Conference Proceedings

Würzburg International Business Forum

International Business Conference 2018

Managing International Political Risk:

Arising Challenges for Multinationals
in a Changing World

Editors:
Emin Akcaoglu, Harald J. Bolsinger & Rainer Wehner

Würzburg, 24 - 25 May 2018

 Conference Proceedings
Würzburg International Business Forum
International Business Conference 2018

Managing International Political Risk:

Arising Challenges for Multinationals in a
Changing World

Würzburg, 24 - 25 May 2018

Editors:
Emin Akcaoglu, Harald J. Bolsinger & Rainer Wehner
FHWS – Würzburg International Business Forum (2008) Conference Proceedings:
Managing International Political Risk: Arising Challenges for Multinationals in a
Changing World. Würzburg, Germany. 192 pp (including the cover pages).

Editors: Emin Akcaoglu, Harald J. Bolsinger & Rainer Wehner

Conference web site design: Dominik Winkler

Conference logo design: Magdelena Ulsamer

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Contents

Keynote Speakers

International Advisory Board

Organisation Committee

Foreword 1

Proceedings of Plenary Session I

Company-specific Reactions to Country Risk Changes: A Case Study from 5

the Perspective of Austrian Subsidiaries in the Russian Federation
Mag. Aneliya Adzhemova

Unmanaged Migration and the Role of MNCs in Reducing Push Factors 11

and Promoting Peace
Carol Reade & Mark McKenna

Why Chinese Firms Invest in Politically Risky Countries: Mapping the Cause 17
Xueli /Charlie Huang & Qiao Wei

Determinants of Political Risk in African Markets: A Nigerian Perspective 27

James B Mshelia & John R Anchor

The Role of Foreign Direct Investments in Social Economy Development 39

Stukalo Nataliia & Simakhova Anastasiia

Exploring the Importance and Satisfaction of the Key Services in Gasoline 47

Stations: A Study on Chinese Petroleum and Chemical Corporation (CPC)
and Formosa Petrochemical Corporation (FPC)
Keng-Hsiang Cheng & Oumarou Zougmore

Proceedings of Plenary Session II

The Role of HR in Responding to Terrorist Threat: A Systemic Approach 65

Benjamin Bader & Carol Reade

Europe’s Multimorphosis and Glocal Political Risk Analysis 67

Heinrich Matthee
 State Capture, Political Risks and International Business: Evidence from 77
Ukraine under Yanukovych
Hannes Meissner & Johannes Leitner

Strategic Responses of Trade-Dependent Firms to Rising Trade 93

Protectionism
Louise Curran & Jappe Eckhard

The Effect of Herd Behavior on Stock Markets During the Election Times: 97
Evidence from Borsa Istanbul
Zeliha Can Ergun

German FDI in Turkey: An Analysis under the Recent Developments 105

Emin Akcaoglu & Rainer Wehner

Proceedings of Plenary Session III

Kia vs. the Government of Nuevo León: Lessons from an FDI Dispute at the 113
State Level
Andreas M. Hartmann & Joohee Kim

Business Diplomacy: How to Ease Multinational Corporations’ Business Risk 125

in Developing Countries and Conflict-prone Zones
Huub Ruël & Lisa Isabell Stümke

Antecedents of Conformity in Multinationality: A Systematic Review of the 149

Literature
Makafui Kwame Kumodzie-Dussey

Digital Tax as Political Risk 155

Ertugrul Akcaoglu

Political risk influence on Multinational Corporations operating in African 161

markets: perspectives from Nigeria
James B Mshelia & John R Anchor

When the Family Becomes the Biggest Obstacle for a Family Business: 177
‘Who is the Best Fit for the Position’
Nesrin Ada & Emin Akcaoglu
 Würzburg International Business Forum
International Business Conference 2018
Keynote Speakers
Ilan Alon, Adger University, Norway
Sencer Imer, Ufuk University, Turkey

International Advisory Board

Ilan Alon, Adger University, Norway
Diederich Bakker, Hanze University of Applied Sciences, Groningen,
The Netherlands
Harald J. Bolsinger, FHWS University of Applied Sciences Würzburg-
Schweinfurt, Germany
Lourdes Casanova, Cornell University, USA
Sencer Imer, Ufuk University, Turkey
Shou Wang Kuo, Shih Chien University, Taiwan
C. Coskun Kucukozmen, Izmir University of Economics, Turkey
Marin A Marinov, Aalborg University, Denmark
Rattanavalee Maisak, Rajamangala University of Technology Phra
Nakhon, Thailand
Justin Paul, University of PR, San Juan, PR, USA
Musa Pinar, Valparaiso University, USA
Jaya Prakash Pradhan, Central University of Gujarat, India
Olga Saginova, Plekhanov Russian University of Economics, Russia
Nataliia Stukalo, Dnipro National University, Ukraine
Dominic Szambowski, International College of Management, Sydney,
Australia
Andrius Tamošiūnas, Vilnius Gediminas Technical University, Lithuania
 Würzburg International Business Forum
International Business Conference 2018

Organisation Committee
Rainer Wehner, Head of Organisation Committee, FHWS University of
Applied Sciences Würzburg-Schweinfurt, Germany

Emin Akcaoglu, FHWS University of Applied Sciences Würzburg-

Schweinfurt, Germany

Patrizia Kujaschewski, FHWS University of Applied Sciences Würzburg-

Schweinfurt, Germany

Christine Wegerich, FHWS University of Applied Sciences Würzburg-

Schweinfurt, Germany

Dominik Winkler, FHWS University of Applied Sciences Würzburg-

Schweinfurt, Germany
Foreword

Foreign direct investment (FDI) by induced financial risks for MNCs, and this
multinational corporations (MNCs) is one situation is not limited only to developing
of the major drivers of economic and emerging countries.
globalization. According to the data
published by UNCTAD, the world FDI Therefore, political risk management is a
stock increased phenomenally from US$ basic area especially for multinational
698 billion in 1980 to US $ 23 trillion in 2012. companies to study particularly these
The growth in FDI flows has indeed days. In other words, in the current global
outpaced the rate of growth in environment of high political risks and
international trade. However, FDI flows policy uncertainty, it will certainly be
have declined since the beginning of the valuable to examine the evolution of
global financial and economic crises in political risk perceptions of multinationals
2007. 2009 was the beginning of a and also the tools and techniques they
recovery period for global FDI flows; but use to skilfully manage such risks.
in 2011, a downward trend started and Analysing how investors perceive and
continued by 2015. After a significant deal with these risks will additionally
improvement in 2015, the trend has been contribute to a better understanding of
downward again. Though a modest the role of political risk insurance in the
recovery is expected at the moment, post-crisis investment landscape, and
UNCTAD states that “elevated how it can help to multinationals’ direct
geopolitical risks and policy uncertainty investment activities in high risk regions or
for investors could have an impact on countries.
the scale and contours of the FDI
recovery in 2017” (UNCTAD, World It is an imperative for companies,
Investment Report 2017: p.2). Therefore, countries, business professionals and
while the world has been going through politicians, to get together for discussion
a turbulent process, political risks and about future developments and about
policy uncertainty currently seem as the options for securing global solidarity to
major concerns of MNCs for their the good of people and business in
potential investments. existing normative frameworks.

In many countries, the political agenda is In this respect, Würzburg International

rapidly changing, and the ever- Business Forum’s International Business
diminishing stability is replaced by huge Conference (24-25 May 2018) brought
uncertainty and high dynamics. academics, professionals, business
Uncertainties caused by unexpected people and representatives of the public
political developments in various sector from the world together to analyse
countries involve significant politics- the current situation, trying to foresee

1
future developments regarding political far on countries’ economies and
risk management within the framework of societies from a broader perspective. The
foreign direct investment and all other Conference has explored both
activities of multinational corporations. theoretical issues in the field and
The Conference provided an practical issues in formulating policy and
international forum for the exchange of strategy and it has also payed attention
information and experience regarding to the issue of employment and growth
political risk management in different regarding multinationals and foreign
countries and the implications of these so direct investment.

Emin Akcaoglu, Harald J. Bolsinger and Rainer Wehner

Editors

2
 Proceedings of
Plenary Session I

3
4
Company-specific Reactions to Country Risk Changes:
A Case Study from the Perspective of Austrian Subsidiaries
in the Russian Federation
Mag. Aneliya Adzhemova, Vienna University of Economics and Business, Austria

Country risk is a term that is not only difficult to define reform countries and the Balkan countries have
but also difficult to assess. The following research project significantly decreased (Brada et al., 2006). The above
shows a company perspective of the understanding of examples show that every country or group of similar
country risk in the broader sense, considering country risk countries is unique and has its specific business
changes over time. Moreover, it examines ongoing environment. Therefore, investigating country risk requires
operations of foreign subsidiaries after a successfully specific analyses of individual countries.
realized market entry. From the perspective of Austrian As stated above, this case study focuses on the Russian
affiliates in the Russian Federation, the author will identify Federation. Therefore, it should be first clarified how
specific company strategic reactions to appeared changes Austrian subsidiary companies with ongoing operations in a
of the Russian country risk ratings. high risk country like the Russian Federation change their
understanding of country risk, when it rises further due to a
Motivation and research issue geopolitical conflict. Based on these observations, the main
aim of this research project is to trace connections between
the occurred increases of the country risk of the Russian
Characteristic for the Russian Federation are not only Federation since 2014 and their influence on the strategies
the remarkable geographical conditions, but also the of Austrian companies with subsidiaries in the Russian
particular economic, political, legal and socio-cultural market.
factors. Consequently, especially foreign investors face
specific business conditions. Besides the well-known
problems like extreme dependence on raw materials’
Theoretical frame and literature review
exports, lack of competitiveness of the manufacturing
industry, a very high level of corruption, inefficient The literature review process consists of three steps.
bureaucracy and a still continuing economic stagnation First, starting with the explanation of the term risk as
(Jänecke & Wehner, 2014), the European Union imposed measurable uncertainty (Knight, 1921), the specific form
economic sanctions based on the Crimea-conflict in March country risk should be described in its broader sense. The
2014 and, as a result, investment growth fell dramatically. second step consists of a brief illustration of the
A view of the state of the Austrian foreign direct investment internationalization process, focusing on that form with the
(FDI) transactions into the Russian Federation reveals a strongest engagement, namely wholly owned subsidiaries.
persistent decline after 2013: In 2013 FDI amounted to € In the last part, the author directs the reader’s attention to
917 million, in 2014 fell to € 247 million and in 2016 – to € the importance, perception and consequences of country
-822 million (OeNB, 2017). Consequently, since 2014, the risk not before the realization of a market entry but after a
credit risk rating of the Russian Federation by Moody’s, company has already been present on a foreign market for a
S&P and Fitch deteriorated markedly while the outlook certain time.
remained negative. This worrying ratings’ development has
led to stress and confusion among foreign investors. Country risk in the broader sense
Internationally seen, according to several country-
specific studies on FDI, country risk seems to be one Country risk can be, on the one hand, a “significant
important determinant of FDI (Blonigen, 2005, market barrier”, and, on the other hand, “an essential
Vijayakumar et al., 2009, Goerzen et al., 2010, Demirbag et determinant of market and location attractiveness”
al., 2007). In post-soviet countries, for example, the (Levasier, 2003). Typically, country risk is associated with
economic transition and political instability have indeed eventual negative external factors that affect companies’
had a negative impact on the investment behavior of foreign activities abroad. They arise from the total economic,
investors and, as a result, FDI flows into Eastern European

5
political and socio-cultural situation of the host country (FDI) level and, on the other hand, on a micro (company)
(Meyer, 1987). In addition, the legal environment of the level. Empirical social research on the connection between
host country, potential global economic and environmental country risk and FDI shows a positive correlation
events are further aspects a country risk researcher should (Chakrabarti, 2001, Click, 2005, Hayakawa et al., 2013,
consider (Przybylski, 1993) as well as various internal and Vijayakumar et al., 2009, Barbopoulus et al., 2013,
external political tensions with neighboring countries or Ledyaeva et al., 2013, etc.). However, this research project
unions. has its focus on reaction strategies of specific companies
The differentiation between country risk in the broader about their market engagement on foreign markets. A good
sense and country risk in the narrow sense of sovereign risk recent example is the article of Gurkov & Saidov (2017),
is also of key importance for this research project. The which shows specific strategic actions of Russian
focus of the paper is on the overall risk of one specific manufacturing subsidiaries of Western multinational
country with all its risk aspects, i.e., “risks in connection corporations in various functional areas. In the case of the
with direct investments of international enterprises” Russian Federation, a series of studies on companies with
(Przybylski, 1993). Furthermore, one should not mix up Russian subsidiaries examine the topics of strategy
country risk with credit risk (Krayenbuehl, 1985). realization and strategy-as-practice perspective (Shekshnia,
Moreover, with regard to the last clashes between the 1994, McCarthy & Puffer, 1997, Lorentz & Ghauri, 2010,
Russian Federation and the European Union, the political Shekshnia, 1998, Koveshnikov et al., 2012, Salmi &
aspect of country risk is a strong one. At the same time, Heikkilä, 2015, Fey & Shekshnia, 2011, Engelhard &
being aware of the fact that country risk includes more Nägele, 2003, Gurkov, 2015, Gurkov, 2016, etc.).
aspects than the political situation of a country, Another decisive factor in determining the coherence
understanding both terms as synonyms would not be exact. between the above two terms is the time of looking at
Different understandings of country risk result also in country risk. On the one hand, the assessment of country
inconsistent country risk assessment concepts, most often risk is crucial before the realization of the market entry and,
based on quantifying risk components and presenting an on the other hand, it continues to exist after the successful
overall country risk rating. The OECD country risk foreign market establishment. Most of the literature
classification of Russia, for example, has worsened by one examines country risk primarily related to entry mode
category at the beginning of 2015. Top ratings agencies like choice claiming that multinational enterprises prefer equity
Moody’s, Standard and Poor’s and Fitch also lowered their joint ventures over wholly owned subsidiaries in foreign
sovereign risk appraisals of Russia as a reaction of the countries where the country risk (expressed also as external
Crimea conflict once in spring 2014 and then again in the or institutional environment) is highly uncertain (Gatignon
beginning of 2015, whereas the outlook remained negative and Anderson, 1988, Agarwal, 1994, Agarwal and
even for the following year 2016. Ramaswami, 1992, Morschett et al., 2010, Kao and Kuo,
2017). However, the existing literature lacks of studies
Foreign market engagement in the form of concentrating on market engagement strategies after a
wholly owned subsidiaries successful market entry. Especially such cases that face
unexpected negative changes of the country risk represent
the focus of the following research project.
Depending on the intensity of capital and management
activities in the home country or, respectively, in the host
country, forms of internationalization start with exporting Methodological approach
and end with direct investments that can be expressed as
cooperative (joint venture) or sole ownership enterprises In order to answer the research question, methods of
(subsidiaries) (Meissner & Gerber, 1980, Johanson & qualitative empirical research are used. Their aim is to
Vahlne, 1990). Wholly owned subsidiaries are explain a social phenomenon "from within" through
characterized by legal independence and liability of the analyzing certain experiences through documents or other
invested capital abroad (Zentes, 2010). Additional means of proof (Flick, 2007). Often, qualitative research is
distribution and production capacities are formed through being associated with a high degree of subjectivity in data
the establishment of new or acquisition of existing interpretation, absence of basic theories, or even a lack of
subsidiaries (Jahrreiß, 1984). hypotheses to be tested (Holweg, 2012). However, in the
course of an explorative case study, the generation of
Building a bridge between country risk and hypotheses happens rather in later stages of research with
the aim of presenting a new perspective of a known topic
market engagement (Eisenhardt, 1989). According to Yin (1994), using a case
study as a research strategy supports a deep and detailed
When investing on a new risky market in the literature, investigation of a certain phenomenon representing an
country risk is important, on the one hand, on a macro identified research gap and has the aim to answer how and

6
why questions, like the current ones. supplementary primary data (expert interviews), if needed.

