Learning from political change and the development of MNCs' political capabilities: Evidence from the global mining industry.

VerfasserYasuda, Naoki
PostenRESEARCH ARTICLE - Report - Abstract

Abstract Previous studies have suggested that (1) a type of organizational capabilities--namely, political capabilities--are required for multinational corporations (MNCs) to grow in global markets, (2) political capabilities are important for building productive relations with governments in politically risky host countries, and (3) MNCs can develop political capabilities by accumulating foreign experiences. However, empirical studies have found both positive and negative effects of such experiences on global market expansions. This study attributes such mixed findings to our lack of understanding about MNCs' procurement processes of political capabilities and proposes types of experiences critical for such procurements by focusing on their reactions to political changes in host countries. Using data on the global mining industry and political changes in host countries, we find that MNCs develop political capabilities and thus make entries into politically risky host countries when they accumulate the experience of partially divesting some of their assets after political changes in host countries. We also find that MNCs are less likely to enter such countries if they have more experiences of exiting from host countries following political change.

Keywords Political capabilities [??] Political change [??] Foreign direct investment [??] Organizational experience [??] Market entry [??] Market exit

1 Introduction

Although international expansion is one of the strategic options available for gaining competitive advantage (Zahra et al. 2000), multinational corporations (MNCs) face the liabilities of foreignness in host countries and the need to overcome challenges associated with international expansion, which include but are not limited to achieving customer recognition in local markets, building collaborative supply and distribution networks, and gaining support in political environments (Ghoshal 1987). Host country political environments are an important element of the business environments of MNCs (Baron 1995; Fagre and Wells 1982). Host country political stability is a critical criterion in MNCs' decisions concerning foreign direct investments (FDIs) (e.g., Feinberg and Gupta 2009). Because of their lack of control or discretion over political environments in their host countries, MNCs engage in corporate political activities (CPA) defined as firms' efforts to influence or manage political entities, and deal with governmental constraints by conducting lobbying activities and contribution activities (Hillman et al. 1999). In addition to this view that MNCs are proactive actors and subject to host countries' governmental influences, there is an emerging alternative view that highlights MNCs' capabilities for exploring preemptive actions to cope with political constraints (e.g., Delios and Henisz 2000). This literature presumes that operating in politically risky environments is a source of competitive advantages (Frynas and Mellahi 2003). Some MNCs are more capable of coping with such challenges; they are faster in terms of international expansion, and better able to find emerging opportunities in host countries than other MNCs. Research has identified factors that differentiate MNCs that have undertaken such expansions from those that have not (e.g., Chang 1995; Jimenez et al. 2014).

One such factor is political capabilities, defined as an organization's routines for identifying key local political and regulatory actors and their preferences for its own benefit (Holburn and Zelner 2010). Because of constraints over political environments, MNCs avoid politically unstable environments; hence, they are less likely to enter host countries with high political risk (Delios and Henisz 2003b; Henisz and Delios 2001; Henisz and Macher 2004). However, MNCs with political capabilities can spot influential political actors such as politicians, bureaucrats, lobbyists, and third-party organizations (e.g., watchdog groups), gather critical information, and understand their interests (Oliver and Holzinger 2008). As a result, political capabilities enable MNCs to develop preemptive actions and reduce managers' perceived political risks in host countries, defined as the unpredictability and instability of legal, political, and regulatory conditions in host countries (e.g., Kobrin 1979), so MNCs with greater political capabilities are more likely to make asset investments in host countries perceived to have high political risks (e.g., Delios and Henisz 2003b).

Although there has been a consensus among scholars about the critical role of political capabilities for international expansion, there is a lack of consensus regarding processes through which MNCs procure political capabilities (Rui et al. 2016). McGuire et al. (2012, p. 344) noted that while previous research "assumes that firms possess political resources and that the key strategic challenge is to choose among a range of options for a given non-market problem", it makes no considerations about "how those resources were acquired in the first place". Indeed, some scholars have predicted that MNCs procure their political capabilities with increases in their cumulative experiences of operations and investment in host countries that present more learning opportunities on a trial-and-error basis to understand how to build and maintain healthy and productive relations with governments in host countries (e.g., Delios and Henisz 2003b). The enhanced political capabilities promote MNCs' international expansions, particularly into host countries with political risks, and this has been substantiated by Delios and Henisz (2000) in their analysis of a sample of 2827 Japanese foreign subsidiaries in 18 emerging economies and by Delios and Henisz (2003b) in their analysis of 3857 international expansions of 665 Japanese manufacturing firms.

However, this prediction of linear effects of foreign experiences is not supported by Garcia-Canal and Guillen (2008), who studied the data of Spanish firms in regulated industries. They found that the experience of foreign investment results in negative impressions among managers if such investment was made in politically risky host countries, and creates disincentives for further entries into other politically risky host countries. Their findings suggest that it is only specific kinds of foreign experiences that contribute to the development of political capabilities that promote international expansions. While empirical studies such as Delios and Henisz (2000) demonstrated the role of foreign experiences by conceptualizing them as a function of the duration of foreign operations, this suggested implication from Garcia-Canal and Guillen (2008) is congruent with a view in the organizational learning literature that firms learn unequally from different kinds of experiences (Madsen and Desai 2010; Oetzel and Oh 2014).

Given that it is important to understand the factors that promote MNCs' international expansions, and that one such factor is MNCs' political capabilities, we believe that it is theoretically and practically valuable to resolve this conflict in previous research and explore how MNCs can procure the political capabilities necessary to enter and perform in host countries with high political risk. In particular, this study attributes these mixed findings to the limited attention given to the procurement processes of political capabilities, adopts a finer-grained characterization of foreign experiences, and specifies what types of foreign experiences are important for acquiring political capabilities.

Drawing upon the learning and adaptation literature, this study focuses on the effects of the accumulation of MNCs' experiences of responding to political changes in host countries on the procurements of political capabilities. Political changes in host countries, defined as changes of the executives in power in host countries as a result of national elections, cause the redirection of current policies in areas such as taxes, employment, and environmental protection, and create discontinuities of operations. We characterize the types of MNCs' responses to political changes in a host country in three ways: (1) exit (i.e., withdrawing all of their assets from the country immediately after the political change), (2) conformity (i.e., making no changes to the assets that MNCs hold in the host country after political changes), and (3) partial divestiture (i.e., staying in the host country after political change but withdrawing some of their assets from it). When facing political changes in host countries, MNCs make one of these responses, which present different opportunities for MNCs to observe the redirections after political changes and to receive feedback from new political actors if MNCs take a particular action. The three types of experiences may have different implications for the procurements of political capabilities that result from what MNCs observe and what feedback MNCs receive after their actions.

We hypothesize that if MNCs accumulate more exit experiences, they are less likely to develop political capabilities and less able to enter host countries with high political risk. In contrast, if MNCs accumulate more experiences of conformity and partial divestitures, they are better able to expand into host countries with high political risk. The cumulative experiences of conformity promote MNCs' expansions into politically risky host countries, but the effect of partial divestiture may be stronger than conformity. We argue that the differences in the MNCs' likelihood of such expansions reflect the differences in their experiences of responding to political changes. Using data from the global mining industry from 1992 to 2007, we find support for our arguments. It is notable that we focus on the effects of MNCs' experiences triggered by political changes in some host countries on their development of political capabilities...

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