Political hazards and firms' geographic concentration

Research summary : We examine the relationship between the geographic concentration of a firm's sales and the firm's vulnerability to expropriation hazards. Although expanding outside the home location can initially increase a firm's exposure to government expropriation, we find that this effect reverses when a firm's sales outside its home location have reached a point at which it has sufficient resources to better influence government actions and to pose a credible threat to exit the market in which it is being targeted. We supplement this main result by identifying two moderating factors: the firm's level of political capital and the effectiveness of institutional constraints on government behavior. We find support for these hypotheses from survey data on privately owned enterprises in China. Managerial summary : This research advises firm managers that certain market activities might knock their firms' economic interests out of alignment with the government's political interests, and thus, influence the political hazards they face, particularly in emerging markets such as China, which has attracted strong interest of many firms with respect to entering the market. Here, all else being equal, the firms' geographic concentration exposes them to different levels of state expropriation—but not in a simple linear fashion as suggested by the conventional wisdom of local protectionism or that of the bargaining advantage generated by the threat of relocation: Those who are “stuck in the middle” ended up paying twice or even three times as much unauthorized levies as the purely local or the most expansive firms. Copyright © 2015 John Wiley & Sons, Ltd.     

Political capabilities,policy risk,and international investment strategy: evidence from the global electric power generation industry

Whereas conventional wisdom holds that multinational enterprises (MNEs) invest less in host countries that pose greater policy risk—the risk that a government will opportunistically alter policies to expropriate an investing firm's profits or assets—we argue that MNEs vary in their response to host‐country policy risk as a result of differences in organizational capabilities for assessing such risk and managing the policy‐making process. We hypothesize that firms from home countries characterized by weaker institutional constraints on policy makers or greater redistributive pressures associated with political rent seeking will be less sensitive to host‐country policy risk in their international expansion strategies. Moreover, firms from home countries characterized by sufficiently weak institutional constraints or sufficiently strong redistributive pressures will seek out riskier host countries for their international investments to leverage their political capabilities, which permit them to attain and defend attractive positions or industry structures. We find support for our hypotheses in a statistical analysis of the foreign direct investment location choices of MNEs in the electric power generation industry during the period 1990–1999, the industry's first decade of internationalization. Copyright © 2010 John Wiley & Sons, Ltd.     

The contingent effects of political strategies on firm performance: A political network perspective

Research Summary: We examine the performance impact of corporate political strategies by analyzing the relationships among firms and various government institutions. While a firm's political connections to a focal government with decision‐making authority enhance performance, connections to a rival government competing with the focal government harm performance, particularly when the rivalry is intense. Firms can neutralize the negative effect from this political rivalry by using direct or indirect connections to a constraining government with power over the focal government. We find support for our conjectures based on an analysis of interactions among Chinese steel firms and the central and provincial governments in acquisition decisions during the industry's consolidation period of 1999–2010. Managerial Summary: Firms invest in political capital in order to influence public policies in their favor. However, the government is a not a monolithic entity and the relationships among various government institutions can alter and even reverse the effects of a firm's political strategy. This research shows that a firm's political connections can be both an asset and a liability. That is, although firms benefit from their connections to governments with decision‐making authority, they can be caught in the crossfire when there is a rivalry between governments. Furthermore, our research suggests that firms can cope with the negative impact from political rivalry by taking advantage of the structural relationships within the political system and influencing governments that have constraining power.     

Firm non‐market capabilities and the effect of supranational institutional safeguards on the location choice of international investments

Research Summary : We investigate the extent to which firms rely on supranational institutional safeguards versus their non‐market capabilities to offset the risks of investing abroad. We argue that firms with non‐market capabilities are insensitive to supranational institutional safeguards when choosing the location of their international investments. We show that supranational agreements between an investor's home and host nation, operationalized as bilateral investment treaties (BITs), increase the likelihood of investment, but there is substantial firm heterogeneity with respect to this relationship. Firms with various forms of non‐market capabilities are not sensitive to BITs, whereas other firms are more likely to invest under BITs. We advance the understanding of how firm non‐market capabilities can substitute for supranational institutional arrangements in addressing risks associated with host country institutional weaknesses. Managerial Summary : The risk of expropriation is one of the main concerns companies have when investing abroad. Because of this, many countries implement bilateral investment treaties (BITs) to safeguard foreign investments, alleviate foreign investor concerns, and promote investments. We show that only those companies without political competence or political connections favor countries with BITs when choosing where to invest. Companies with political competence or political connections, on the other hand, ignore BITs and apparently rely on their ability to influence governments whenever their foreign investments face expropriation threats. As a result, politically connected or competent companies can enter markets most of their competitors lacking these capabilities shy away from. They can, therefore, do business in environments in which they face less competition.     