Sampling Data collection

First, the process of data collection requires a precise Data collection distinguishes between two types of data
selection of the cases (Flick, 2007). The concrete subjects depending on the survey methodology: secondary and
of this research investigation are Austrian companies with primary data collection. For both types of data, the selection
the strongest possible foreign representation in the Russian of available data followed in German and English as well as
Federation, i.e. wholly owned subsidiaries with Austrian in Russian language.
capital participation up to 100%. The main source of Another important criterion for the data collection is to
suitable companies was the homepage of the Vienna Stock determine a time period of the upcoming investigation. In
Exchange because quoted companies have to publish their this thesis, the date of the official outbreak of the conflict
reports that provide a good data basis. The list has been also between the Russian Federation and Ukraine, namely
completed by own research work. Consequently, there has March 2014, served as a guideline for the timeframe. In
been selected six companies having at least one sales office order to be able to compare the business environment
or/ and a production facility in the Russian Federation. In situation before and after 2014, the total investigation
the next step, the researcher grouped the selected period consists of two separate periods (from 2011 to 2013
companies in three industry sectors: financial institutions, and from 2014 to 2016) or six years in total, which applies
infrastructure and mechanical engineering. to both secondary and primary data.

Research method Secondary data The secondary data include, on the one
hand, statistical FDI data from the Austrian National Bank
Due to the small sample of relevant Austrian as well as from the Central Bank of the Russian Federation.
companies with direct investments in the Russian On the other hand, also vital for the realization of this
Federation and the intention to carry out an in-depth research project are country risk ratings provided by various
analysis of the selected companies, the best research international (Moody’s, Standard & Poor’s’, Fitch) and
method seems to be a case study method. This method national (Expert RA and NRA International) rating
requires a description and investigation of an individual agencies. The second secondary source is online available
case or a series of case studies (Flick, 2009). Usually, the company information like reports and press releases of the
main idea of such research method is to find one or more selected Austrian companies from 2011 – three years before
solutions for a certain problem that a company faces (Yin, - to 2016 (published in 2017) – three years after the
2003). A major advantage of the case study method is the escalation of the conflict between the Russian Federation
fact that the case is not isolated from the context, in contrast and Ukraine in March 2014. Relevant for the analysis are
to an experiment, but the analysis happens in its ordinary those documents and text passages among all available that
environment (Eisenhardt & Graebner, 2007). In this contain information about the engagement on the Russian
research work, a system of categories presents, on the one market.
hand, the homogeneity (the similarities on which the groups
of companies have been formed) and, on the other hand, the Primary data Published company reports are easily
heterogeneity of cases (for example, the different industries accessible and available at any time. However, they have a
in which the selected companies operate). In the first step, few drawbacks as data material, a central one of which is
parallel within-case analyses for each of the six companies the incompleteness of the necessary data, since they do not
are planned; in the second step, cross case analyses within aim to answer the specific research question but give
every of the three sector groups will follow. general information about a company's business activities
There is a wide range of data collection and evaluation (Bowen 2009). This results in the need for additional or
techniques in social sciences. In this sense, the choice of more accurate information from other sources. Possible
one or more suitable methods of investigation should occur sources include specific market or sector studies, analyst
very precisely. To ensure the expected result(s), reports, as well as interviews with company representatives
combinations of different methods are often used. Among (Schawel & Billing, 2014).
the different forms of triangulation, the so-called Based on the gained information from the insight into
"methodological triangulation", i.e., a triangulation between the company reports, there will be conducted expert
different methods ("between-method") is the most interviews with the responsible persons for the business
widespread (Flick, 2007). To obtain valid results, the activities on the Russian market. There is evidence that
analysis implies a combination of, on the one hand, personal interviews provide much flexibility in the process
secondary data (company reports, press releases and of both data collection and the following analysis (Yeung,
additional corporate documents) and, on the other hand, 1995). This intention is planned to be realized both with

7
representatives in the Austrian headquarters and with the reports, it turns out that there are no definitions of it and
respective persons directly in the Russian Federation. Direct especially the financial institutions mention country risk as
observers of occurring changes due to the volatile country a specific type of risk. Some of the selected companies
risk give additional valuable, close to the market, analyze the business environment of countries they operate
information about the company performance in such a in on a frequent basis. Identified political, economic, legal,
turbulent environment. demographic, geographic and social-cultural aspects
assemble the puzzle of the term country risk. In order to
Data evaluation determine changes in the understanding of every single
aspect of country risk, the author compared company
As stated above, this research work represents a document information three years before and three years
multiple case study. Both the company information after 2014. As expected, predominantly the political, but
available online (company reports and press releases) and also many economic aspects provided new insights after the
the transcriptions of the planned narrative interviews outbreak of the Russian-Ukrainian conflict. Even if many
represent different types of documents. For their evaluation, companies claimed that they did not experience
the best-suited method seems to be a document analysis unmanageable damage, still, profitability and even trust in
(Bowen, 2009) conducted with the help of the software the Russian market dropped remarkably and everyone
program for qualitative data analysis Atlas.ti. hoped for a soon diplomatic solution.
Atlas.ti does not perform the data analysis itself but However, many factors indicated a shrinkage of the
supports the whole analysis process (Friese, 2014). In the economic performance of Russia. GDP decline, peak values
program, the first step is to form so-called hermeneutical of the inflation, drop of the prices because of a massive
units (abbreviated HUs). These units include the primary devaluation of the ruble, lower oil prices and a following
texts (the actual data (documents)) and secondary texts significant stock price decrease were quite onerous
(memos, codes, code networks, etc.), which can occurrences after the imposing sanctions for the
subsequently be edited and managed in relation to each performance of the companies operating there. The
other. As this research project includes 1722 HUs so far, a companies registered that their customers also felt the
precise description of the different documents helps with negative effects of the destabilization of the
reaching completeness and efficiency of the subsequent macroeconomic situation of Russia: their creditworthiness
analysis of each part of the examination objects. declined which ended in a weaker demand and losses from
An essential and a very creative part of the whole data bad loans. As investment climate has clouded, many
evaluation is the coding process that assumes a very careful companies issued a profit warning. Additionally, they warn
analyzing approach. There are many methods how coding against possible isolationist tendencies in Russia.
can be processed. In this particular case, the data structure The interpretation of country risk from the perspective
includes three steps (Costas, 2012). The first step consists of Austrian subsidiaries in the Russian market actually
of the building of first-order categories (coding “in vivo” changed after 2014. At first sight, it seems that mainly the
data by searching for relevant words, phrases, and political and economic aspects underwent changes.
descriptions, and grouping them into first-order categories). However, some legal and socio-cultural considerations
The second step is about formulating of second-order were essential for further successful ongoing companies’
themes (linking and collapsing the first-order categories operations on the Russian market. In the following, the
into significant second-order themes). In the final stage, the author will give exact examples of the reactions of Austrian
researcher groups the second-order themes to a small subsidiary companies to changes of the Russian country
number of aggregate theoretical dimensions. In the end, the risk.
author has to return to the respective text passages and Considering the above negative appearances of many
interpret the results of the coding process in the context. aspects of the country risk of Russia, the reader expects,
logically, also negative consequences for the companies’
performance. Financial losses, project postponements, staff
(Expected) Results cuts, closure of branches, etc. did indeed accompany the
ongoing operations of the selected Austrian companies.
As the paper’s aim is to provide answers to two Surprisingly, one can observe also not a few positive
different research questions, the results represent important consequences for the business operations of the Austrian
insights of two connected subjects: changes of the subsidiaries on the Russian market. These include spreading
interpretation of country risk according to Austrian of the market coverage by opening additional branches in
subsidiary companies in Russia and changes of their new regions of the Russian Federation and, consequently,
strategies as a reaction of increases of the Russian country hiring of new staff, as well as fulfillment of already
risk since 2014. approved projects irrespective of the increased country risk.
Looking at the country risk as a term in company These and other more concrete implications will be first

8
identified in the coding process and then grouped in Brada, J. C., Kutan, A. M. and Yigit, T. M. (2006): The
overarching strategic actions of the Austrian subsidiaries on effects of transition and political instability on foreign
the Russian market in various functional areas like capital direct investment inflows. In: Economics of Transition 14
and asset management, operations management, human (4), pp. 649–680.
resource management, etc. Chakrabarti, A. (2001): The determinants of foreign
To conclude, the author wants to give an overview of direct investments: Sensitivity analysis of cross-country
positive and negative descriptions of the Russian market regressions. Kyklos 54(1), pp. 89-114.
according to the selected Austrian companies. If before Click, R.W (2005): Financial and political risks in US
2014 Russia was defined as a promising market, extremely direct foreign investment. Journal of International Business
interesting market, the most important, the most profitable Studies 36, pp. 559-575.
one, full of potential, etc., after the conflict has erupted: The Costas, J. (2012): ''We Are All Friends Here'':
pearl was yesterday. Of course, even during the time Reinforcing Paradoxes of Normative Control in a Culture
between 2011 and 2013 the Russian market was not an easy of Friendship. In: Journal of Management Inquiry. XX(X),
market, much more difficult that assumed, Putin’s kingdom pp. 1–19.
and even a big personal disappointment. Indeed, the Demirbag, M., Tatoglu, E. and Glaister, K. W. (2007):
negative tendency of the former promising market Factors influencing perceptions of performance. The case
remained, but companies still describe it as a chance, core of western FDI in an emerging market. In: International
market, cash cow and important future market. Business Review 16 (3), pp. 310–336.
Eisenhardt, K.M. (1989): Building theories from case
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pp. 532-550.
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strategic reactions at company level to a worsening country building from cases. Opportunities and challenges. In:
risk. It makes an important and innovative contribution to Academy of Management Journal 50 (1), pp. 25–32.
the in-depth analysis of the effects of the changes of Engelhard, J., & Nägele, J. (2003): Organizational
country risk ratings of one specific host country, the learning in subsidiaries of multinational companies in
Russian Federation, on the performance of Austrian Russia. Journal of World Business, Vol. 38, Issue 3, pp.
subsidiary companies there. This kind of – at first sight 262-277.
limited – research actually gives a very detailed and Fey, C., & Shekshnia, S.: The key commandments for
concrete practical information on effective strategies of doing business in Russia. Organizational Dynamics, Vol.
doing business in difficult markets. Moreover, it shows 40, Issue 1, 2011, pp. 57-66.
ways how firms can deal with an unexpectedly occurred Flick, U. (2007): Triangulation: Eine Einführung (2nd
increase of country risks at a point of time when they have ed.). Wiesbaden: VS Verlag für Sozialwissenschaften,
already established foreign entities. GWV Fachverlage GmbH.
Flick, U. (2009): Qualitative Sozialforschung. Eine
Einführung. Originalausgabe (7th ed.). Reinbek bei
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Unmanaged Migration and the Role of MNCs in Reducing
Push Factors and Promoting Peace
Carol Reade, San José State University, San Jose, CA, USA
Mark McKenna, Hult International Business School, San Francisco, CA, USA

The ‘global migration crisis’ has triggered a call for Europe or North America, and while some countries, like
businesses to partner with governments and NGOs to Germany, which also ranks among the top 10 migrant
facilitate labor integration and ease social tensions in host destinations, have opened their borders, many more have
countries. We propose that businesses can also play a role sought to restrict the inflow of migrants (UNHCR, 2016).
in reducing the push factors in origin countries that drive As a result, the migration crisis has reverberated through
unmanaged migration flows. By engaging in socially the politics, economies, and social fabrics of countries
responsible business practices that promote societal peace across the world (PricewaterhouseCoopers, 2017). Given
and stability, MNCs can help ameliorate the global the stresses placed on public institutions and resources, the
migration crisis while also reducing political risk in their challenges posed to host countries are immense. Societies
operating environments. We draw from the CSR, peace have become divided as they seek to manage the social and
through commerce, and international management labor integration of migrants. A study by
literatures to formulate a set of research propositions. PricewaterhouseCoopers (2017) has highlighted the
importance of collaboration between governments, NGOs
and the private sector to develop solutions to manage the
“Migration should be a choice, not a necessity” challenges faced by host country societies.
(New York Declaration, September 2016 ) We propose that business can also play a role in
reducing the push factors in origin countries that drive
The world is witnessing the migration of people on an unmanaged migration and refugee flows. Origin countries
unprecedented scale. More and more people live in are often afflicted with societal conflict and instability. By
countries that are not their native lands, with numbers engaging in socially responsible business practices, we
swelling to 244 million in 2015 (New York Declaration, believe that MNCs, in collaboration with governments and
2016). While many of these people migrate by choice, NGOs, can help ameliorate the global migration crisis while
“pulled” for instance by education opportunities, more than also reducing political risk in their operating environments.
65 million people including refugees, asylum seekers and Corporate social responsibility (CSR) activities are
internally displaced persons have been “pushed” from their consistent with calls from the United Nations, including the
homes due to conflict, violence, persecution and human UN Global Compact, the UN Principles for Responsible
rights violations as of the end of 2016 (UNHCR, 2016). Management Education (PRME), and the UN Sustainable
Millions of others flee their homes due to disasters, climate- Development Goals (SDGs), for businesses to promote
induced droughts, poverty and hunger (Oxfam, 2018), peace, stability and development in fragile and conflict-
interrelated phenomena that can both cause and be made affected countries (Schouten & Miklian, 2018). This paper
worse by conflict. According to Eric Schwartz, president of responds to calls in the international business literature for
Refugees International, an estimated 25 million people a studies that examine how businesses can tackle the ‘grand
year are displaced due to natural disasters that are challenges’ of our time, including migration (Buckley, Doh
exacerbated by the impacts of climate change, which in turn & Benischke, 2017). Our objective is to examine the
can aggravate the impacts of forced displacements as a relationship between unmanaged migration, push factors,
result of conflict (KQED, 2018). MNCs and peace, and to develop a set of research
A ‘global migration crisis’ is thus unfolding, as propositions drawing on the CSR, peace through
many of those forced from homes seek new lives in foreign commerce, and international management literatures.
lands. These unmanaged migrants cross first into
neighboring countries, with Syrian, Afghanistan, South CSR and the Business-Peace Nexus
Sudan and Somalia currently the largest source countries,
and Turkey, Pakistan, Lebanon, and Iran among the top 10 Corporate social responsibility (CSR) has been defined
migrant destinations. However, many hope to travel on to in a number of ways. It can generally be thought of a set of

