Learning from risky environments: global diversification strategies of Spanish MNEs.
| Verfasser | Jimenez, Alfredo |
| Posten | RESEARCH ARTICLE - Multinational enterprises |
Abstract This paper seeks to investigate the bilateral impact of two components of global diversification: political risk and product diversification relatedness. By analyzing a sample of 119 Spanish firms we find empirical evidence that having experience in risky environments is a useful resource for multinational enterprises. The results obtained show that experience managing high levels of political risk in the foreign direct investment (FDI) portfolio increases the number of countries where the firm may potentially invest. This multinational flexibility encourages a higher degree of product diversification relatedness by facilitating the achievement of economies of scope in the activities carried out in foreign markets. By contrast, the degree of relatedness in product diversification did not show any significant impact on political risk, due to the existence of instruments available to cover or minimize this risk when investing abroad.
Keywords Experience * Political risk * Product diversification relatedness * Simultaneous equations * Spanish multinational enterprises
1 Introduction
Global diversification is an increasingly common corporate strategy which involves carrying out product and geographical diversification (Kim et al. 1989; Hashai and Delios 2012; Kistruck et al. 2013). The interactions between these two dimensions have recently started to gain attention from researchers. Thus, Kumar (2009), Kistruck et al. (2013) and Benito-Osorio et al. (2014) have recently identified the existence of a simultaneous relationship between both variables pointing towards the possibility that selecting one of these two strategies restricts the quantity of resources available for the carrying out of the other. These studies, however, examine the relation between these two variables on the underlying assumption of a certain degree of homogeneity among the countries into which MNEs expand as they internationalize (Yang et al. 2013). This study seeks to advance one step further in the study of the relations between these two components of global diversification by incorporating political risk, a factor which sharply differentiates some locations from others and which has a critical effect on the firm's strategy.
Thus the objective of this paper is to examine whether there exists a simultaneous relations between political risk and product diversification. More specifically, we argue that those firms with an investment portfolio in countries with a higher level of political risk can take advantage of their experience interacting with host-country institutions to enter new markets with fewer restrictions. This broader range of potential locations favors a higher degree of relatedness in the product diversification strategy by increasing the possibilities of achieving and the impact of economies of scope.
In turn, we argue that the higher the degree of relatedness in the firm's product diversification, the greater the incentives to enter into markets where both political risk and potential returns may be higher. This is due to the lower costs of absorbing knowledge and adapting to new environments when there exists a greater similarity between the activities and needs of the various strategic business units of the firm (Kumar 2009). By contrast, when the level of product diversification relatedness is low and, therefore, the products in the firm's portfolio are not related to each other and have very different requirements, experience gained in negotiations and interactions with host-country authorities and institutions will be less useful.
In order to verify our hypotheses, we empirically examine a sample of 119 Spanish MNEs. We purposefully focus on companies from Spain given the demonstrated relevance and positive impact of political risk in the location of companies in regulated industries in Latin America (Garcia-Canal and Guillen 2008), the scope of the international expansion of MNEs across industries (Jimenez 2010), and their performance (Jimenez and Delgado 2012). Notwithstanding, this proactive approach towards political risk, particularly salient in their international expansion in the last decade (Jimenez 2010), has also led to some negative outcomes. For example, some foreign governments have recently taken direct measures against MNEs from Spain located in their territories. Argentina recently expropriated the part of the YPF oil company owned by the Spanish firm Repsol and the government of Bolivia did likewise with the local subsidiary of Red Electrica de Espana. Direct measures such as nationalization and expropriation and more indirect ones, such as forced re-negotiation of previously agreed conditions between host nations and MNEs continue to represent a serious threat to the interests of MNEs (Jimenez et al. 2014). This highlights the current relevance of an appropriate planning of the firm's "non-market strategy", especially in relation to the political context, in order to achieve the firm's goals (Hillman and Hitt 1999; Hillman et al. 2004; Bonardi et al. 2006; Holtbrugge et al. 2007; Oliver and Holzinger 2008; Doh et al. 2012).