The relevance of political affinity for the initial acquisition premium in cross‐border acquisitions

Research summary : In the context of economic nationalism, we investigate the relevance of political affinity between countries to the initial acquisition premium offered in cross‐border acquisitions. Political affinity is defined as the similarity of national interests in global affairs. We argue that political affinity affects how foreign acquirers anticipate their bargaining position in their negotiations with domestic target firms. With decreasing political affinity, the host government becomes increasingly likely to intervene against foreign firms in an acquisition deal. Consequently, foreign acquirers need to provide a more lucrative initial offer to dissuade target firms from leveraging government intervention to oppose the acquisition. Our prediction is supported by strong evidence that political affinity, as revealed by UN general assembly voting patterns, leads to lower initial acquisition premiums. Managerial summary : Media reports suggest that politics plays an important role in international business transactions. However, we still know very little about how bilateral political relations affect corporate decision‐making. In this article, we analyze the influence of the quality of bilateral political relations on the bidding behavior of foreign acquirers in cross‐border acquisitions. We argue that the host government is more likely to intervene against the foreign acquirer during deal negotiations if the quality of bilateral political relations is poor. A lower political affinity between countries therefore decreases the bargaining power of the acquirer and pushes up the initial bid premium the acquirer has to offer to the local target. Our empirical results confirm our argument. Copyright © 2015 John Wiley & Sons, Ltd.     

Top management conservatism and corporate risk strategies: Evidence from managers' personal political orientation and corporate tax avoidance

We investigate whether managers' personal political orientation helps explain tax avoidance at the firms they manage. Results reveal the intriguing finding that, on average, firms with top executives who lean toward the Republican Party actually engage in less tax avoidance than firms whose executives lean toward the Democratic Party. We also examine changes in tax avoidance around CEO turnovers and find corroborating evidence. Additionally, we find that political orientation is helpful in explaining top management team composition and CEO succession. Our paper extends theory and research by (1) illustrating how tax avoidance can serve as another measure of corporate risk taking and (2) using political orientation as a proxy for managerial conservatism, which is an ex ante measure of a manager's propensity toward risk. Copyright © 2014 John Wiley & Sons, Ltd.     

Government's green grip: Multifaceted state influence on corporate environmental actions in China

Research summary: Emerging economies such as China enjoy economic expansion, but also face dramatic environmental challenges. China's government is a central actor in both stimulating economic activities and pursuing environmental protection. Drawing on panel data and in‐depth interviews, we examined the influence of the Chinese state at multiple levels on the environmental actions of publicly listed firms. The results show that corporate environmental actions follow an inverted U‐shape as control of environmental practices moves from the central government to the most decentral administrative level. This curvilinear relationship is positively moderated by the stringency of environmental regulation and negatively moderated by environmental monitoring capacity. We conclude that state influence on corporate environmental actions in China is multifaceted and subject to “policy‐policy decoupling.” Managerial summary: As China's environmental awareness is growing, the country's government is increasingly concerned with the question as to how it can improve the environmental performance of the firms it controls. Our evidence shows the concurrence of two contravening government influences on corporate environmental practices: a performance‐enhancing effect of the regulatory pressure by multiple authorities and a performance‐diminishing effect of the autonomy enjoyed by local governments. Both the most centrally and the most decentrally controlled firms in China show significantly weaker environmental performance than those controlled by intermediary levels of government. The stringency of sectorial environmental regulation and environmental monitoring capacity affect the strength of the Chinese government's green grip.     

