The impact of political risk on multinational corporations is an important theme in the literature in the fields of International Business and Strategic Management. Traditionally, academic researchers examined the management of political risk by MNEs through either the bargaining power approach (BPA) or the political institutions approach (PIA). The BPA approach, which derives from Vernon (1971), focuses on the relative bargaining power of a MNE and a given host country government. The PIA approach, in contrast, examines the mechanisms by which public policy in a host country is determined. Authors who use the PIA approach suggest that it is easier for MNEs to manage political risk in host countries in which decision-making authority is dispersed among a variety of individuals (e.g., through the US-style separation of powers) than in host countries in which authority is concentrated is concentrated in fewer individuals.
Both of these approaches have some value, but I’ve never been happy with them, not least because they tend to exclude the analysis of the cultural and intellectual contexts in which firms operate. That’s why I was intrigued by a new piece in the Strategic Management Journal by Charles E Stevens, En Xie, Mike W Peng.
Stevens, Charles E., En Xie, and Mike W. Peng. “Toward a legitimacy‐based view of political risk: The case of Google and Yahoo in China.” Strategic Management Journal (2015).
As the authors point out, the BPA and PIA lens is applied most frequently the forms of political risk confronted by MNEs who operate in the “asset-intensive extractive and infrastructure sectors” in developing countries. While recognizing that these approaches often provide the best way of understanding political risk, they argue persuasively that these approaches are less suitable for understanding political risk in the home country (i.e., the country where the multinational has its headquarters) and in relatively “complex and interconnected” sectors in industries such services or the high-tech sector. S
Citing such scholarly articles as Marquis and Quin (2014), Bucheli and Salvaj (2013), Kostova and Zaheer (1999), and Bitektine (2011), Steven et al. identify an emerging approach to writing about political risk in multinationals that they call the Legitimacy-Based View (LBV). They then proceed to develop a formal conceptual model for the LBV. The LBV recognizes that corporations are granted legitimacy by a range of actors rather than simply the state. Such actors can withhold a corporation’s “social licence” to operate. Moreover, they break down the broad term “the government” by recognizing that each national government is a far from monolithic entity: rather than being a single actor, the government is a collection of individuals, some of whom may have very different ideas about the legitimacy of a given MNE. [This approach will be music to the ears of most political scientists, along with all methodological individualists].
The empirical information about Google and Yahoo in the paper is interesting to me, especially since I followed the saga of Google in China, but I am most interested in the theoretical framework the authors develop as it could be applied by a wide variety of IB, strategy, and business history scholars.
About the authors: Charles Stevens teaches at Lehigh University. En Xie teaches at Xi’an Jiaotong University. Mike W. Peng is the Jindal Chair of Global Strategy Head, Organizations, Strategy, and International Management, University of Texas Dallas.