11
practices through which companies integrate social and most often precipitated by “push” factors that involve some
environmental concerns in their business operations and in form of political conflict (UNHCR, 2016). Political
their interactions with stakeholders (EU Commission, conflicts can manifest as protests, strikes, riots,
2001). CSR thus embodies the notion of the ‘triple bottom insurrections, terrorist attacks and war (HIIK, 2014;
line’ based on which companies take into consideration Klomp & de Haan, 2009). There are a number of
social and environmental sustainability in addition to underlying systemic factors that drive political conflict
sustainability of corporate profits (Dyllick & Hockerts, which are, in their own right, “push” factors for
2002; Waddock, Bodwell & Graves, 2002). unmanaged migration. They can be grouped into economic,
The United Nations Global Compact has provided societal, geopolitical and environmental push factors (Perry,
businesses with a blueprint to further their CSR efforts in 2012). The following details these push factors and
areas like employment, corruption, and poverty, and to proposes the role that MNCs can play in reducing them.
become more engaged in sustainable development,
particularly in countries affected by conflict. Through its Economic
Business for Peace (B4P) unit it encourages businesses to
partner with governments and NGOs to work toward Economic factors have been the most highly researched
sustainable development that promotes societal peace and reason for unmanaged migration (Perry, 2012). A lack of
stability in fragile and conflict-affected countries. The economic development, with few jobs, high unemployment,
linkage with CSR is made explicit, and Forbes is cited as and poverty, prompts people to look for opportunities
recognizing that the promotion of peace is as an important elsewhere. Further, there is a strong link between
component of future CSR efforts (UN Global Compact, underdevelopment and violence; resources are scarce,
2015). Proponents of “business for peace“ argue that if competition intensifies, and violence can erupt as people
companies pursue meaningful CSR opportunities in larger get desperate (Fort & Schipani, 2004).
more demonstrable ways, CSR will become more central to MNCs can reduce economic push factors by providing
an organization, “becoming the very DNA of the jobs, creating safe working spaces, and engaging in
organization“ (Ashgar, 2015). economic development efforts. These might include
Business for peace, or peace through commerce, is a training and resource transfer (Fort & Schipani, 2007). We
relatively new concept (Fort, 2007) that has gained some therefore propose:
momentum in the international business literature (e.g., Proposition 1: When MNCs engage in job-creating
Oetzel, Westermann-Behaylo, Koerber, Fort, & Rivera, investments and support local CSR initiatives, there will be
2010; Oetzel & Getz, 2011; Reade, 2015). It has been noted greater societal peace and stability in their areas of
that the business for peace concept has grown out of the operation and a decreased incidence of unmanaged
relative increase in the power and influence of MNCs migrant flows.
compared to nation states, which have generally taken the
lead role in peace building efforts (Schouten & Miklian, Societal
2018). Businesses, in fact, have historically been associated
more with conflict than with peace, as exemplified by the
Societal push factors include concerns over religious
role of commerce in following the flag during periods of
freedom, personal safety and stable social conditions
colonialism and mercantilism (Fort & Schipani, 2007).
(Perry, 2012). Where these conditions are not met, societal
More recently it has been recognized that increased trade
tensions can escalate into ethnic conflict or other forms of
can help reduce conflict and that companies themselves
identity-based conflict, such as conflicts based on religious
most often benefit from the stability that comes with
affiliations or beliefs. Such conflicts between groups have
increased peace (Fort, 2007). The business-peace nexus
been on the rise (HIIK, 2014). People’s emotions,
brings to our attention that there are parallel activities of
perceptions, and worldviews are tied to group identification
profit-seeking and peacebuilding efforts at play (Schouten
and appear to be central to cycles of violence and conflict
& Miklian, 2018), similar to triple-bottom-line notion of
(Schirich, 2001).
CSR.
To address such societal push factors, MNCs can
We now turn to migration push factors and the
“nourish a sense of community” within the company (Fort
potential role of MNCs (through CSR activities) to reduce
& Schipani, 2007). This means engaging in egalitarian
them, as a basis for our research propositions.
practices and participative decision making (Fort &
Schipani, 2007; Reade, 2015). Responding to such social
Migration Push Factors and MNC stresses can also include adopting practices that are
Engagement culturally relevant and based on indigenous knowledge
(Reade, 2015; Reade & McKenna, 2013). Firms might also
pay attention to creating diverse teams to integrate
Unmanaged population movements across borders are
organizational members in the case of ethnic conflict (Lee

12
& Reade, 2015). Therefore, we propose: term, business can adopt and advocate for sustainable
Proposition 2: When MNCs adopt equitable and environmental practices that will limit the worst effects of
transparent human resource management practices and climate change. Therefore, we propose:
support internally and externally the promotion of Proposition 4: When MNCs engage in and advocate
fundamental human rights, there will be greater societal for environmentally sustainable practices within their areas
peace and stability in their areas of operation and a of operation, there will be greater societal peace and
decreased incidence of unmanaged migrant flows stability and a decreased incidence of unmanaged migrant
flows.
Geopolitical
Conclusion
Geopolitical push factors include weak or ineffective
governance and fragile or corrupt state institutions, but can Rapid increases in recent years in the unmanaged
also be exacerbated by the presence of conflict in a movement of people across boarders has been described as
neighboring state and by terrorism, often linked to cross- a “global migration crisis”. The UN High Commission for
border and international networks. Many internal conflicts Refugees has reported that as of the end of 2016 there were
around the world are concerned with either changing or more than 65 million people worldwide who had been
preserving the current political or economic system (HIIK, driven from their homes by conflict, poverty, and
2014), while domestic and international terrorism creates environmental disaster (UNHCR 2016; Oxfam 2018).
instability for both societies and businesses (IEP, 2016; While violence and conflict are the proximate cause when
2017; Suder, 2006). The World Economic Forum (WEF) people decide to flee for safety, underlying economic,
has determined that terrorism is one of the top risks for societal, geopolitical and environmental “push” factors are
businesses whilst many of the refugees currently fleeing most often a contributing factor leading to the increased
their countries do so because of terrorist threats. political instability and societal unrest that are the drivers of
MNCs can address these geopolitical factors by being unmanaged migration.
responsible corporate citizens within their operating Unmanaged migrants when internally displaced
environments, advocating for responsive and effective contribute to increased social stresses within countries of
governance, and engaging in supportive practices and origin, and as they move across borders can exacerbate
actions to protect the safety and security of their employees inter-group conflict and political instability in neighboring
(Bader, Reade & Froese, 2016; Bader & Schuster, 2015; countries and along migration routes. When unmanaged
Suder, Reade, Riviere, Birnik, & Nielsen, 2017). We migrants are able to reach destination countries, the result is
therefore propose: often an increase in societal and political conflict as these
Proposition 3: When MNCs engage with governments countries seek to accommodate an increasing flow of
and nongovernmental organizations as responsible refugees, asylum seekers, and undocumented migrants. In
corporate citizens, there will be greater societal peace and this context, attention has been drawn to the role business
stability in their areas of operation and a decreased can and should play, in collaboration with governments and
incidence of unmanaged migrant flows. nongovernmental organizations, in facilitating host-country
integration of unmanaged migrants (PwC, 2017).
Environmental We have proposed that MNCs also have a role to play
in reducing the push factors in countries of origin that drive
Natural disasters and environmental degradation can these unmanaged migration and refugee flows. Four
lead to the displacement of people. Earthquakes, climate research propositions have been presented for how business
change-induced draught, and lack of potable water are some can engage in socially responsible business practices to
examples of how natural and manmade environmental ameliorate these push factors and thereby promote greater
disasters can increase social instability and push people to societal peace and stability in their areas of international
migrate. The effects of climate change can uproot people by operating environments. In this way, MNCs can contribute
destroying livelihoods, increasing food insecurity, and not only to the betterment of their own business but can
undermining social capital (UNFCC, 2018). help to address one of the ‘grand challenges’ of our time.
In the short term, businesses often have the capacity to
respond to natural and manmade disasters more quickly and
effectively than traditional aid providers (Balestros & Wry,
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16
Why Chinese Firms Invest in Politically Risky Countries:
Mapping the Cause
Xueli Huang, RMIT University, Australia
Qiao Wei, RMIT University, Australia

This paper examines the concept of political risk and investment behaviours, that are very different from those of
explores the causes of Chinese outward foreign direct Western MNEs (Buckley et al., 2008b), and even those
investment (OFDI) in politically-risky countries. Empirical from other developing countries? This raises an interesting
observations indicate that Chinese MNCs tend to invest in question if the existing knowledge on FDI can adequately
countries with a relatively high level of institutional address important issues arisen from the increasing Chinese
hazards (political risk). Understanding the causes for this is OFDI in this changing world.
of both theoretical and practical significance. This paper Chinese outward FDI has rapidly increased since 2008
reviews literature of core journals in international business, and become a leading source of global FDI. It reached
examines the concept of political risk, describes and maps $145.7 billion in 2015 (Ministry of Commerce, 2016) and
potential reasons for Chinese firms to invest in politically was ranked as the second largest in the world, only trailing
risky countries, particularly in Africa. Finally, we discuss the USA (UNCTAD, 2016). By the end of 2015, the stock
the potential changes of Chinese firms’ investment of Chinese outward FDI reached $1.1 trillion (Ministry of
behaviours based on the findings. Commerce, 2016). A total of over 20, 000 Chinese firms
has invested in 188 countries and regions. (Ministry of
Political risk has increasingly become a major Commerce, 2016). Moreover, Chinese firms have also
consideration in international business and foreign direct invested substantially in politically-risker countries,
investment (FDI) due to the growing globalisation, rapid noticeably African countries over the last decade and
technology development, and social movement (Buckley, accumulated FDI stock of over $34 billion in Africa by the
Chen, Clegg, & Voss, 2016a; Stevens, Xie, & Peng, 2016). end of 2015 (Ministry of Commerce, 2016). Such risky
Resource nationalism, tension between multinational investment approach seems difficult to be fully explained
enterprises (MNEs) and local communities (Klein, 2014), by the main stream FDI theory, such as Dunning’s OLI
cyber-attack, and more recently revival of nationalism or model (Dunning, 2001) that was developed primarily for
‘deglobalisation’ movement are becoming sources of FDI from developed countries, and the Linkage-Leverage-
political risk. It is widely reported in the literature that Learning (LLL) model (Mathews, 2006) for FDI from
there is a negative relationship between the level of a developing countries. These main stream FDI theories
country’s political risk and its inward FDI as MNEs tend to primarily focus on the factors at the firm level, although the
invest in low political risk countries to minimize its “location” of OLI model has considered the host country’s
investment risk (Delios & Henisz, 2003) and that MNEs market size and the economic endowment (national
tend to avoid or reduce their investment in countries with resources and strategic assets). As concluded by Buckley
high political risk (Giambona, Graham, & Harvey, 2017). et.al (2008) in their study on Chinese outward FDI that
Nevertheless, several studies have reported that Chinese “Chinese ODI (outward FDI) is indeed distinctive with
firms (most of them have not generated over 25% of their respects to a standard model of developing country ODI,
total revenue from international operations, thus cannot be which itself is distinctive with respect to industrialised
considered as MNEs) have invested heavily in politically country ODI” (p.717). However, little systematic research
riskier countries (Buckley, Cross, Hui, Liu, & Voss, 2008b; has been conducted on why such distinctiveness or
Kolstad & Wiig, 2012; Ramasamy, Yeung, & Laforet, differences in outward FDI behaviour exit between Chinese
2012). For example, Kang and Jiang (2012) found there is investors and their counterparts in developed and other
a positive association between Chinese outward FDI stock developing countries.
and political risk in their study on the location choice of This paper aims to explore why Chinese firms invest
Chinese firms in Southeast Asian countries. Similarly, a in politically riskier countries and map the causes of such
positive relationship was also reported by Lu, Huang and investment. A small, but recently growing, literature has
Muthiri (2017) in their study on Chinese outward FDI in drawn theories from institutional and transaction cost
African countries. Why Chinese firms display such theories (Buckley et al., 2008b), and more recently, political
idiosyncratic, or “perverse” (Buckley et al., 2018) economy (Tuman & Shirali, 2017), and behavioural