Once bitten twice shy? Experience managing violent conflict risk and MNC subsidiary‐level investment and expansion

Research summary : Researchers have increasingly emphasized the need to better understand how context affects the value of experiential learning. We address this gap by investigating when corporate‐level experience can be leveraged across borders and when experience needs to be country‐specific to be valuable. We test our hypotheses using a unique multi‐source panel dataset of 379 large MNCs from 29 home countries and their subsidiaries in 117 host countries over a 10‐year period, 1999–2008. In contrast to prior research, we find that the ability of a firm to leverage its experience with political risk across borders is limited by the type of risk involved. Experience with nonstate violent conflicts may be transferrable, but only country‐specific experience appears to yield measureable benefits for conflicts involving the host country government . Managerial summary : Violent conflicts not only increase social unrest but also impose added costs of doing business. For managers who find themselves in the midst of violent conflicts or who wish to survive and potentially gain a competitive advantage in operating in such challenging environments, is it possible to learn to manage such a seemingly “unmanageable” problem? In contrast to studies that have examined other types of political risk, we find that the ability of a firm to leverage its experience with violent conflict risk across borders is limited. Specifically, only country‐specific experiential knowledge about how the host government prepares and manages such conflict risks yields measureable economic benefits for MNCs and their subsidiaries operating in countries during conflict . Copyright © 2016 John Wiley & Sons, Ltd.     

In search of El Dorado: The elusive financial returns on corporate political investments

Although many believe that companies' political activities improve their bottom line, empirical studies have not consistently borne this out. We investigate the relationship between corporate political activity (CPA) and financial returns on a set of 943 S&P 1500 firms between 1998 to 2008. We find that firms' political investments are negatively associated with market performance and cumulative political investments worsen both market and accounting performance. Firms placing former public officials on their boards experienced inferior market performance and similar accounting performance than firms without such board members. We find, however, that CPA is positively associated with market performance for firms in regulated industries. Our results challenge the profit‐maximizing assumptions underlying CPA research and focus on agency theory to better understand CPA. Copyright © 2012 John Wiley & Sons, Ltd.     

Red,blue, and purple firms: Organizational political ideology and corporate social responsibility

Research summary : Why do firms vary so much in their stances toward corporate social responsibility (CSR )? Prior research has emphasized the role of external pressures, as well as CEO preferences, while little attention has been paid to the possibility that CSR may also stem from prevailing beliefs among the body politic of the firm. We introduce the concept of organizational political ideology to explain how political beliefs of organizational members shape corporate advances in CSR . Using a novel measure based on the political contributions by employees of Fortune 500 firms, we find that ideology predicts advances in CSR . This effect appears stronger when CSR is rare in the firm's industry, when firms are high in human capital intensity, and when the CEO has had long organizational tenure . Managerial summary : Why do firms vary in their stances toward corporate social responsibility (CSR )? Prior research suggests that companies engage in CSR when under pressure to do so, or when their CEOs have liberal values. We introduce the concept of organizational political ideology, and argue that CSR may also result from the values of the larger employee population. Introducing a novel measure of organizational political ideology, based on employees' donations to the two major political parties in the United States, we find that liberal‐leaning companies engage in more CSR than conservative‐leaning companies, and even more so when other firms in the industry have weaker CSR records, when the company relies heavily on human resources and when the company's CEO has a long organizational tenure . Copyright © 2016 John Wiley & Sons, Ltd.     

Managerial Political Behavior in Innovation Portfolio Management: A Sensegiving and Sensebreaking Process

By applying formalized innovation portfolio management systems, firms seek to ensure an alignment of their goals and strategy with their employees' different abilities, actions, and outcomes. However, research indicates that nonrational, political behavior also determines formalized innovation portfolio management decision‐making processes. Research on political behavior in respect of innovation portfolio management usually conceptualizes political behavior as a set of self‐serving activities, such as negotiation, bargaining, coalition building, and acquiring power, aimed at protecting, maintaining, or promoting an actor's self‐interest and power. Consequently, extant research tends to focus on political behavior's dysfunctional impacts on decision‐making processes and their subsequent outcomes. This paper challenges this negativity bias by exploring a novel, neutral specification of political behavior and its relation to innovation portfolio management decision‐making processes. By conducting an automotive industry case study focusing on the innovation portfolio management decision‐making processes, the paper analyzed the data from 43 interviewees. The conceptual model shows that managers' political capabilities determine their ability to behave politically. According to the results, political behavior comprises the activities that prepare the stage and orchestrate others in order to form a political coalition. Furthermore, results show that political behavior functions as a sensegiving and a sensebreaking process, with managers seeking to shape an innovation project's understanding according to their interests and to influence portfolio decisions. The resulting novel specification of political behavior extends the construct's scope and validity by investigating their functional and dysfunctional aspects, and by indicating that a political sensemaking process complements formalized innovation portfolio management decision‐making processes.     

