Investment Climate Constraints as Determinants of Political Tie Intensity in Emerging Countries: Evidence from Foreign Firms in Ghana.

VerfasserLiedong, Tahiru Azaaviele

1 Introduction

Multinational enterprises (MNEs) in emerging countries are faced with unpredictable nonmarket environments which pose challenges to their survival and performance (Heidenreich et al. 2015; Puck et al. 2013; Shirodkar and Mohr 2015; White et al. 2015). Corporate political activity (CPA) scholarship demonstrates that governments represent major sources of uncertainty, mainly as they have the power and authority to shape firms' competitive environments (Baron 1995; Weidenbaum 1980). This notion is even stronger in emerging countries where firms are exposed to investment climate constraints stemming from institutional voids (Khanna et al. 2005; Puffer et al. 2010), where governments act in the presence of weak checks and balances and wield significant power which allow them to control critical resources (Li and Zhang 2007; Peng and Luo 2000), and where there are more frequent profound and rapid environmental changes that significantly affect the value of firms' political embeddedness (Siegel 2007; Sun et al. 2010). Therefore, in the face of such challenging investment climates "in emerging economies, resource dependencies on the government are stronger" (Mellahi et al. 2016; p. 156) and it is imperative for firms in these markets to design and use political strategies in order to prosper or even survive (e.g., Dieleman and Boddewyn 2012; Kostka and Zhou 2013; Peng and Luo 2000).

Foreign firms in emerging countries are exposed to and must address two types of investment climate constraints: Administrative constraints and control constraints (Asiedu and Lien 2004; Bitzenis et al. 2012). Drawing upon the World Bank Enterprise Survey (World Bank 2013), administrative constraints can be defined as the obstacles that arise from weak and fledgling administrative institutions or unclear and ill-enforced administrative principles (e.g. corruption, bureaucracy, discrimination), while control constraints are the obstacles emanating from government's direct imposition of drastic measures to manage macroeconomic stability (e.g. import/export restrictions, foreign exchange controls, profit repatriation restrictions). The CPA literature provides significant support for the view that administrative constraints such as corruption (Brockman et al. 2013; Luo 2006) and control constraints such as limited economic freedom and capital controls (Blumentritt 2003) increase pressure on foreign firms to engage in nonmarket activities, particularly the development of political ties. However, the CPA scholarship has focused on firm strategies for addressing specific aspects of investment constraints and has failed to investigate how political strategies are affected when firms are faced with both administrative constraints and control constraints. Consequently, we have almost no knowledge of the relative influence of these two types of constraints, as perceived by managers, on the development of political ties by foreign firms in emerging markets. An understanding of the varied effects of the two types of investment climate constraints is important because they pose strategic challenges which require nonmarket responses from firms (Heidenreich et al. 2015; Nell et al. 2015).

In emerging markets, informal political ties are commonly used by firms to overcome weak market supporting institutions (Acquaah 2007; Park and Luo 2001; Xin and Pearce 1996). The literature on determinants of CPA offers various typologies of political strategies that MNEs can use to shape their business environments. These strategies range from buffering to bridging (Meznar and Nigh 1995), bargaining to non-bargaining (Boddewyn and Brewer 1994) and reactive to proactive (Oliver and Holzinger 2008). However, the most popular strategies that are studied--the financial, information and constituency-building strategies propounded by Hillman and Hitt (1999)--are based on empirical findings in developed country contexts. In emerging countries, most of Hillman and Hitt's strategies are difficult to use by firms because the institutional environments in these countries offer few or no opportunities for their deployment (Rajwani and Liedong 2015). As a result, informal political ties remain the crucial effective strategy for firms to overcome weak institutions (Acquaah 2007; Park and Luo 2001; Xin and Pearce 1996). While it has recently been argued that advancements in some emerging countries have increased the scope for different political strategies (Shirodkar and Mohr 2015), we posit that this may be the case for a few countries where the institutional environment has been undergoing important transformations (most notably, China and India) but it may not be the case in other countries where such transformations have failed. Hence political ties are still the dominant political tactic in the developing world, especially in SubSaharan Africa.