17
decision theory (Buckley et al., 2016a; Maitland & expanded as the global political, economic and social
Sammartino, 2015) to explain the investment behaviours of environment change over the past three decades. For
multinational enterprises (MNEs) into politically riskier example, Howell and Chaddick (1994, p.71) defined
countries. However, there has been little systematic political risk as “the possibility that political decisions,
integration of these theories to provide a comprehensive events or conditions in a country, including those that might
understanding of Chinese outward FDI in politically riskier be referred to as social, will affect the business environment
countries. such that investors will lose money or have a reduced profit
This paper is organised as follows: We firstly review margin”. Similarly, Czinkota, Ronkainen and Moffett
and analyse the concept of political risk. Next, we provide (2000, p.107) defined political risk as both “the actions of
a comprehensive overview of the factors identified in the legitimate government authorities” and “events caused by
extant literature on outward FDI by Chinese firms. After factors outside the control of government”. These
this, we map these factors to identify their relationship. definitions added social risk to the realm of political risk.
Finally, we discuss the main causes of risk-taking Country risk is another term widely used in studying
behaviour by Chinese firms and predict the future trend of international business risk. Conceptually, it covers political
their outward FDI behaviour in those politically-risky risk. The concept of country risk can be defined as
countries. “additional risks not present in domestic transaction…
(they) typically include risks arising from a variety of
Political risk: A conceptual framework national differences in economic structures, policies, socio-
Although political risk has long been a subject of political institutions, geography and currency” (Meldrum,
study, there is no consensus on its definition (Fitzpatrick, 2000, p.33).
1983). The concept of political risk has been defined in Casson and Lopes (2013) have proffered a typology of
many ways, with different scope and breadth. Early risks for foreign firms in host countries, and argue risks can
definition of political risk focused on the effects of be both subjective and objective from an epistemic
government actions on the business. For example, Weston perspective. The subjective risk is primarily caused by the
and Sorge (1972, p.60) defined political risks as they “arise investors’ unfamiliarity about the host country due to the
from the actions of national governments which interfere lack of experience and thus can be alleviated through
with or prevent business transactions, or change the terms learning. They then classified the objective risks into two
of agreements, or cause the confiscation of wholly or general groups (institutional and natural) and six specific
partially foreign owned business property". These categories. The institutional risks cover political, social,
government interferences with private investment often business, financial risks while natural risks include climatic
generate “potential for significantly affecting the profit or and geological risks. Therefore, political risk can be
other goals of a particular enterprise” (Robock, 1971, p.7) considered as one specific institutional risk of country risk.
thus are sources of business risk for the firm (Kobrin, Based on the discussion above, the conceptual framework
1979). of political risk can be depicted in Figure 1.
Recent research on political risk has examined the
Country Risk
causes of government actions in two streams; one focuses
on the impact of political institutions on investors, such as
quality of institutions, rules of laws, and corruption; another
stream examines on the stability, or change, of political
institutions or policies (Henisz, 2000). With regards to Institutional risks Natural disasters
policy instability, or “political hazard” (Delios & Henisz,
2003), it refers to potential changes in government policy,
or “policy creditability” (p.1155). In other words, it is
Financial Economic Political Social Climatic Geological
concerned with the policy stability or how difficult to make (business)
changes in laws and regulations under the existing
institutional systems (Delios & Henisz, 2003). Host country
government policy change is a major source of political risk Extent of impact of Political instability
(Casson & da Silva Lopes, 2013). This specific aspect of existing institutions
political risk is often referred to “policy risk” (Bouchet,
Clark, & Groslambert, 2003; Buckley et al., 2016a). In
summary, political risk can be considered as the product of
Government instability Policy Instability (Political
the possibility of a political action and the magnitude of
hazard or constraints)
loss it may cause, although these two aspects have often
been examined in the literature as two parallel streams. Figure 1 The conceptual issue of political risk
More recently, the scope of political risk has been (Source.Casson & da Silva Lopes, 2013)

18
 Political risk can be examined in multiple levels, and also used both higher equity mode (wholly-owned
considered as a relative term to investing firms as its subsidiaries) and international joint ventures (IJVs) at their
potential impact can vary with investing projects, firms, early stage of internationalisation. They conclude that
their industry, and their home country (Luo, 2001a) because “Chinese ODI (outward FDI) is similar to, yet distinct from,
the impact of host country government actions can be the standard model of emerging country ODI…” (p.741).
targeted at a specific level (Frynas & Mellahi, 2003). Table 1 shows the similarities and differences of OFDI
While the country-level risk can be termed as “macro between China and other developing countries.
political risks”, the other three levels (industry, firm, and
project) of risks can be called as “micro” political risks Table 1. Similarity and difference of outward FDI between
(Robock, 1971). The relativeness nature of political risk China and other developing countries
can be partly attributed to a variety of factors at the level of Standard model of Chinese outward FDI
both host and home countries (Ramamurti, 2001), developing country
organisational level (Feinberg & Gupta, 2009), and outward FDI model
individual level (Buckley et al., 2016a; George, Home country Similar as Chinese firms
Chattopadhyay, Sitkin, & Barden, 2006) due to the different embeddedness enjoy financial advantages
perception by home country governments, focal firms, and especially
their managers towards the nature of political risk and thus
their capability to deal with political risk (George et al., Home government Similar as Chinese
2006; Hagigi & Sivakumar, 2009) . Moreover, the impact support government provides strong
of political risk is also related to home country’s institutions support for its domestic firms’
(Stevens et al., 2016). For example, the impact of outward FDI, but can be
corruption can have more severe impact on those foreign different in forms and extent
investors from countries where bribery is considered illegal
by laws in home country, such as USA (Doh, Rodriguez, Early outward FDI Different as early Chinese
Uhlenbruck, Collins, & Eden, 2003). occurs in other outward FDI was directed
In summary, the concept of political risk covers both developing countries mostly to developed countries
the quality or impact of political institutions, and their
stability. It can be objective or subjective, and has multiple Outward FDI occurs in Different as early Chinese
levels. culturally and Outward FDI was directed to
geographically close psychically and
Why Chinese firms invest in political riskier countries geographically distant
countries? countries
Research on outward FDI, particularly in the past two
decades, has examined theories underpinning FDI from Later outward FDI Different as both early and
developing countries, including China. Several studies occurs in more advanced continued Chinese outward
have found that Chinese OFDI tend to invest in politically economies FDI occurs in more advanced
risky countries as one of its distinctive features (Nuckley economies
et.al., 2018). For example, using the China’s outward FDI
data from 1991 to 2005, Buckley et.al., (2008b) found that IJVs are the main entry Different as both wholly-
Chinese firms invested heavily in countries that have high mode, especially in early owned subsidiary and IJVs
levels of political and economic risk, such as sub-Saharan outward FDI are used.
Africa, Latin America and the Caribbean, and Southeast Source: adapted from Buckley et.al., (2008).
Asian regions. They also reviewed literature on developing
country’s outward FDI to assess if Chinese outward FDI Based on the findings in Table 1, all the differences of
conforms to the general model of FDI and the special case Chinese outward FDI from that of other developing
of emerging country FDI. They pointed out that Chinese countries lie in the high level of risk Chinese firms take in
outward FDI conforms some aspects of developing country investing abroad, particularly in both of its investment path
outward FDI models, such as home country embeddedness and entry mode. Rather than adopting an incremental
or special ownership advantages, and home government approach to risk, Chinese firms invested in culturally and
support for outward FDI. Nevertheless, Chinese outward geographically distant countries with wholly-owned
FDI differs from their counterparts in other developing subsidiary as the dominant entry mode at the early stage of
countries in several aspects. For example, the early their internationalisation process. Moreover they also
Chinese outward FDI were made in developed, and invested substantially in politically-riskier countries. All
culturally and geographically distinct countries, rather than these suggest that such risk-taking behaviour is an
developing and psychically close countries. Chinese firms important characteristic of Chinese outward FDI.

19
 The risk-taking investment behaviour by Chinese firms can be similar in many ways, such as poor legal
can be observed in both developed and developing enforcement, corruption, and labour relations. The
countries, as shown in Table 1. However, the type of risk importance of institutions to competitive advantage has
taken by Chinese firms in developing countries is different been stressed in strategic literature (Peng, 2006). The short
from that in developed ones. While lack of ownership institutional distance also helps build internal legitimacy
advantage and international experience is often the risk for within Chinese firms (Child & Rodrigues, 2005).
Chinese firms to invest in developed countries, political risk Discrimination by some developed countries may also
is often the major risk for Chinese firms to invest in contribute to the fact that Chinese firms invest in politically
developing countries. This paper only focuses on Chinese riskier countries. Accesses to the market and resources by
outward FDI in developing countries with high levels of emerging MNCs, including Chinese firms, to developed
political risk. countries may be blocked by the host countries. Examples
A number of studies have explored the reasons why include the proposed acquisition of Unocal by CNOOC in
Chinese firms invest in politically-risky countries, the USA (Globerman & Shapiro, 2009) and Huawei’s bid
particularly in Africa. Most of reasons or drivers are for the National Broadband Network (NBN) project in
primarily based on both institutional and transaction Australia (Hedges, 2015). Such discrimination limits the
approaches, and at both national and organisational levels. choice of Chinese firms in their FDI decisions.
We reviewed literature from six core international journals The strong strategic and financial support from
(Journal of International Business Studies, Journal of World Chinese government (Lu, Liu, Wright, & Filatotchev, 2014;
Business, Journal of International Management, Global Luo & Wang, 2012) has been identified as one of the
Strategy Journal, Management Review International, and important features of Chinese outward FDI (Buckley et al.,
International Business Review) and seven other 2008a). It is not a secrecy that Chinese government,
management journals supplemented by other articles particularly from both central and provincial levels, offers
published in key management journal and other relevant direct financial support to those Chinese firms investing
sources of information. abroad (Luo, Xue, & Han, 2010). Moreover, Chinese
A variety of factors have been reported in the extant government plays a primary role in directly negotiating and
literature of political risk and Chinese OFDI. These factors bargaining with host country governments for entry
can be grouped into three levels: country, organisational conditions for Chinese natural resources firms (Li,
and individual levels. Newenham-Kahindi, Shapiro, & Chen, 2013), often through
bundling investment with low-interest loans, providing
Influencing factors at the country level infrastructure (e.g., road, railway and port) and foreign aid
Several studies have reported the impact of home (e.g, healthcare and education) that cannot be matched by
country embeddedness (Buckley et al., 2008b), or “home Western MNCs due to its size and complexity. This “helps
country conditions) (Luo & Wang, 2012) on risk-taking them (Chinese firms) mitigate the considerable political
investment behaviour. These studies largely focus on home risks associated with these investments” (Li et al., 2013,
country institutions and economic environments. p.301). In addition, Chinese government has also
coordinated the investment activities of Chinese firms in
Institutional factors FDI host countries to enhance their legitimacy there, which
With regards to institutional factors, Buckley et.al., can help alleviate political risk (Stevens & Newenham-
(2008) suggested that the different or idiosyncratic outward Kahindi, 2017).
FDI behaviour of Chinese firms can be attributed to the
following reasons: 1) soft budget constraints as Chinese Economic factors (Transactional cost theory)
firms can access to cheap capital; 2) improved bilateral Like MNEs from other developing countries, the fit of
relations between Chinese and host country governments; technology and products possessed by Chinese firms with
3) Chinese government’s political agenda as it directs the demand of developing countries can be another possible
outward FDI. Empirical studies have supported for these explanation for Chinese firms to invest into politically
three factors at the home country level (for more details, see riskier countries. The costs for MNEs from developing
Buckley et al., 2018) countries to adapt their products and technologies for
Short distance in institutional setting between China developing countries can be lower compared those for their
and other developing countries is another potential reason counterparts in developed countries. Given the technology
(Kolstad & Wiig, 2012; Morck, Yeung, & Zhoa, 2008). and products owned by emerging MNEs, expanding market
Although China has become the second largest economy in developing countries can be the only option for them if
since 2010, China is still a developing country judged by they aim to compete on their firm specific advantage (FSA)
many intuitional and economic indicators, such as (Rugman, 2005). Anecdotal evidence shows that Chinese
corruption and GDP per capita. Therefore, the institutional firms, such as Huawei, and ZTE, are able to adapt their
environment between China and other developing countries products and technologies to developing countries due to

20
their “cheaper and more easily used products with risky countries or second class of resources in developed
technology” by users in those countries (Shen, 2012). countries where political risk is usually low. Moreover, the
The large size of Chinese domestic market is probably exploration and extraction of natural resources often
an important factor that is not shared by most of firms in involve an initial large scale capital investment, and a long
other developing countries. The large domestic market can period of gestation period (Asiedu & Lien, 2011). Often
help Chinese firms make OFDI due to the scale and scope only large Chinese SOEs can afford such large scale of
of economy. This is a unique factor for Chinese firms and investment.
helps them invest in politically riskier countries. It is Latecomer in the global market is another reason why
pointed out that Chinese firms can leverage their large Chinese firms invest in politically riskier countries (Kolstad
domestic size, coordinate their domestic and international & Wiig, 2012). This well applies to Chinese firms,
business and thus reap the benefits of scale of economy particularly SOEs, seeking natural resources. Established
(Yeung & Liu, 2008). This is particularly helpful for those extractive companies, such as BHP Billion and Rio Tinto,
high volume Chinese manufacturing firms to compete with had opportunities to explore and extract first-class natural
those technologically sophisticated and capital intensive resources globally, particularly in those host countries with
MNEs in international market. The large domestic market low political risk, such as Australia and Canada. Thus, like
size also benefits Chinese firms in terms of scope of other MNEs from emerging economies, Chinese firms have
economy in developing their business portfolio in both to invest either in second-class resource in developed
domestic and foreign markets. countries like Australia, or first-class resources with
relatively high political risk. As commented by an
Organisational factors executive of a Chinese SOE on its decision to invest in a
A raft of organisational factors has been identified in copper mine in Africa during our interview: “Our decision
the literature. State ownership (Morck et al., 2008; Yeung to acquire the mine was primarily based on its mineral
& Liu, 2008) has been highlighted in the FDI literature, and quality as it contains about 2% of copper, which is much
is probably one of the most dominant factors at the higher than 0.4% in our mines in Australia”.
organisational level that drives Chinese outward FDI into Lack of international experience, particularly merger
politically-riskier courtiers (Kolstad & Wiig, 2012). and acquisition (M&A) activities (such as due diligence and
Although Chinese firms started making their FDI since risk assessment) could be another factor contributing to the
early 1990s, Chinese privately owned enterprises (POEs) risk-taking behaviour by Chinese firms. An overwhelming
were only permitted to invest abroad since 2003 (Huang & majority of Chinese firms only started their international
Chi, 2014). Thus, it is not surprised that Chinese SOEs investment since 2001 when the Chinese government
have been dominant for Chinese FDI, although Chinese implemented its “going out” policy, and lifted its restriction
POEs have been playing an increasingly important role, on Chinese private firms to invest abroad (Huang & Chi,
particularly since the GFC in 2009. SOEs are less sensitive 2014). Given the complexity of political risk and its
to political risk (Ramasamy et al., 2012) due to their subjectivity in its assessment and evaluation, Chinese firms
ownership from the agency perspective and their soft may be unable to assess the level of political risk
budget (Luo, 2001b; Tolentino, 2010). satisfactorily (Yeung & Liu, 2008), and thus insensitive to
A related factor is the strategic motive of Chinese political risk (Buckley, Yu, Liu, Munjal, & Tao, 2016b).
outward FDI. One of the dominant motives for Chinese Chinese firms may also adopt different ways in
outward FDI is resource-seeking (Kolstad & Wiig, 2012) political assessment compared with the Western MNEs. It
that is dominant in the FDI by Chinese SOEs. Due to its has been pointed out by Brautigam (2009), a veteran
rapid economic development over the past three decades research on Chinese engagement in Africa, that Chinese
and the shortage of domestic supply of energy and minerals, firms tend to assess the political risk at the project level,
China has relied heavily on international supply for its rather than the country level, suggesting different
economic development. Therefore, China needs to secure contextual factors and criteria are used by Chinese firms in
resources from international markets to safeguard its evaluating political risk in host country.
economic future (Lu et al., 2017). Consequently, a
substantial proportion of Chinese outward FDI has been Individual factors
made in the energy and minerals sector (Huang & Austin, Recently, several studies have explored the factors
2011), primarily by Chinese SOEs. Although resource- influencing the risk-taking investment behaviour at the
seeking FDI is less subjective to political risk in the host individual level. Agency theory has been used in
countries (Kansal, 2015) as it depends on the availability of explaining FDI behaviours of top management in Chinese
natural resources, Chinese firms, as latecomers in firms (Liu, Lu, & Chizema, 2014). Agency theory is an
international markets (a point to be discussed below), have important characteristic of SOEs (Peng, Bruton, Stan, &
limited options (Stevens & Newenham-Kahindi, 2017). Huang, 2016) and agency problem is perennial in Chinese
They can invest either in quality resources in politically- SOEs due to state-ownership and weak corporate