On the duality of political and economic stakeholder influence on firm innovation performance: Theory and evidence from Chinese firms

Research Summary

In this study, we propose and test a multi‐stakeholder perspective to address variation in innovation performance across firms. Specifically, we analyze how a focal firm's innovation performance is shaped by its political stakeholders (local and central governments) and economic stakeholders (suppliers, buyers, and competitors). Using a data set consisting of over 26,400 Chinese firms, we first find support for our predictions that a focal firm's innovation performance will be enhanced by both its government connections and the innovativeness of its economic stakeholders. We then analyze whether the interdependent effect of these political and economic stakeholders is more likely to be synergistic versus antagonistic, and find evidence consistent with the antagonistic view.

Managerial Summary

We show how a firm's innovativeness is influenced strongly by its relationships to external stakeholders. Specifically, we examine the potentially dual‐edged role of political stakeholders (local and central governments) and economic stakeholders (suppliers, buyers, and competitors). Using extensive data on Chinese firms, we find: (a) that the higher the level of government connections, the greater a firm's innovativeness; (b) that firms located in proximity with more innovative economic stakeholders also tend to have higher innovation performance. We also look beyond these independent positive effects to examine the joint effect of these two forms of stakeholder influence, and here we see that more influence is not always better. Specifically, we find that the innovation benefit that typically accrues to firms in proximity to more innovative economic stakeholders is weakened when those firms also have higher‐level government connections.     

Risk management in public sector research: approach and lessons learned at a national research organization

As the Canadian federal government's main research body and a public sector agency, the National Research Council (NRC) must manage numerous strategic as well as operational risks, including those at the project, program and portfolio levels. Such risks might arise from political and other stakeholder interests, intellectual property ownership and policy, funding structures, public perceptions of science and technology, occupational health and safety, management of highly qualified personnel, availability of receptor capacity for research being undertaken, and unknown markets for very new research areas, to name a few. Varying risk management practices have existed across NRC institutes and programs in the past as a result of the relative autonomy afforded to these groups. In seeking a more systematic approach, driven by both external and internal interests, NRC researched best practices, models and frameworks for risk management. NRC needed an appropriate model and approach for managing risk that could be applied throughout different levels and within the various arenas of its activities. The approach selected is based on the concept of enterprise risk management, allowing NRC to look not only at specific areas of risk but the larger picture – effectively assessing, controlling, exploiting and monitoring risks from all sources that might threaten the achievement of its goals. At the same time, such an approach also ensures that potential opportunities that could facilitate achievement of its goals are not missed. This paper shares some of NRC's findings of its research (including best practices), describes its current framework and approach, as well as some of its challenges.     

The role of managers' political networking and functional experience in new venture performance: Evidence from China's transition economy

Drawing upon the resource‐based view and transaction cost economics, this study aims to examine how various types of managerial resources (i.e., political networking and functional experience) can be beneficial to new ventures in a transition economy. Using survey data from a sample of new ventures in China's high‐technology industries, we demonstrate that managers' political networking and functional experience are positively related to new venture performance. We also find that the positive relationship between functional experience and new venture performance is moderated by the type of ownership of the ventures and the level of dysfunctional competition in their environments. Theoretical and managerial implications are discussed. Copyright © 2007 John Wiley & Sons, Ltd.     

Buffering and enabling: The impact of interlocking political ties on firm survival and sales growth

Several studies suggest that political ties help firms survive or perform but do not examine the boundary conditions concerning which types of firms and which type of ties help firms. We draw from resource dependence and resource‐based theories to argue that political ties can improve both firm survival (labeled “buffering”) and performance (labeled “enabling”), with weaker firms gaining more from buffering and stronger firms gaining more from enabling. We further examine the relative impact of local and central ties. We test our hypotheses on the television manufacturing industry in China between 1993 and 2003. Results demonstrate the buffering roles of political ties, and under narrower conditions, their enabling roles. Local ties account for these outcomes, while central ties do not provide buffering or enabling benefits. Copyright © 2014 John Wiley & Sons, Ltd.     

Emerging Market Firms' Internationalization: How Do Firms' Inward Activities Affect Their Outward Activities?