Africa is increasingly becoming attractive to multinational firms, but management issues in the region are still under-researched (George et al. 2016; Klingebiel and Stadler 2015; Mellahi and Mol 2015). Africa remains particularly under-explored in the area of CPA research. Extant research on the antecedents of political strategies has mainly focused on US firms (e.g., Meznar and Nigh 1995; Schuler 1996), US subsidiaries in Western Europe (Hillman 2003; Hillman and Wan 2005; Wan and Hillman 2006), and foreign subsidiaries in Asia (Shirodkar and Mohr 2015; White et al. 2015). Majority of the published empirical research on the antecedents of CPA in emerging markets have focused on China (e.g., Kostka and Zhou 2013; Mondejar and Zhao 2013; Park and Luo 2001), a country with very distinct institutional characteristics. As a result, we know relatively little about other countries that are characterized by very different market and nonmarket environments. Specifically, the lack of CPA research on Africa prevents us from seeing the larger emerging market picture. We know that institutional voids in African economies pose significant investment constraints for firms (Bah and Fang 2015). What we do not know, however, is how these constraints affect CPA.

Further, the role of public affairs (PA) functions or departments in political strategy formulation is poorly understood. Even though these functions serve as crucial links between firms and their external environments (Doh et al. 2014; Griffin and Dunn 2004), they have not received adequate attention. In other words, researchers have done little to differentiate between PA functions and CPA or even to understand the impact of PA functions on nonmarket strategy. These functions could facilitate the formalization or structuration of CPA, which can affect the scope, intensity or effectiveness of political strategies (Schuler 1996). Foreign firms operating in emerging countries may have to establish PA departments to manage their interactions with political decision makers in order to gain legitimacy, hence it is important to understand whether and how PA functions affect political tie development and strength.

In this study, we fill the gaps above by examining the effects of managers' perceptions of two investment climate constraints, namely administrative constraints and control constraints, on political tie intensity in Ghana, Africa. Based on previous studies (Danis et al. 2010; Li and Zhang 2007), we define political tie intensity as the extent to which senior managers develop and maintain informal ties to politicians. Our data reveals that while control constraints incentivise political tie intensification, administrative constraints have the opposite effect. We also uncover evidence of moderating and possible substitution effects for PA functions.

We set this study in Ghana for theoretical and empirical reasons. According to the World Bank and IMF, Ghana was the fastest growing African economy in 2011. While not the largest economy on the continent, Ghana is an attractive destination of foreign direct investment. Data from the United Nations Conference on Trade and Development (UNCTAD) shows that Ghana ranked sixth in Africa for cumulative FDI inflows between 2000 and 2015. In 2015, FDI accounted for 9.05% of Ghana's GDP, which is a larger contribution when compared to 44 other African countries including Nigeria, Egypt and South Africa--the largest economies in the region. Foreign firms' participation in Ghana is therefore unquestionable.

Despite being attractive to foreign investors, Ghana is fraught with investment challenges. According to the World Bank (2017), Ghana ranks 108th out of 190 countries for ease of doing business, which is lower than most of the emerging Asian countries that frequently feature in international business research (e.g. Taiwan, China, Malaysia, Philippines, Singapore, etc.). It also ranks 154th for trading across borders (i.e. time and cost to export or import) and 155th for resolving insolvency. With respect to global competitiveness, Ghana lags behind other lower middle income countries in the world, ranking 114th out of 138 countries globally (Schwab 2016).

Considering that managerial ties become less valuable as institutions becomes stronger (Sheng et al. 2011), political ties could be more important in Ghana than in emerging Asian countries such as China, Brazil and India which have witnessed significant transitions and institutional development over the years. Firms in Ghana utilize business and political ties (Acquaah 2007; Boso et al. 2013), which could be the result of the persistent investment constraints in the country.

This study makes significant contributions to the CPA and international business literature. First, it adds to our knowledge of the antecedents of political strategies. By examining how perceptions of managerial assessment of different types of institutional arrangements in emerging countries affect political tie intensity, we offer insights into how challenges in international markets trigger MNE...

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