21
governance (Tam & Yu, 2011). Senior managers in for FDI financing.
Chinese SOEs are often appointed politically, rather than
based on their professional competences (Yeung & Liu,
2008). Anecdotal evidences showed that executives of Country Organizational Individual
Chinese SOEs may use outward FDI for empire building
(Huang & Zhu 2016) and benefit their family members,
State owned
relatives and friends.
enterprises
Lack of experience in international business and risk
(SOEs) Political
assessment at individual level could be another reason for
Chinese firms to underestimate the level of political risk. China’s appointment
Chinese entrepreneurs, particularly those from start-ups or political Resource
small firms, were reported to use “guerrilla-style” outward system: supply -seeking
FDI strategy because they lack managerial expertise and yet security and Agents
identify a new business opportunity in a host country capital controls Political
(Yeung & Liu, 2008).
agenda
Finally, it is also reported that managers of Chinese Lack of
driven
firms use their personal relationship and networks as international
individual specific advantage (IFA) in making their Government experience
investment decisions. This could be another reason for to support Latecomers
invest in politically-riskier countries because such
networking capabilities can “circumvent cumbersome rules Easy access
and regulations… (and) help obtain privileged access to to financial
markets and resources (Yeung & Liu, 2008, p.77). Capital market
resources
Based on the discussion above, we have mapped the distortion
factors that have been identified in the literature and driven
Chinese firms to take risky behaviour in their FDI (Figure Experienced in
2) operation and familiar
Chinese with institutions in
Discussion and cause-mapping institutional politically riskier
This paper focuses on the identification and integration environment countries
of factors influencing Chinese firms’ investment in Assessing political risk
politically-riskier countries. Although Chinese firms were at the project level
widely observed to display different patterns, particularly
China’s large and
risk-taking, in their OFDI behaviour, extant literature
heterogeneous
explaining such idiosyncratic investment behaviour is still Economy of scale (high
domestic market and
very scant and fragmented. We conducted a systematic volume business)
rapid economic
literature review to identify factors underlining the risk-
growth
taking behaviour of Chinese firms in their OFDI, classify
them into the levels of country, organisation and individual, Easy to use/obtain
and map them to understand their connections (Figure 2). cheap financial capital
Compared with MNEs from other developing for FDI
countries, Chinese firms also have shared with them several
characteristics at both country and organizational levels,
such as stage of technology and product development, short Use of personal
institutional distance to those in developing countries, relationship; flexible
financial support from home government, and latecomers in Chinese culture management style and
international markets. However, there are several networking
distinctive factors that drive Chinese firms to take more risk
in their outward FDI? Our map (Figure 2) indicates that
there exist three major sources of distinctive factors that Figure 2. Mapping factors that influences the risk-taking
impact on such risk-taking behaviour: the China’s political investment behavior by Chinese firms
system underpinned by its socialist ideology, the China’s political system or regime (Shi, Hoskisson, &
uniqueness of Chinese SOEs, and the large size and Zhang, 2016), particularly its institutions and political
heterogeneity of Chinese domestic market and its rapid structure built on its political ideology, is one of key
economic growth that accumulates large amount of capital sources of the risk-taking investment behaviour of Chinese

22
firms for several reasons. The ideological differences and Government still has “little clear skill or experience” in
increasing competition between China and US with its managing political risk, unstable government and security
Western alliances is a perennial phenomenon since 1949 threats in host countries (Shi, 2017).
and result in the grave concern by Chinese government The large domestic market size and its heterogeneity is
about the security of its key mineral and energy supply also a unique factor influencing the risk-taking behaviour of
from the global market for its economic development. For Chinese investors as they can leverage their domestic
example, the resource-seeking motivation of Chinese operations for their international investment and business
outward FDI is primarily a national initiative to secure (Luo & Wang, 2012) in terms of scale of economy and
critical resources for Chinese economy. Although this is investment portfolio. Chinese investors can reap substantial
not different from those of Japanese MNEs in 1970’s and benefits from their domestic market size, making their
1980’s, it is the China’s political ideology that concerns the products more competitive in international market
political influence and control by developed countries on its (Buckley, et.al., 2018). The large domestic market size also
international supply (e.g., oil and minerals), thereby making enables them to take a risky approach in their FDI as such
the international supply for China’s economic development FDI may be more likely to be considered as “affordable
more critical. Part of China’s “Belt and Road Initiative” is loss” based on the effectuation theory in entrepreneurship
aimed to diverse these suppliers and their transportation for discipline (Chandler, DeTienne, McKelvie, & Mumford,
China’s national security (Cheng, 2016). Economic 2011). Those Chinese firms setting up their trading offices
diplomacy by Chinese government is another outcome of overseas can also benefit from China’s large domestic
this ideological competition. A point in this case is the market and thus export their products at a lower price.
diplomatic relationship between China and African Will Chinese firms invest in politically-riskier
countries. At the sixth Forum of China-Africa Cooperation countries in the future? The answer is yes as long as China
(FOCAC) Summit and sixth Ministerial Conference in Dec is concerned with the competition of its political systems
2015, President Xi Jinping announced China will offer with those of Western countries, particularly the US. Its
African countries $60 billion of funding support from 2016 political agenda, such as its “Belt and Road” initiative, will
to 2018 (FOCAC, 2015). Part of such financial support is play its part in driving Chinese firms, particularly its SOEs
to help Chinese firms to invest in Africa among other to invest in politically-riskier, often developing countries
initiatives (FOCAC, 2015). All these partly reflect the {Huang, 2016 #6}. In addition, the large domestic market
competition between China’s socialist ideology and the size will still help Chinese firms benefit from their scale of
capitalist ideology of Western countries. The capital economy, enable them to take a risky approach in their
control by Chinese government and capital flight with outward FDI. Nevertheless, the amount for investing in
Chinese private firms widely reported in media partly politically riskier countries may be changed, especially in
reflect the concern about this ideological difference at both those countries with rich natural resources and poor
levels of the Chinse government and firms (Weinland, institutions due to increasing awareness of the impact of
2017). political risk on commercial loss and staff security (Shi,
The second factor driving the risk-taking behaviour of 2017), coupled with the FDI made so far in the resources,
Chinese firms is the role played by China’s SOEs that is partly alleviating the supply security of China’s key
very different from those from other countries. In general, industries, such as energy and iron ore.
SOEs are very different from private firms in terms of their It is surprisingly that few studies have been devoted to
objectives, financing and senior management appointments studying the factors at individual level. In fact, no
(Peng et al., 2016). However, Chinese SOE sector is empirical research has been conducted so far, in our best
massive. The total asset of Chinese SOEs at the end of 2016 knowledge, on how Chinese managers/owners perceive
was two trillion dollars and generated $700 billion of political risk at the individual level. Yeung and Liu (2008)
revenue (State-owned Assets Supervision and suggested that Chinese managers take a risky approach in
Administration Commission (SASAC), 2017). Moreover, their outward FDI because they are flexible in management,
Chinese governments are still heavily intervening with and can skillfully leverage their personal relationship and
SEOs through multiple channels (Zhang & Freestone, network. As argued by Buckley et. al., (2016a), a
2013), including the appointment of senior management manager’s risk propensity, that is, “an individual’s current
and boards of directors, approval of major investment tendency to take or avoid risk”, can play a substantial role
decisions and financing, and even control of its SOEs’ in evaluating the nature of risk as it is subjective. How
production. Thus, the investment decisions at Chinese factors at the individual level influence the risk-taking
SOEs are often driven by its government’s political agenda behaviour could be an area with a huge potential for future
and economic diplomacy. Agent problem is also a research on Chinese outward FDI.
characteristic of Chinese SOEs due to their political
appointment, coupled with their weak corporate governance
(Tam & Yu, 2011). At the same time, the Chinese

23
Conclusion decades in Chinese economy has accumulated much capital
This paper attempts to identify factors that influence in China which helped the financing Chinese firms easily
Chinese firms to invest in politically riskier countries and secure financing for their OFDI and at the low costs.
map their causes. In doing so, we reviewed literature of
Chinese outward FDI in leading journals, and integrate and
map the factors influencing Chinese firms’ investment in References
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Determinants of Political Risk in African Markets:
A Nigerian Perspective
James B Mshelia, University of Northampton, UK
John R Anchor, University of Huddersfield, UK

The political risk determinants are significant for 2015; World Bank, 2015).
understanding how countries’ specific political risk The evolution of political risks has made them
indicators emerge that affects Multinational Corporations increasingly difficult to analyse. This has resulted in a range
(MNCs) activities within African markets. The study of consequences that have influenced some of the types of
investigates the determinants of political risk empirically by strategies which multinational corporations may adopt in
analysing data from MNCs operating in Nigeria using a emerging markets, due to differing country’s political risks
mixed methods approach. The findings identified eight (Kerner & Lawrence, 2014; Kesternich & Schnitzer, 2010).
determinants and determined their relationships with some However, MNCs vary in terms of their types of ownership
political risk. This paper contributes to the extant body of structure and entry mode. This suggests that they may
literature on political risk with some implications for perceive political risk in different ways and that this will
practice in the conduct of PRA and management of political influence their type of international involvement in
risk. It offers insight into what causes unexpected recurrent developing countries (Agarwal & Feils, 2007; Kesternich &
changes in most Africa’s political environments. Schnitzer, 2010; Quer, Claver, & Rienda, 2012).
Each type of political risk has a number of interrelated
Keywords: political risk, multinational corporations, determinants which lead to its existence in a particular
emerging markets, developing country, Nigeria, Africa country (Burmester, 2000; Kobrin, 1982). They may affect
multinational corporations in different ways. Likewise, it is
Introduction the presence of these determinants which influences some
of the political decisions or policies made by the
government, which could further be attributed to the
Political risk is one of the most important influences heterogeneity of political risk in most developing countries.
upon the conduct of contemporary international business, Therefore, the purpose of this paper is to critically analyse
particularly for multinational corporations (MNCs) the relationship between the determinants of political risk
operating in developing countries or emerging markets and the nature of political risks themselves – and to do so in
(Baek & Qian, 2011; Baldacci, Gupta, & Mati, 2011; an African context.
Jiménez, Luis-Rico, & Benito-Osorio, 2014). A number of African markets are becoming important to the world
events have taken place, whose consequences have re- economy with increasing rate of FDI by MNCs in their
shaped the international business environment and have quest for growth and competitiveness (Bekaert et al., 2014;
influenced the types of strategy which multinational Hayakawa, Kimura, & Lee, 2013; Ramamurti, 2004;
corporations adopt. These include the growth of trans- UNCTAD, 2016). However, most emerging markets in
national terrorism and conflicts in some part of the world Africa tend to have evolving political climates, with
(Bekaert, Harvey, Lundblad, & Siegel, 2014; Sottilotta, unstable governments and frequent policy changes. In some
2015). Due to the consequences of some of these events for African countries, terrorism and domestic insurgencies are
multinational corporations, it is prescient to investigate the particular issues (Asiedu, 2006; Baek & Qian, 2011;
determinants of political risk within the context of Jensen, 2008; Tarzi, 2005). This means that they have
developing countries. specific political risk factors that need to be taken into
Political risk has been evolving over the past few consideration in any calculus of political risk and political
decades, and different types have emerged during this risk assessment (Baldacci, Gupta, & Mati, 2011; Bekaert et
period. At one time, the main risks facing businesses were al., 2014; Quer et al., 2012).
nationalisation and expropriation. Subsequently, issues such Africa is not a homogenous entity; rather it is diverse
as tax restrictions, license cancellation, delayed profit and complex with considerable variations within as well as
repatriation, changes in investment agreements, between some states. This diversity and pluralism relate to
protectionism, have come to the fore (Baek & Qian, 2011; political, economic, socio-cultural and institutional systems
Jiménez, Luis-Rico, & Benito-Osorio, 2014; Sottilotta, (Amankwah-Amoah, 2016). Therefore, the consequences of