As Doh et al. (2012, p. 23) have emphasized, non-market strategies are inextricably and inexorably linked with the traditional strategy approach focused on different aspects of the market. At the same time, many of the theories and perspectives used in the analysis of market strategies could be adopted and incorporated in order to understand non-market strategies, leading to a broader and more integral approach than that usually employed in the field of strategic management.
Thus, by combining the "New Institutional Economics" approach (Levy and Spiller 1994; DeFigueiredo 1997; Henisz 1998; Zelner 1999; Jensen 2003) with the resources and capabilities-based view (Wernerfelt 1984; Barney 1991) this present study contributes to the literature on the institutional environment and its impact on the management of the firm. It does so by showing that experience dealing with political risk represents a key resource for MNEs which plays a determining role in corporate product diversification strategy by encouraging a greater degree of product relatedness. Therefore, market and non-market strategies do not constitute two separate sets of decisions independent one from the other. Rather their joint study provides a new and integral conceptual framework which should produce a better understanding of the strategic decisions adopted by the firm.
A second contribution lies in the empirical evidence obtained showing that firms must consider political risk and the political environment as a source of potential opportunities--in this case to obtain economies of scope and create and sustain competitive advantages in markets where competitors without experience in managing risk cannot enter- and not just as a threat or a restriction (Garcia-Canal and Guillen 2008; Oliver and Holzinger 2008; Holburn and Zelner 2010; Jimenez and Delgado 2012; Jimenez et al. 2014).
The remainder of the paper is structured as follows: Sect. 2 reviews the literature on political risk and product diversification strategy and sets out the hypotheses. Section 3 describes the sample, model, dependent, independent and control variables. Section 4 covers the results and robustness tests and, finally, Sect. 5 sets out the main conclusions and limitations of the study and suggests future lines of research.
2 Literature Review and Hypotheses
2.1 Political Risk, Experience and Political Capabilities
Several authors have recently claimed that political risk is not only an exogenous variable but also, at least partially, it can be considered endogenous as MNEs can develop non-market strategies (i.e., strategies directed at factors external to the market) especially targeted to the political environment (Hillman and Hitt 1999; Hillman et al. 2004; Bonardi et al. 2006; Holtbrugge et al. 2007; Oliver and Holzinger 2008; Doh et al. 2012). This approach recognizes the possibility that MNE-host government relations involve opportunities for mutual benefit and are not just a zero-sum game (Luo 2001). This was precisely a limitation of what used to be the predominant perspective in the study of political risk; the bargaining power approach (Vernon 1971; Kobrin 1987). This approach builds on the idea that the existence of sunk costs reduces the firm's negotiating power in comparison with that of the host government once the investment has been made. MNE's bargaining power also decreases as local firms reduce their technological and management disadvantage. Eventually, a point can be reached where the host government may consider the benefits of appropriating the rents that the MNE generates by expropriating, nationalizing or making unilateral modifications to the business terms previously agreed (Kobrin 1987).
Recognizing that markets operate in a political, administrative, judicial, and social context, a new approach based on the analysis of political institutions has started to be employed to predict the level of risk as a function of the existence of constraints on the discretional behaviour of the authorities (Henisz 2000; Henisz and Zelner 2001). Building on the "New Institutional Economics" literature (Levy and Spiller 1994; DeFigueiredo 1997; Henisz 1998; Zelner 1999; Jensen 2003), this perspective acknowledges that the institutional context in which the firm operates affects its behaviour and that certain political regimes provide a better environment for investment. However, the impact of political hazards is not homogenous for all firms. Rather there is a notable degree of heterogeneity in terms of the political capabilities at the disposal of MNEs both at the subsidiary and the headquarters-level. Due to the different starting point, evolutionary paths and organizational attributes, the level of political capabilities and the ability to transfer them to different locations is unequal across firms...
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