The Effect of Corporate Political Activity on MNC Subsidiary Legitimacy: An Institutional Perspective.
| Verfasser | Banerjee, Shantanu |
| Posten | RESEARCH ARTICLE - Multinational corporation - Report - Statistical data |
1 Introduction
Multinational corporations (MNCs) employ a range of market and non-market strategies to succeed and grow in international markets. In international business (IB) research, scholars largely focus on the market-related strategies of multinational firms (MNCs) and how these strategies deliver superior customer value and performance in competition with local and foreign firms. It is increasingly recognized, however, that MNC subsidiaries do not operate in a vacuum, "but in specific social, cultural, and political contexts" (Okhmatovskiy 2010, p. 1039). As MNC subsidiaries operate across diverse institutional contexts, they manage their broader external environments through institutional strategizing that are broadly referred to as non-market corporate political activities (CPA) (Marquis and Raynard 2015). Although the study of CPA has its origins in the political literature (e.g., Mitchell et al. 1997), increasingly, IB and management scholars acknowledge that institutional pressures affect MNC subsidiary activities and formally incorporate CPA strategies in theoretical models of organizational effectiveness (e.g., Blumentritt and Nigh 2002; Shirodkar and Mohr 2015b; Wan and Hillman 2006). The need for non-market activities to achieve MNC subsidiary goals is also growing in practice (Rodriguez et al. 2006), as illustrated by the following example of Amway in China:
Whereas a long-term focus under private-ownership helped Amway ride through years of underperformance in China, "just as important was Amway's ability to sell itself to officialdom. The firm's senior managers got to know regulators and informed them about the differences between pyramid schemes and established direct sellers... Amway (also) sponsored a fellowship that sent rising stars of the Communist Party to Harvard's Kennedy School of Government, with a handy stopover at Amway's headquarters in Ada, Michigan" (Economist 2016, p. 49). Similar examples of CPA by firms to gain favour from governments are found in developed countries, as indicated by the following quote in the context of the gambling industry in Australia.
... the (gambling) industry does not leave regulation to chance: it donates lavishly to both big political parties and to independent politicians. "This corrupts governance," argues Andrew Wilkie, an independent MP who instigated the attempt at federal regulation in 2012" (Economist 2017, p. 22). Prior CPA studies have drawn on different perspectives from various academic disciplines to focus on the environmental and firm level drivers of CPA (Getz 1997, 2002; Hillman et al. 2004). Although there is a good understanding of the drivers of CPA and the different types of CPA pursued by firms, relatively less attention is paid to the outcomes and the potential benefits of CPA (Getz 1997; Hillman et al. 2004; Ozer 2010). Empirical evidence regarding the relationship between CPA and firm performance is mixed and not always positive (Rajwani and Liedong 2015). This indeterminate financial outcome linked to CPA has mainly been attributed to its "unique strategic nature" (Hadani 2012). Over the years, studies have speculated that CPA leads to legitimacy, however, traditional CPA and IB studies have not paid sufficient attention to the issue of strategic use of CPA for shaping subsidiary legitimacy (Hillman and Hitt 1999; Hond et al. 2014; Nell et al. 2015). For example, whereas Luo (2001) recognizes the need for legitimacy, it does not tell us how firms should go about gaining it. Legitimacy, like market share, has to be earned through firm actions (Kostova and Zaheer 1999). Echoing the above, institutional theory posits that firms need to broaden their mandate beyond achieving superior financial and market-related performance, and focus on other non-financial goals such as legitimacy that are considered important for MNC subsidiary survival and success in host countries. Accordingly, our paper extends Luo (2001) and Kostova and Zaheer (1999) by showing empirically how the different types of CPA and their adaptation within the local environment support MNC subsidiaries in gaining legitimacy in the host country.
Legitimacy is defined as "a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions" (Suchman 1995, p. 574). As legitimacy is a socially constructed perception of propriety about an entity such as a multinational firm, it is essentially "a conferred status" (Singh et al. 1986). Literature on legitimacy posits that obtaining the support and endorsement of external stakeholders is key to gaining legitimacy (Meyer and Scott 1983; Suchman 1995). Accordingly, conferring legitimacy does not occur spontaneously, but rather is an effect of social judgement by different stakeholders through conscious thought and attention via the institutionalisation process (Rueede and Kreutzer 2015). Certainly, in most countries, government remains the most influential stakeholder controlling critical resources and opportunities, and shaping the regulatory framework (Chan and Makino 2007; Hillman and Wan 2005). For that reason, by strategically engaging in CPA, MNC subsidiaries can successfully maintain positive government relationships and gain legitimacy to access vital resources, operate productively, and create value for the firm and its diverse stakeholders (Reast et al. 2013).