27
political risk for multinational corporations differ from one contexts with different political risks. Institutional factors
emerging market to another and likewise within individual are a significant consideration for firms undertaking
parts of some of them (Brink, 2004). Nigeria is chosen as international business, especially in developing countries
the emerging market to study since it has become one of the where there often serious institutional weaknesses (Francis
world’s major destinations for foreign direct investment & Zheng, 2009; Meyer, Estrin, Bhaumik, & Peng, 2009;
(FDI) by multinational firms due to both its natural Osabutey & Okoro, 2015). This is because both informal
resources and its large domestic market (population 160 and formal rules influence whether a firm should enter a
million). However, it has suffered from an unstable political new market (Quer et al., 2012). Likewise, it is government
environment caused by issues such as terrorism, institutions in a country who set up the rules and regulations
inconsistent government policies, political violence, high which constitute how organisations should interact in both a
rates of poverty, high rates of unemployment, religious formal and an informal setting (Meyer, 2008; Peng et al.,
intolerance, bad governance and poor management of 2008; Quer et al., 2012; Witold & Swaminathan, 2008).
resources (Bienen, 2013; Iarossi & Clarke, 2011). The Consequently, the rules and regulations set by these
paper is structured into six parts; the first is this government institutions are parameters which can
introduction, the second part is a theoretical review and determine the differences between a profitable investment
literature about political risk in Nigeria. The third part is and a non-profitable investment.
about the methodology and analysis of findings adopted for
the study, the fourth part discusses the findings, and the Political Risk
fifth part is about the study’s contributions, with the sixth a
conclusion. The definition of political risk is a challenge due to its
association with concepts such as ‘political uncertainty’ and
Literature Review ‘political instability’ (Brink, 2004; Howell, 2002;
Fitzpatrick, 1983). A number of researchers have tried to
Political risk appeared as a distinct field of study in relate political risk to government interventions and
international business devoid of an accepted theory political events. Howell (2002, p. 4) defines political risk
summarising the fundamental principles clarifying the “as the possibility that a political decision or events in a
responses of multinational firms towards host government host country will alter the business environment in such a
policies regulating them either within the context of manner that an investor will run a loss or not gain as much
developed or emerging markets (Robock, 1971; Grosse & as expected from the investment”. More generally, political
Behrman, 1992). Institutional theory is potentially a way risk may be understood in terms of its unfavourable
forward in this context since the causes of political risk are consequences for multinational corporations operating in a
often institutional. Previous studies have attempted to link political environment.
political risk to institutional theory to explain what
influences a firm’s decision to internationalise to a location The unfavourable consequences of a political event
(Dunning, 1998; Buckley et al.,2007; Busse & Hefeker, depend on nature and conditions under which it occurs and
2007; Jiménez et al. 2011, 2014; Osabutey & Okoro,2015; the characteristics of the investment as well as the
Nathan, 2008; Quer et al.,2012; Witt & Lewin,2007). The environment (Kobrin, 1979). For this reason, if political
neo-institutional theory has a broad theoretical concept with risk is seen as an event variable instead of a process
accentuates on legitimacy, isomorphism and rational myths variable, its conceptualization could be enhanced
which focus more on resilient facets of social structure. In (Fitzpatrick,1983). This implies that it is the probability of
the context of this study, the legitimacy aspect of changes over time in the level of political risk which is its
institutional theory posture will be considered due to the key driver even though there is the possibility of other
fact that multinational firms often attempt to attain factors, both in the event and process variables, that can
legitimacy relative to the individual host country they are change the level of political risk. Consequently, this study
operating in (Meyer, 2008; Scott, 2004: Zucker, 1987). The defines political risk as any changes in the political
legitimacy perspective of the neo-institutional theory environment as a result of government decisions or any
construct can be used to explain how firms make decisions event/condition which affects the likelihood of a foreign
in responding to different institutional regulations as they investor achieving its business objectives in a host country.
move from either a developed economy to an emerging one This suggests that political risk does not always originate
or vice versa (Meyer, 2008; Peng, Wang, & Jiang, 2008; from government political decisions because some features,
Quer et al., 2012). Therefore, these institutions could be causing political risk are not related to them or to political
“responsible” for the emergence of political risk in some events but they are inherent in a political environment.
markets. Therefore, political risk is different from political instability
Institutional theory is applicable to multinational firms and political uncertainty. Political uncertainty refers to
particularly since they operate in different institutional changes due to government actions in a political

28
environment whereas political instability refers to the determinants of political risk in these different
unexpected changes in the political environment. However, developing countries.
political risk refers to the probability of the occurrence of A particular political environment can lead to different
risk. It is a more objective way of measuring the amount of types of political risk with a variety of consequences for
doubt from political uncertainty and political instability multinational corporations (Uzonwanne, 2013). These
than measures which capture the subjective elements of consequences add to the cost of doing business, and the cost
uncertainty and instability (Brink, 2004). increases with an increasing probability of political risk,
Political risk in an emerging market is driven by thereby creating different scenarios that corporations need
politics, history, religion, economics, culture and to investigate critically (Brink, 2004: Qian & Baek, 2011).
international relations (Brink, 2004, p. 21). The drivers of For this reason, multinational corporations use various
political risk are divergent and vary among countries; means to assess each political environment so as to be able
likewise their effects on multinational corporations to manage and mitigate political risk.
(Burmester, 2000; Kobrin, 1982). Even in the same market,
political risk types, costs, probabilities and the degree of Classification of Political Risk
their intensity can vary from one part to another; likewise,
their consequences, which can be divided into micro and Political risk can be classified according to its
macro risks, vary in their impact (Brink, 2004; Howell,
source since not all risks are as a result of changes from
2002). This can be attributed to differences in political
host government decisions. Political risk can be categorised
environments, especially in developing countries with weak
into three sources; namely host-government, host-society
regulatory institutions, and where ideological, ethnic and
religious cleavages are prominent (Busse & Hefeker, 2007: and neighbouring countries (Al Khattab, et al., 2011).
Gaft, 1988). The resultant inability of some multinational However, this paper includes other types of political risk,
corporations to understand fully diverse political such as investment agreement changes, licence cancellation,
environments has resulted in across-the-board policies, delayed in profit repatriation, price controls, and changes in
which have dichotomized some developing countries as rules and regulation which were not covered by Al Khattab,
safe or unsafe (Fitzpatrick 1983, p. 251). Hence, there is the (2011), Table I.
need for multinational corporations to have insights about

Table 1. Classification of Political Risk according to Sources

Serial Host government Host society Neighbouring
countries
1 Taxation restrictions Demonstrations/riots/strikes Wars
2 Currency inconvertibility/devaluation Revolutions, Sanction
3 Contract repudiation Terrorism
4 Import or export restrictions Coups d’état
5 Ownership/ personnel restrictions Civil wars
6 Delayed profit repatriation Hijacking
7 License cancellation Piracy
8 Price controls
9 Expropriation/ nationalisation
10 Investment agreements changes
11 Changes in rules and regulations
Source: Developed from Al Khattab et al. (2011)

Political Risk in Nigeria (John, 1997; Umoren, 2001). Political instability started to
emerge in the country after 1966 with the staging of a
Since the amalgamation of the country in 1914, Nigeria military coup, and then a civil war took place from 1967 to
has undergone a series of transformations that have shaped 1970. Then from 1972, the government introduced a
and reshaped its political landscape. After her independence succession of policies that led to the nationalisation of a
in 1960, a number of political and economic reforms were number of multinational corporations, coupled with a
introduced by both military and democratic governments number of military interventions in the government, as well
which had consequences for multinational corporations as different political and religious crises (Bienen, 2003;

29
Onapajo, 2012; Orugbani, 2005). More recently, terrorism, relate to religion, value systems, per capita income,
high levels of corruption, high rates of unemployment, ethnicity, bureaucratic quality, political structure, military
inadequate infrastructure, a poor legal system and the intervention/government change and constitutional
unstable situation in the oil-rich Niger Delta region have problems.
featured in the country (Aon, 2014; Wafure & Nurudeen,
2010). Nevertheless, Nigeria’s economy is growing and Religion
there is an increasing inflow of inward FDI (World Bank,
2015). Religion has been a significant factor in the political
The country is divided along cultural, ethnic, linguistic evolution of most developing countries, especially in
and religious lines within her different geographical countries where there are several religions due to extremism
regions. Religion and ethnicity permeate the cultural, social or fundamentalism. Some countries’ laws are based on the
and political, as well as the economic, the life of its citizens religion of the state, with a resultant effect on certain
(Bienen, 2013; Onapajo, 2012). There are different regional businesses. Nigeria is a multi-religious country and religion
ethnic militia groups, such as the Movement for the permeates the cultural, social, political and economic life of
Emancipation of the Niger Delta (MEND) in the south, the its people, which causes divisions along religious lines
Movement for the Actualisation of the Sovereign State of (Kendhammer, 2013; Onapajo, 2012; Uzoma, 2004). The
Biafra (MASSOB) in the east, the Odua People’s Congress desire of a religious group to express its own identity
(OPC) in the west and ‘Boko Haram’ in the north prompts religious sentiment with some having extremist
(Babawale, 2001). ‘Boko Haram’ is a terrorist group, whose views, has been one of the most common sources of
actions have led to many deaths, and its activities have conflict in the country (Falola, 1998; Kukah, 1993). Indeed
resulted in the declaration of a state of emergency in three Nigeria has witnessed a number of religious conflicts
northern states (Bienen, 2013; Danjibo, 2009). According to especially in the northern part of the country (Agbiboa,
the Nigerian Bureau of Statistics, ‘despite the growth of the 2013; Bello & Fawole, 2011; Meagher, 2013; Salawu &
Nigerian economy, ironically, the percentage of Nigerians Hassan, 2011).
living in poverty is on the increase’(NBS,2012, p. 11). The
report demonstrated that the percentage of the poverty rate Value System
of the population increased considerably during the period
1980 to 2010, with the northern part of the country having A value system determines what is allowed and what is
the highest percentage. In a study conducted by the World prescribed in a society. Every society presumes that the
Bank on the Investment Climate Assessment Report, 2012, values it has enunciated for its members are eternal
it was reported that in 26 states, investors in Nigeria lost 10 principles, which are immutable and timeless. A value
percent of their revenue due to poor infrastructure, crime, system classifies certain acts and patterns of behaviour in a
corruption and insecurity (Iarossi & Clarke, 2011). It also society, in accordance with its own ethical considerations.
reported that 80 percent of firms offered bribes to These classifications underpin the ethics and morals of a
government officials for one reason or another. Therefore, it society. However, certain circumstances may lead to the
is in this setting that the determinants of political risk in the breakdown of these classifications by society, due to poor
emerging Nigerian market will be identified in order to leadership, corruption and poverty; these are issues which
assess their impact on multinational corporations. are all too common in Nigeria (Ikharehon & Omoregie,
2015; Okigbo, 1993). The lack of values, such as integrity,
honesty, hard work, moderation and humility, puts every
Features of Political Risk other principle of conduct at risk in a country. It is for this
There are a number of contributory factors leading to reason that a high rate of corruption has been reported in
the emergence and evolution of political risk in an Nigeria (Agbiboa, 2013; Ayoola, 2013; Ogaboh, Agba, &
emerging market. These are referred to as the determinants Coker, 2010; Smith, 2010). Indeed the degeneration of
of political risk. One of the criteria for selecting these these values is a systemic failure which has had a major
determinants is based on knowledge of the observed set of a effect on the operation of the business environment in the
political environment, which determines the emergence of country due to lack of ethics (Bakare, 2011; Ochulo et al.,
political risk (Brink, 2004; Rarick, 2000). These 2011; Okigbo, 1987; Okoosi-Simbine, 2011).
determinants are associated with economic, socio-economic
and social variables which can lead to events or conditions Ethnicity
that cause unexpected changes in a political environment
and/or changes in government actions. Most developing The existence of multiple ethnic groups in a country is
countries have ideological, ethnic and religious cleavages a potential major source of political risk. The competing
inherent in their political environments. These cleavages demands for state resources, as well as political power,

30
often create tension and agitation among them (Rarick, weak and defective, as well as which marginalise some
2000). These situations are common in most developing groups (Amuwo, 1998; Falola & Heaton, 2008). A number
countries, where the interests of some ethnic groups are of studies on Nigeria have shown that her political structure
prioritized over others. In Nigeria, there have been issues of is one of the challenges of the country (Dudley, 2013
inter-ethnic rivalry due to economic and political Joseph, 2014; Sklar, 1965). Some of the political
differences and interests (Nnoli, 1978). They have been instabilities which have been experienced in the country are
responsible for some of the conflicts between the minority because of her political structure. This has also resulted in
and majority ethnic groups which have been witnessed in the formation of different regional ethnic militia groups
the country (Ajayi, 2014; Oladiran, 2013; Salawu & across the country such as MEND, MASSOB, OPC and
Hassan, 2011). Boko Haram (Bienen, 2013).

Per capita Income Military Interventions /

Unstable Government Change
Per capita income is indicative of the living conditions
of the average citizen in a given country. Per capita income Government changes and military intervention in the
can be high or low depending on the minimum wage, as affairs of governance, thereby creating political instability,
well as the productivity of the economy and its impact on are witnessed more in developing countries than in
the average citizen of that country (Ake, 1985; John, 1997; developed ones. The involvement of the military in politics
Olaloku, 1979). A low per capita income indicates that is one of the elements of political risk in most developing
most the population are living in poverty, which often countries. Changes in government have significant
increases the crime rate in a country. Several studies on implications for the business environment due to policy
Nigeria have shown that there is a high poverty rate in the changes which often accompany them (Sottilotta, 2015).
country due to the high rate of low per capita income The tendency for the military to intervene in the affairs of
among its population (NBS, 2012; Okoroafor & Nwaeze, governance is a source of political risk in some developing
2013). This is responsible for some of the social problems, countries, and there may be a history of military
crimes and political unrest which have been witnessed in intervention. Nigeria witnessed military interventions and
the country (Okoroafor & Nwaeze, 2013; Olofin et al., unstable government from 1966 to 1979 and from 1983 to
2015). 1999. This has contributed to the present state of Nigeria’s
politics and its governance (Amuwo, 1998; Dudley, 1982;
Bureaucratic Quality Ogaba Agbese, 1996; Orugbani, 2005).

The quality of its bureaucracy determines the strength Constitutional Pitfalls

of a country’s institutions and the frequency of the revision
of government policies, which is especially likely when The constitution of a country provides the foundation,
there is a change in government or of leadership in any as well as the mechanism, for the distribution of power,
government organisations. There have been cases of authority and incentives for citizenship. It also plays an
political interference in bureaucratic decision making with important role in the political stability of a country
consequences which have affected the quality of (Tushnet, 2012). The failure of most developing countries
governance in Nigeria (Aluko & Adesopo, 2004). There are to ensure that their constitutions and other statutory laws
situations where excessive bureaucracy exists, creating a adapt to the realities of their circumstances is responsible
long process of doing business and other unethical practices for some of the conflicts which they have experienced. The
that increase business costs ( Lawal & Tobi, 2006; Okotoni, provisions of Nigeria’s constitution have been decisive in
2001). This often results in negative consequences for how its citizens are governed and how the rule of law has
multinational corporations doing business in the country been applied (Kalu, 2004, 2008; Obasanjo, 1989; Okigbo,
(Eme & Ugwu, 2011; Onyekwelu, Okpalibekwe, & Dike, 1993). Nigeria has experienced specific challenges as a
2015). result of her constitution, that was drafted mainly by
preceding military governments before the democratic era
Political Structure (Ilesanmi, 2001; Kalu, 2004; Oviasuyi, Idada, & Isiraojie,
2010; Read, 1979). There have been agitations for a
The political structure which may be spelt out in the constitutional review in Nigeria, premised on the grounds
constitution of a country covers a wide range of competing that the present constitution was drafted by previous
values, ideas, interests, persons and resources. This also military governments and does not adequately address the
translates into who gets what, when and how. Most aspirations of its citizens. Some of the contentious issues
developing countries still have political structures that are and conflicts which have been experienced in the country

31
have been attributed to constitutional pitfalls (Obasanjo, between the independent and the dependent variables
1989; Ogowewo, 2000; Kalu, 2004). (Burns & Burns, 2008; Fields, 2013; Wetcher-Hendricks,
2011).
Hypothesis
The databases of the Corporate Affairs Commission in
The features of political risk outlined above are likely Abuja and the Nigerian Stock Exchange in Lagos were used
to change over time, since the socio-economic and political to identify 247 firms which were involved in international
situation of a country – in this case, Nigeria - may improve business in Nigeria. A further re-examination on a firm-by-
or deteriorate. If the determinants of political risk have firm basis during a pilot study clarified the identification
various degrees of unfavourable consequences for firms, process. Only 150 firms were finally identified as being
they will result in a negative impact on multinational involved in international business. Subsequently, 59 firms
corporations. These determinants of political risk create with international names and some form of foreign
different types of political risk. This creates a rationale for affiliations supporting their operations indicated that they
identifying the relationship between the determinants and were not involved in international business because they
types of political risk in Nigeria. Therefore, there is the had been nationalised by the then Nigerian government in
need to test whether as these determinants of political risk the 1970s. A total of 74 multinational corporations in
increases, the types of political of risk increases or vice Nigeria across different types of firms participated in an
versa. online survey, giving a participation rate of 81.3%.

