNEs to survive and succeed. Learning to deal with challenging host country institutional environments effectively is particularly relevant for emerging economy MNEs (EMNEs). In recent years, MNEs from emerging economies have increased considerably and turned out to be an important source of global outward foreign direct foreign direct investment (OFDI), among which many of them are state-owned companies (Paul & Benito, 2018). Research has found that although EMNEs have become an important global FDI player (UNCTAD, 2019), they are more likely to suffer from multiple liabilities of foreignness, especially in developed markets (Fang & Chimenson, 2017; Li et al., 2023; Paul & Benito, 2018).

For example, surveys on trust in MNEs conducted in 26 countries since 2009 reveal that EMNEs (e.g., MNEs headquartered in Russia, India, and China) suffer a serious trust deficit in host country markets (Edelman, 2013, 2014). In developed economies such as the United States, Germany, and France, nearly two-thirds of respondents (63%) do not trust state-owned EMNEs (Shearman, 2013). In general, EMNEs are trusted much less in host country markets than at home. For instance, in 2013, Chinese companies were trusted by 83% of respondents in the domestic market, and by 56% in other emerging economies, but only by 24% in developed markets (Edelman, 2013). Given the importance of trust in business, a trust deficit inevitably disadvantages EMNEs in developed economies. How to handle challenging host country institutional environment with trust deficit to obtain legitimacy is a major challenge for EMNEs.

However, the existing literature on MNEs has paid little attention to the interaction between MNEs, especially EMNEs, and host country institutional environments (Alaydi et al., 2021; Chidlow et al., 2021; Liu et al., 2021; Parente et al., 2019; Zhang et al., 2017). Empirical studies exploring how EMNEs proactively respond to challenging host country institutions are very limited (Alaydi et al., 2021; Liu et al., 2021 ; Lu et al., 2022). Since research on the post-entry interaction between EMNEs and institutions is still in the early stage (Chidlow et al., 2021), many topics are under researched (Zhang et al., 2017). We do not have sufficient knowledge about how EMNEs interact with local institutions and behave in host countries, how they respond to host country institutional challenges, what are the mechanisms through which interactions between EMNEs and local institutions occur, and what factors shape such interactions (Chidlow et al., 2021; Zhang et al., 2017).

To narrow the gaps in the literature and answer the call for more research on interactions between EMNEs and institutions (Henisz & Swaminathan, 2008; Regner & Edman, 2014; Liu et al., 2021), this study explores how Chinese MNEs address the challenging institutional environment in Australia. Specifically, based on a longitudinal qualitative study, this research examines the following questions: what strategies have been adopted by Chinese MNEs to deal with a challenging institutional environment with multiple liabilities of foreignness and trust deficit in Australia?

2 Theoretical Background: The System, Societal, and Dominance Effects

Extant studies on the interaction between MNEs and institutional environment have been dominated by institutional theory (Chidlow et al., 2021). Traditional institutionalism focuses on legitimacy (DiMaggio & Powell, 1983; Scott, 2001). Studies on the relationship between MNEs and institutions based on traditional institutionalism emphasize the influence of institutional environments on MNEs and isomorphism, arguing that MNEs should adopt strategies of local adaptation so as to obtain legitimacy and social licence (Dieleman & Sachs, 2008; Edwards et al., 2013; Hamprecht & Schwarzkopf, 2014; Regner & Edman, 2014; Yi et al., 2023). The notion of passive isomorphism has received criticism in recent decades since it views organizations as submissive recipients of a given institutional environment but downplays organizational agency (Regner & Edman, 2014; Saittakari et al., 2023; Zhang et al., 2017). In fact, passive isomorphism cannot ensure legitimacy. By contrast, neo-institutionalism calls for going beyond the rigid institutional determinism and emphasizes that organizations have the ability, resources, and intention to proactively manage external institutional challenges for self-interests (Luiz, 2021; Oliver, 1991; Regner & Edman, 2014). In other words, organizations will develop their strategies to respond and shape local institutional environments.

Based on institutional theory and resource dependency theory, Oliver (1991) hypothesizes a five-strategy framework to describe how organizations strategically address institutional pressures and constraints, including acquiescence (full compliance), compromise (partial compliance), manipulation (co-option, influence, or control strategies), avoidance (concealed or symbolical nonconformity), and defiance (active rejection strategy). According to Clemens and Douglas (2005, p.1210), these strategies can be grouped into two categories: 'work within the system' (acquiescence, compromise, and manipulation) and 'fight the system' (avoidance and defiance). However, apart from reconciling or wrangling with existing institutional environments, MNEs have a third option. For example, based on coevolutionary theory (Lewin & Volberda, 1999), Cantwell, Dunning, and Lundan (2010) hypothesize that MNEs may choose to co-evolve with local institutional environments. One the one hand, MNEs comply with local formal and informal institutions through institutional adaptation; On the other hand, MNEs act as change agents to foster local institutional change (Saittakari et al., 2023). Therefore, the interaction between MNEs and institutional environments is a process by which MNEs shape and shaped by institutional environments.

The interactions between MNEs and institutional environments may be better understood through the framework of "system, societal, and dominance effects" (hereafter the SSD model) put forward by Smith and Meiskins (1995). MNEs as complex socio-economic entities operate across multiple national regimes and systems, and hence shaped by various forces, not just home and host country institutional contexts, but also the global organizational fields, international standards, and the global political economy. Therefore, a global perspective is essential to expand and deepen our understanding of the interactions between MNEs and institutional environments, considering multiple forces. The SSD model (Smith & Meiskins, 1995) can help us understand cross-national behaviour and strategies of MNEs in a broader context of the global political economy and extend our understanding of MNEs' strategic responses to host country institutional environments.

According to Smith and Meiskins (1995, p.253), system effects refer to the influence 'modes of production' resulting from the application of science and technology to production, which set parameters and limits on organizational strategies and behavior. Systems have different levels. At the organizational level, a system can refer to the ' socio-technical system'. At the industrial level, it can be distinct economic sub-systems. At the national level, it involves a political economic system such as capitalism or state socialism. System effects reflect uneven development and a hierarchy of efficiency and performance, which contributes to a country's image and status in the global economy.

Societal effects refer to the influence of "societal contexts through which 'modes of production' emerge, develop and get reproduced. It is a level of institutionalisation which encultures systemic forces with unique qualities" (Smith & Meiskins, 1995, p.254). Societal effects arise from nationally specific traditions, institutional arrangements, and culture, as well as differences between countries. A country's social and cultural institutions or the national business system (Whitley, 1999) are significant factors shaping organizational characteristics and behavior (Kostova et al., 2008).

Societal effects are closely related to country-of-origin effects in international business research. On the one hand, country-of-origin effects emphasize that home-country imprinting shapes the characteristics of MNEs, leading them to behave in different ways (Harzing & Sorge, 2003). On the other hand, the nationality of MNEs generates stereotypical views among host country nationals, shaping MNEs' image and competitiveness, and leading to various liabilities of foreignness (Dobrucali, 2019; Moeller et al., 2013; Porter, 1990; Ramachandran & Pant, 2010; Verlegh & Steenkamp, 1999).

Dominance effects highlights uneven development of different nation states and the hierarchical nature of the global economy. According to Smith and Meiksins (1995), the global economic system is a hierarchical structure comprised of markets with different degrees of economic status. Markets in the group with the highest level of economic performance and efficiency are dominant economies deemed to be the representatives of modernity and superiority. Consequently, the...