Since MNC subsidiaries are evidently of foreign origin, they face circumstances significantly different from domestic firms and have different priorities with respect to the strategic use of CPA as compared to their domestic counterparts in the host country (Wocke and Moodley 2015; Zaheer 1995). To overcome the liability of foreignness, a subsidiary may seek to build positive perceptions of itself through a variety of legitimacy seeking actions, including CPA (Boddewyn and Brewer 1994; Nell et al. 2015; Suchman 1995; Wocke and Moodley 2015; Zaheer 1995). For example, MNC subsidiaries often employ strategies intended to influence the public policy environment in a manner favourable to the firm (Baysinger 1984). However, competing in the public policy environment is not easy, as improper implementation of accepted practices can heighten tensions with the host government and society (Lawton et al. 2013; Rajwani and Liedong 2015; Wocke and Moodley 2015). Another potential downside of subsidiary CPA is that it is more sensitive to ethical issues than market strategies, as the nonmarket setting has a murkier aspect where fraudulent ways can be the prevalent mode (Doh et al. 2012; Mantere et al. 2009; Rajwani and Liedong 2015). It has been observed in the non-market strategy literature that "institutional contradictions create a context where a particular nonmarket strategy may lead one stakeholder group to confer legitimacy to the firm but meanwhile may lead another group of stakeholders to withdraw its legitimacy" (Mellahi et al. 2016, p. 154). As CPA inevitably faces widely contradictory nonmarket and corruption circumstances and remains "unseen" (Hadani 2012; Windsor 2007), any public awareness of MNC subsidiaries' CPA involvement in a host country can raise ethical questions that can have negative repercussions on the reputational goals of the company. Thus, all else being equal, the need for MNC subsidiaries to seek legitimacy in host countries becomes more complex and controversial than for local firms (Hillman et al. 2004; Lux et al. 2011; Rajwani and Liedong 2015). Presented with such confounding institutional environment, it becomes evident that traditional CPA strategies alone may not be sufficient to attain legitimacy in a host country (Mellahi et al. 2016).
Accordingly, we extend the study of legitimacy with a neo-institutional (or institutional sociology) perspective that emphasises the need for isomorphism with established and prevalent practices or norms within the firms' institutional environments (Doh et al. 2012; Kostova and Roth 2002). From a neo-institutional viewpoint, societal actors have discernible influences on firms' conduct (Doh et al. 2012), which compels firms to pursue adaptive strategies (De Villa et al. 2015) and mimic the activities of competitors in the host nations. By adopting a configuration of multiple adaptive and transformative strategies, subsidiaries both adapt to and shape the institutional environment of host nations. Such an integrated approach enables subsidiaries to engage in conduct that constitutes "appropriate" behaviour as well as facilitates engaging with key stakeholder groups to influence what constitutes "appropriate" behaviours as the criteria for legitimacy (Greenwood et al. 2011; Scott 2014). As the mechanisms underlying sociological institutionalism are fundamentally similar in both organizational and political fields (Beckert 2010), subsidiary CPA strategies are "inextricably and inexorably linked to traditional strategic rationales and approaches" (Doh et al. 2012, p. 23). Against this background, the key research question that we aim to address in this study is--how do the various CPA strategies of MNC subsidiaries contribute to the goal of achieving MNC subsidiary legitimacy. (1) To the best of our knowledge, no study explicitly tests the legitimacy effect of diverse CPA strategies.
Our paper makes three theoretical contributions to the CPA literature in international business. One, we contribute to the organisational sociology perspective of institutional theory by showing how subsidiary CPA can manage relationships with relevant stakeholders in host nations to gain an important non-financial outcome for MNC subsidiaries, namely, subsidiary legitimacy. In particular, our study extends the CPA literature in IB by examining the effect of both adaptive and transformative approaches to gain legitimacy (Dorobantu et al. 2017). Two, we discuss the concepts of...
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