H1 - There is a positive relationship between the Reliability Test

determinants of and the types of political risk in Nigeria.
The scales used in the questionnaire were checked for
Methodology, Data and Analysis of internal consistency using Cronbach’s alpha coefficient to
ensure that the research instrument provided an adequate
Results and accurate measurement for the study. Values above 0.7
Multinational corporations operating in Nigeria were are considered acceptable; however, values above 0.8 are
surveyed via the use of an on-line administered preferable (Pallant, 2010). A Cronbach’s alpha coefficient
questionnaire to collect data to address the aim and test the value of 0.86 was found (Table 2). Therefore, there is very
hypothesis developed for this paper. Descriptive and good internal consistency associated with the scales used in
inferential statistical analysis was used to equate the scores the questionnaire.
of the variables as well as examine the relationships
Table 2. Reliability Statistics
Cronbach's Alpha Cronbach's Alpha Based on Standardized Items Number of Items Number of cases

0.86 0.953 117 74

Characteristics of Multinational Firms international business, 64.9% were internationalised by FDI

and 32.4% by export/import. This indicates that most
The multinational firms were classified according to internationalised by FDI into petroleum & gas and
their type of industry. 32.4 % of them were in the petroleum manufacturing sectors mainly.
and gas sector while 36.5% of them in manufacturing
(Table 3). In categorising the firms based on their form of
Table 3. Description of Characteristics of Multinational Firms
Characteristics of Nigerian Multinational Firms Frequency Percentage
Manufacturing 27 36.5
Petroleum & Gas 24 32.4
Type of Industry Banking 12 16.2
Insurance 5 6.8
Construction 3 4.1
Communication 3 4.1
FDI 48 64.9
Export/Import 24 32.4
Forms of International FPI 1 1.4
Business Others 1 1.4

Table 4 shows political and financial risks have a mean score of 4 (4 ‘Very concerned’) while cultural risk has a

32
mean score of 2.8. This indicates that most of the risks than cultural risk in international business.
participants are very concerned with political and financial

Types of Risk Mean SEM Median Mode SD V Min Max

Political risk 4.00 .092 4.00 4 .794 .630 2 5
Financial risk 4.04 .091 4.00 4 .748 .615 2 5
Cultural risk 2.84 .109 3.00 3 .937 .877 1 5

Table 4. Types of Risk in International Business in Nigeria

Table 5 indicates Mean scores ranging from 3.71 to most of the participants considered that these causes or
3.49, Mode scores ranging from 4 to 3 and SD scores features are major determinants of political risk in Nigeria.
ranging from 0.79 to 1.09, across all features of political Among the causes or features of political risk poor value
risk. The results of the Mean, Mode and SD scores (‘3 system, religious Intolerance, inter-ethnic rivalry and low
moderately a feature’ ‘4 highly a feature’) indicate that per capita income had the highest mean scores.
Table 5. Determinants of Political Risk in Nigeria
Determinants of Political Risk Mean Median Mode SD V Min Max
Poor Value System 3.71 4.00 4 .790 .624 2 5
Religious Intolerance 3.72 4.00 4 .836 .699 1 5
Inter-ethnic Rivalry 3.73 4.00 4 .746 .556 2 5
Low Per Capital Income 3.61 4.00 4 .718 .516 2 5
Unstable Gov. Change 3.21 3.00 4 1.092 1.193 1 5
Constitutional Pitfalls 3.09 3.00 3 .939 .881 1 5
Lengthy Bureaucratic Process 3.46 3.00 3 .831 .690 1 5
Weak Political Structures 3.49 3.00 3 .848 .719 1 5

The outputs of the multiple regression results (Table 6) political risk cannot be explained by the determinants only.
indicate that almost all the dependent variables Hence, it implies that there are other variables or factors
(determinants) have a positive, but weak, relationship with which account for this difference in the origin of political
the independent variable. Thus, it implies that as the risk. The F value is 2.145 which is significant at p<.05 with
determinants increase, political risks increase and vice the value sig 0.440. Thus, it can be concluded that the
versa. The R value = 0.463 discloses that a medium regression model results significantly predict types of
correlation exists between the determinants and political political risk. However, none of the independent variables
risk. This implies that an increase or a decrease in the makes a statistically significant unique contribution
determinants will not result inevitably in an increase or (significant at p<.05). This suggests that there is an overlap
decrease in political risk. The value of R2 is 0.214 which among them in making a unique contribution to the
indicates that 78.6% of the variation in the origin of prediction of political risk.
Table 6. The Determinants of and Types of Political Risk
Independent Variables Correlation R R2 Adjusted F Sig. Unstandardized
R2 Coefficients
B Std. Error
.463 .214 .114 2.14 .044
5
(Constant) political risk .000 2.141 .553
Constitutional pitfalls .386 .220 .196 .158
Poor value system .374 .616 .126 .250
Religious intolerance .310 .856 -.073 .402
Inter-ethnic rivalry .347 .672 .188 .441
Low per capita income .361 .194 .273 .208
Bureaucratic process .332 .813 -.047 .199
Unstable government changes .293 .902 -.016 .129
Weak political structure .244 .368 -.148 .163

33
 Thus, the output of the multiple regression results in measure, the relative poverty rate in the Nigerian
Table 6 validates H1 that there is a positive relationship population increased to 65% in 2011 (NBC, 2012b, p.11).
between the determinants of political risk and types of The failure to not ensure that the constitution and other
political risk. statutory laws adapt to the realities of the circumstances is
responsible for some of the conflicts experienced in Nigeria
Discussion (Oviasuyi et al.,2010; Ogowewo, 2000; Kalu, 2008; Read,
1979). A major constitutional pitfall, if not resolved, makes
The features of political risks referred to as a country prone to political instability and uncertainty; the
determinants were selected based on knowledge of the consequences of which can have an impact on multinational
observed set of a political environment, in which its corporations. PRS Group (2015) also argue that frequent
features contribute to the emergence of political risk. These changes in government have significant implications for the
features are associated with socio-economic and political business environment due to policy changes that often
factors, and they undergo changes intermittently in a accompany them. Indeed the tendency for the military to
political environment. These determinants have intervene in the affairs of government exacerbates this
consequences in a political environment if they are not problem as well as being a threat to democracy in Nigeria
considered, checked, rectified, controlled, balanced or (Orugbani, 2005).
improved. The possible resultant effects of these A perceived structural defect and institutional
determinants are that they may lead to events or conditions deformity affect the collective identity of the Nigerian
that could cause unexpected changes and/or changes from people (Dudley,2013; Joseph, 2014; Kalu, (2008).
government actions in a political environment. There are a Likewise, Lawal & Tobi (2006) and Okotini (2001) pointed
number of explanations, which are supported by the out that the quality of bureaucracy determines the strength
findings of other studies, of these causes or features of the of the institutions and the frequency of changes in a country
determinants of political risk. in terms of revisions to policies. A weak political structure
The lack of values, such as integrity, honesty, hard and poor bureaucratic quality are contributing features that
work, survival of the fittest, moderation, and humility, puts make political risk manifest in Nigeria.
every other principle of conduct at risk in Nigeria (Ayoola, The research findings establish that political risk
2013; Agbiboa, 2013b; Smith,2010; Uma & Eboh,2013). determinants make varying relative contributions to the
These acts and patterns of behaviours arise from the ethics prediction of political risk in Nigeria. Ideological, ethnic
and morals of its society. However, poor leadership, and religious cleavages are central to the political
corruption and poverty (among others) can lead to the environment of Nigeria. These cleavages contribute to
degeneration of value systems in a country. The political risk. Likewise, it is the presence of these
degeneration of these values has created an impact on the determinants of political risk that influence some of the
operations of firms in Nigeria. Religion has been a political decisions and policies made by the Nigerian
significant factor in the political considerations of the government, which could be attributed to the emergence of
country and permeates the cultural, social, political and some of the heterogeneity of political risk in the country. It
economic life of most people. Anything that undermines is only when these determinants of political risk are
religious practices has led to instability, especially in the identified in the context of a specific country that country-
northern part of the country. Equally, however, a mixture of specific risk variables and indicators can be determined.
religion and politics is used for economic and political gain These determinants are significant in the understanding of
in Nigeria (Agbiboa, 2013; Kendhammer, 2013; Meagher, how risk variables and indicators emerge and how political
2013; Onapajo,2012). risk exists in different forms.
Competing demands for state resources and political The acceptance of H1, which confirmed a positive
power often creates tension between ethnic groups, which relationship between the determinants of political risk and
has, in turn, generated conflict between the minority and types of political risk, has validated these determinants of
majority ethnic groups in Nigeria. The presence of multiple political risk in Nigeria. An implication of this is that if the
ethnic groups in the country, along with different ethnic determinants of political risk make political risk manifest, a
militia groups, reflects issues of inter-ethnic rivalry positive relationship should exist between these
(Ajayi,2014; Oladiran,2013; Ebegulem, 2011; Salawu & determinants of political risk. The multiple regression
Hassan, 2011). Inequitable distribution of resources and analysis revealed that determinants such as religious
political power is another of the determinants of political intolerance, bureaucratic process, unstable government
risk in Nigeria (Anyanwa, 2010; Olofin et al., 2015; change and weak political structure showed a stronger
Okroafor & Nwaeze,2013; Uma et al.,2013). Per capita unique contribution to political risk in Nigeria than the
income is an indication of the living conditions of an other factors. However, it has been found that an increase
average citizen in Nigeria. A report by the Nigerian in just one of the determinants of political risk will not
National Bureau of Statistics showed that, based on this spontaneously result in an increase in a type of political risk
since other overlapping contributory features were emergence of political risk in the context of the emerging
identified to be among the determinants of the prediction of Nigerian market. These are constitutional pitfalls, poor
political risk. Consequently, each determinant of political value system, religious intolerance, inter-ethnic rivalry, low
risk which impacts on multinational corporations can be per capita income, unstable governments, lengthy
influenced by the consequences of other determinants. bureaucratic processes and weak political structures. They
were selected based on knowledge of the observed setting
Contributions of the political environment and their interrelationships
with socio-economic and political factors in contributing to
This research has identified eight determinants which the emergence of political risk. These concepts were
contribute to the emergence of political risk in the Nigerian augmented by ideas gathered from several other studies on
context. These determinants are - constitutional pitfalls, Nigeria (Ayoola, 2013; Agbiboa, 2013b; Kendhammer,
poor value system, religious intolerance, inter-ethnic rivalry 2013; Meagher, 2013; Ajayi, 2014; Oladiran, 2013; Olofin
and low per capita income. Other determinants include et al., 2015; Uma et al., 2013).
unstable government change, lengthy bureaucratic process The findings suggest that these determinants and their
and weak political structures. While Ascher & Overholt subsequent consequences cause various types of political
(1983), Bjelland (2012), Brink (2004), Howell & Chaddick risk to manifest themselves in the Nigerian business
(1994) and Kobrin (1982), have investigated indicators of environment. They are significant in understanding how
political risk, this study contributes to the understanding of political risk variables and indicators have emerged, which
political risk by suggesting these determinants are key have in turn caused different forms of political risk to
drivers of political risk. These determinants are significant existing. The validation of H1 that there is a positive
in understanding how they could contribute to the relationship between the determinants of political risk and
emergence of political risk and how it could cause political risk itself has confirmed that these determinants
unexpected changes in government decisions and/or can make political risk manifest. Some of the determinants
changes in a country itself. It can be suggested that some of are more prominent than others in contributing to political
these determinants of political risk are part of the risk, due to their interrelationship in the political
challenges that accompany the evolution of most environment.
developing nations. The evidence from this study suggests that it has been
These determinants of political risk could contribute to the changes accompanying these determinants which have
how multinational firms conduct their PRA in the sense that influenced some of the political decisions or policies made
they provide knowledge for those operating in similar by governments in Nigeria. Likewise, their resultant effects
developing countries about how they could improve their could be attributed to the emergence of different types of
conduct of PRA, especially in Africa. The inclusion of political risk in Nigeria. Thus, with their identification, a
these determinants when using different PRA techniques or political environment can be assessed more accurately. An
methodologies would improve the quality of the results they implication of this is the possibility that each type of
obtain for better understanding and operating in a political political risk has a number of interrelated determinants that
environment. This will, in turn, influence the type of prompt its existence. Therefore, based on this finding, how
strategies, in relation to modes of market entry, for specific political risks emerge which differentiate one
example, which multinational firms adopt. emerging market from another can be better explained. In
This study has shown that changes accompanying these conclusion, this paper has provided insight from an African
aforementioned determinants could influence political perspective about what causes frequent unexpected changes
decisions made by a government and that its resultant in governments’ political decisions or policies and which
interrelated effects can be attributed to the emergence of may affect multinational corporations.
different types of political risk in Nigeria. Therefore, these
determinants are significant in understanding how risk
variables and indicators emerge and how they contribute to
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38
The Role of Foreign Direct Investments in Social Economy
Development
Stukalo Nataliia, Oles Honchar Dnipro National University, Ukraine
Simakhova Anastasiia, Oles Honchar Dnipro National University, Ukraine