Research summary : In this study we examine how an emerging market firm's inward international activities (“inward activities”) are related to its outward international activities (“outward activities”) by focusing on the role of the firm's gain from its inward activities. On the one hand, drawing upon the organizational learning perspective, we propose that a firm's gain from inward activities may facilitate its outward activities through improving its resource fungibility. On the other hand, we draw upon the prospect theory to propose that a firm's gain from inward activities may hinder its outward activities by discouraging the firm's top managers from taking risks that are inherent in outward activities. With detailed data from a sample of manufacturing firms in China, we find empirical support for both lines of arguments . Managerial summary : Are emerging market firms with higher inward gain more likely to engage in outward internationalization activities? We argue that it depends upon how a firm uses its gain from inward activities. If the firm can improve its resource fungibility (particularly organizational resource fungibility) from its inward gain, it is more likely to engage in outward activities. If the firm cannot improve its resource fungiblity, the answer is no. Our findings suggest that for emerging market firms, internationalization is not just a path toward new markets; instead, it reflects how these firms exploit and explore what they have learned from their interactions with foreign firms at home in foreign markets. Therefore, managers must think more strategically on developing (organizational) resource fungibility from their inward activities . Copyright © 2017 John Wiley & Sons, Ltd.     

Windfalls of emperors' sojourns: Stock market reactions to Chinese firms hosting high‐ranking government officials

Research summary: We contribute to the corporate political activity (CPA ) literature by showing that investors value companies that host visits of high‐ranking government officials (P resident and P remier). We argue that investors may value host official visits for two reasons: (1) the signal received about possibility of firm accessing government‐controlled resources via promotion or protection; and (2) the certification effect from such high‐powered visitors elevating the firm's reputation and legitimacy. Results from an event study analysis of 84 high‐ranking government official visits in C hina from 2003 to 2011 indicate that investors responded positively to host firms as reflected by stock market performance. Furthermore, the greatest positive reactions accrued to firms experiencing weaker prior period financial performance and to firms that are privately compared to state‐controlled . Managerial summary: Do visits by high‐ranking government officials influence firm stock market performance? Studying a sample of C hinese public firms that hosted 84 visits by the C hinese P resident and the P remier from 2003 to 2011, we find that investors reacted positively to such visits compared with a group of non‐host firms from the same industry and with similar financial performance and size. In addition, firms with weaker prior financial performance and private firms benefit the most from hosting such visits. Our findings imply that hosting visits of high‐ranking government officials can signal future government‐controlled resource inflows and boost host firms' reputation and legitimacy . Copyright © 2016 John Wiley & Sons, Ltd.     

Productivity enhancement at home via cross‐border acquisitions: The roles of learning and contemporaneous domestic investments

We examine whether ex post domestic productivity gains accrue to firms making cross‐border acquisitions. We argue that cross‐border acquisitions can enhance the acquirers' productivity at home, and we posit that these domestic productivity gains will be greater when there are learning opportunities in the target's host country and when contemporaneous domestic productivity‐enhancing investments are made by the acquirer in conjunction with the acquisition. These predictions are supported by data drawn from a sample of French acquiring and nonacquiring firms. Our results indicate that cross‐border acquisitions and investing in productivity at home are complementary: each makes the other more beneficial to firm productivity. Copyright © 2014 John Wiley & Sons, Ltd.     

Hedging House Price Risk in China

The increasing risk associated with China's housing prices is globally recognized. However, hedging this risk is challenging because of a lack of financial derivatives on China's housing assets. We suggest that the short sale of futures contracts for construction raw materials, i.e., iron ore or/and steel, can act as useful tools to hedge the systematic risk of China's new home price. We first present evidence that there is a strong and stable correlation between changes in China's housing prices and global steel/iron ore prices. Using a hedging strategy model, we then show that, during the sample period between 2009 and 2015, 20.6% of the total unpredicted variance in Chinese housing prices can be hedged by shorting rebar and iron ore futures. We further examine this strategy with an event study based on the announcement of the “home‐purchase restriction” policy in April, 2010. The cumulative abnormal returns show that both steel and iron ore prices reacted significantly to this negative shock, and therefore the proposed strategy could substantially help investors offset losses in the housing market. We finally provide some evidences that this strategy can also help investors in specific regional housing markets, or the resale housing markets.