Social development of any country is based on an of incomes of the population for countries with transitive
economic system that provides for it financially. Among the economy .
sources of financing of the social sphere, external sources, Despite certain achievements in studying social aspects of
some of which include foreign direct investments (FDI), FDI, the problem of the role of FDI in the development of
occupy a very important place. However, in scientific social economy has not been considered yet. All developed
literature, not enough attention is paid to the problem of countries of the world today have the developed social
FDI potential for the development of social economy of a economy. In the countries with transitive economy, there
country. With this in mind, the purpose of this study is to takes place the transformation of the social component
explore the role and the place of direct foreign investments (Stukalo, Simakhova, 2018), which requires additional
in the development of social economy. financial resources, which FDI could potentially become.
Developing countries face the problems of social
JEL classification: F 21, B 55 development, social economy is not developed, which
Keywords: foreign direct investments, social requires significant capital investments and investment
economy, group of economies, Ukraine, development funds (Proshare, 2014). Socio-economic impact of FDI on
the example of Nigeria showed a significant social effect of
FDI are essential for the economic growth of any country. foreign investment for developing countries. Thus, the main
The studies, conducted by different authors, proved the positive channels of FDI for the social sphere of a
reliability of this statement. Thus, in particular, the developing country include (Proshare, 2014): employment
influence and significance of FDI for the economic growth sphere (an increase in the employment level, wages, and
of various countries were studied by Asheghian, P (2016), development of skills of workers), gender equality
Sothan, S (2017), Kumar, A. B., (2012), Kok, R, Ersoy, B. (enhancing of a social the status of women), the
A., (2009), Cambazoglu, B, Karaalp, H. C. (2014), He, X, environment (contribution to solving ecological problems),
and X. Yao (2017). The authors have shown that FDI have internal business (an increase in its profitability), the sphere
especially significant impact on economic growth of of state finances (an increase in taxation incomes). Thus,
developing countries. Thanks to the inflow of FDI, new FDI will enhance social capabilities of a country and
jobs are created, trade is developing, new technologies are influence its social development.
brought into these countries, which also implicitly Given the development of social economy, one of its key
influences social development of a country. The social characteristics is the entrepreneurial initiative, the ability of
effect of FDI was examined in the research of Scaperlanda, the population to self-sufficiency of realization of the own
A. (1998) and the experts of OECD (2008). In the given potential of citizens (Simakhova, 2017). No doubt,
papers, it was noted that multinational companies that development of entrepreneurship in the country is affected
invest FDI in developing countries, promote the by attraction of foreign investments. Moreover, FDI is one
development of social responsibility, cooperation and of the channels of savings for the population due to an
solidarity in these countries. Moreover, FDI are aimed at increase in wages and profits from business activity in
creation of well-paid jobs and effective management. companies with foreign capital.
Certain authors raise the question of the influence of FDI A positive effect of FDI is manifested in the fact that they
on differentiation of incomes of the population, in provide access to modern technologies and management. In
particular, Wong, M.Y. H (2016) and Franco, C. and the national economy they fuel the markets of goods and
Gerussi, C (2013). Thus, the scientist Wong, M.Y. H (2016) services, promote the expansion of the range of consumer
proves that FDI contributes to differentiation of incomes of products and improve their quality. FDI also influence
the population by the creation of a small sector of highly competitiveness of companies that receive them. From the
paid workers on the labour market. In contrast to these macroeconomic point of view, FDI contribute to socio-
results, the study of researchers Franco, C. and Gerussi, E. economic stabilization, improvement of social and
(2013) shows that FDI do not contribute to differentiation economic policy that allow solving social problems in a

39
country.
Under conditions of effective actions, aimed to attract FDI Table 2. FDI outflows by group of economies in 2014-2016
in the economy of a country, they can play an important (billions of dollars and per cent)
role not only in stabilizing the economic stability of a
country, but also contribute to the solution of the problem Group of 2014 2015 2016
of enhancing the life of the population by improving labor economies
Bln. % Bln. % Bln. %
productivity. That is, the chain is as follows: FDI – dol. dol. dol.
increasing labor productivity – increasing competitiveness – World 1253 100 1594 100 1452 100
economic stabilization – enhancement of life quality. Under Developed 708 56.5 1173 73.6 1044 71.9
such conditions, developing countries should be the major economies
recipients of FDI. If we pay attention to the world statistics
Developing 473 37.7 389 24.4 383 26.4
as for FDI dynamics, such situation was observed in 2014, economies
when the share of the developing countries was the highest
in terms of attracting FDI and made 53.2%, but up to 2016, Transition 73 5.8 32 2.0 25 1.7
the inflow of FDI to developing countries considerably economies
decreased, specifically, by USD 58 bln. Compared with Structurally 26 2.1 14 0.9 10 0.7
2014, their share made up only 37 % (Table 1). weak,
vulnerable
Table 1. FDI inflows by group of economies in 2014-2016 and small
economies
(billions of dollars and per cent)

Group of 2014 2015 2016

Source: Unctad World Investment Report, 2017
economies
Bln. % Bln. % Bln. % The data of Table 2 show a decrease in the investment
dol. dol. dol.
potential of developing countries and the countries of
World 1324 100 1774 100 1746 100
transitive economy. Thus, within 2014-2016, FDI, provided
Developed 1032 59.1 to developing country decreased by USD 90 bln, to the
economies 563 42.6 984 55.5
countries with transitive economy – by USD 48 bln. It
Developing 704 53.2 752 42.4 646 37.0 indicates a shortage of foreign investments for financing
economies social development and integrated social actions in these
Transition 57 4.3 38 2.1 68 3.9 countries. Therefore, an increase in attraction of FDI in the
economies future in developing countries and in transitive countries
will promote a gradual development of social economy in
Structurally 68 5.1 64 3.6 58 3.3 them.
weak,
vulnerable To explore the situation in the countries with transitive
and small economy, take the example of Ukraine. Thus, within 2000-
economies 2016, FDI in the economy of Ukraine were increasing (Fig.
Source: Unctad World Investment Report, 2017 1).

According to data from Table 1, 2014-2016 saw the

changes in the share of groups of the countries in terms of
attracting FDI, thus, the share of developed countries
increased from 42.6% in 2014 to 59.1% in 2016. The share
of the countries with transitive economy decreased from
4.3% to 3.9%, and that of the countries with small
economies decreased from 5.1% to 3.3%. These trends are
associated with allocation of the investment funds of
developed countries to the countries of the same group of
developed economies, since the share of the developed
FDI, mln. UAH Ratio of FDI to GDP
countries in provision of FDI increased from 56.5% in 2014
to 71.9% in 2016, or by USD 336 bln (Table 2). Thus,
financing social economies at the expense of FDI takes
Fig. 1. Dynamics of direct foreign investments in the
place in the developed countries of the world. The
economy of Ukraine and their ratio to GDP in 2000-2016.
redistribution of investment funds from developed countries
Source: State Statistics Service of Ukraine, 2013;
to developing countries and countries with transitive
State Statistics Service of Ukraine, 2017
economy has not taken place lately.

40
 The performed calculations of the ratio of FDI to GDP in Ukraine on FDI takes the form:
show that, despite the growth in absolute volume of FDI, in Y= 0.006, (1),
2014-2016, there was a decrease in the ration of FDI to where Y is the average monthly wages in Ukraine;
GDP. This indicates insufficiency of the FDI volume for X is the FDI in Ukraine.
providing social development in the country. R-square is 0, 977
For a more detailed study of FDI influence on the social A high value of R-square indicates that there is close
economy, it is necessary to perform a correlation-regression relationship between average monthly wages in Ukraine
analysis of FDI influence on the main social indicators. One and the FDI volume. However, verification of adequacy of
of the results of the social economy is provision of high the model with the help of approximation coefficient, which
welfare of the population (Sharpe, 1999; Simakhova, 2017). made up 19 % in calculation, showed that the model is not
In turn, the welfare of the population can be estimated significant and reliable for further analysis and research.
through the dynamics of average monthly wages To compare the obtained results of dependence of average
(Karpuškiene, 2015; Quarter, Mook, Armstrong, 2009) and monthly wages on FDI for Ukraine, we will calculate the
through GDP per capita (Ilter, 2016; Simakhova, 2016; correlation-regression model of dependence of average
Harvie, Slater, Philp, 2009; Dipietro, Anoruo, 2006). wages on FDI for Poland as a country with transitive
In Ukraine, the dynamics of the FDI growth within 2005- economy and for such highly developed countries like
2016 coincides with an increase in average monthly wages Germany (with the corporative social model) and Great
(Table 3). Britain (with the liberal social model) (Esping-Andersen,
1990).
Table 3. FDI dynamics and average monthly wages in
Ukraine within 2005-2016. Тable 4. Dynamics of FDI and average monthly wages in
Direct Poland within 2005-2016
foreign Direct
investments, Average monthly foreign Average
mln UAH wages investments, monthly wages,
mln USD USD
2000 21040 230
2005 8207 812
2001 24460 311 2006 14576 841,1
2002 29160 376 2007 19855 987,3
2003 36210 462 2008 12279 1240,2
2004 48130 590 2009 10043 980,3
2010 12800 1124
2005 86480 806
2011 15925 1200,6
2006 109120 1041 2012 12424 1117,4
2007 149190 1351 2013 3625 1169,4
2008 187700 1806 2014 14269 1194,3
2015 13472 1021
2009 311800 1906
2016 11358 1012,8
2010 357664 2239 Source: Unctad World Investment Report, 2017; OECD,
2011 389962 2633 2018; State Statistics Service of Ukraine, 2017; State
2012 435209 3026 Statistics Service of Ukraine, 20014
2013 442374 3265
2014 677830 3480 According to the data of Table 4, FDI in Poland within
2015 789614 4195 2005-2016 had a variety of trends of development, the
growth was preceded by a decrease in volumes. Average
2016 903732 5183
monthly wages in Poland, with the exception of 2009, had a
tendency to grow.
Source: State Statistics Service of Ukraine, 2013; State The calculation of the correlation-regression model of
Statistics Service of Ukraine, 2017 dependence of average wages in Poland on FDI within
2005-2016. gave the following results:
The calculation of the correlation-regression model of The equation of dependence of average wages in
dependence of average monthly wages in Ukraine on FDI Germany on FDI takes the form:
within 2005-2016 gave the following results: Y= 0,078 X, (2)
The equations of dependence of average monthly wages

41
 where Y is the average wages in Poland; The equation of dependence of average wages in
X is the FDI in Poland. Germany on FDI takes the form:
R-square is 0.897 Y= 0.798 X (3)
Therefore, it is possible to observe the similar tendency of where Y is the average wages in Germany;
relationship of FDI in Poland with average monthly wages X is the FDI in Germany.
like in Ukraine with a high value of R-square for the R-square is 0.66
equation of dependence of average wages in Poland on FDI. Compared with Ukraine, a low value of R-square for the
However, approximation coefficient in the calculation equation of dependence of average wages in Germany on
appeared to be equal to 23.5%, which indicates FDI shows medium density of the indicators.
insignificance of the model. Approximation coefficient in the calculation appeared to be
We will consider the dependence of average wages on 49.6%, indicating insignificance and inaccuracy of the
FDI for highly developed European countries with social model.
models of economic development. As far as Great Britain is concerned, within 2005-2016,
the tendencies of development of foreign investment also
Table 5. Dynamics of FDI and average monthly wages in has a variable character.
Germany within 2005-2016
Direct Averag Table 6. Dynamics of FDI and average monthly wages in
foreign e annual Great Britain within 2005-2016
investments, wages,
mln USD USD Direct
2005 47421 41895 foreign
2006 55686 41865 investments, Average annual
mln USD wages, USD
2007 80227 41877
2008 8114 42150 2005 182894 4033,1
2009 23807 42280 2006 147396 4193,9
2010 65646 42502 2007 176864 4805,6
2011 67514 43054 2008 91798 4561,2
2009 89796 3930,4
2012 28181 43701
2010 58180 4003,5
2013 15573 44161
2011 42200 4200,4
2014 3954 44743
2012 55446 4209,5
2015 33312 45810
2016 9528 46389 2013 51676 4193,3
2014 44821 4456,9
Source: Unctad World Investment Report, 2017; OECD, 2015 33003 4216,6
2018; State Statistics Service of Ukraine, 2017; State 2016 253826 3854,3
Statistics Service of Ukraine, 2014
Source: Unctad World Investment Report, 2017; OECD,
According to the data of Table 5, it is possible to notice 2018; State Statistics Service of Ukraine, 2017; State
the differences in the trends of development of investment Statistics Service of Ukraine, 2014
activity and an increase in average wages. Thus, within
2005-2016, wages in Germany continually had a tendency The calculation of the correlation-regression model of
to increase and increased. As for the volume of FDI, they dependence of average wages in Great Britain on FDI
were increasing within 2005-2007, decreased in 2008, within 2005-2016 gave the following results:
increased in 2009-2011, decreased in 2012-2014, increased The equation of dependence of average wages in Great
in 2015 and decreased in 2016. Thus, in comparison with Britain on FDI takes the form:
Ukraine, where within 2005-2016 FDI increased, it Y= 0.028 X (4)
decreased in Germany over the same period. Therefore, we where Y is the average wages in Great Britain;
can preliminary conclude that in Germany, unlike Ukraine, X is the FDI in Great Britain.
FDI is not a significant factor that affects an increase in R-square is 0.68
wages in the country. A low value of R-square for the equation of dependence
The calculation of the correlation-regression model of of average monthly wages on FDI in the UK shows a
dependence of average wages in Germany on FDI within similar situation with Germany, where this value was 0.66.
2005-2016 gave the following results: Approximation coefficient during calculation also appeared

42
high and made up 50.5%, which indicates insignificance with the average monthly wages in Ukraine, it is possible to
and inaccuracy of the model. argue that FDI influences the social development of
Thus, the average monthly wages in Ukraine and Poland Ukraine, however, they are not a direct factor of influence
depends on FDI, but they are not the major and important on the social economy.
factor in formation of wages. As for the UK and Germany, As far as Poland is concerned, GDP per capita has
average wages in the countries with developed economies, been constantly increasing since 2006 (Table 8).
in spite of various models of social economy, do not
correlate with the FDI volume in a sufficient degree. Table 8. Dynamics of GDP per capita in Poland and FDI
We will verify the following hypothesis about the impact within 2005-2016
of FDI on the volume of GDP per capita for the above
countries. Direct
Within 2005-2016, GDP per capita in Ukraine as well as foreign GDP per
the volume of FDI constantly grew (Table 7). investments, capita,
USD, mln USD
Table 7. Dynamics of GDP per capita in Ukraine within 2005 8207 16054
2005-2016 2006 14576 14655
2007 19855 15656
Direct
2008 12279 16459
foreign
GDP per investments, 2009 10043 16707
capita, UAH UAH, mln 2010 12800 20076
2011 15925 21078
2005 9709 86480
2012 12424 21412
2006 11630 109120 2013 3625 21728
2007 15496 149190 2014 14269 22452
2008 20534 187700 2015 13472 23332
2009 19862 311800 2016 11358 23975
2010 24429 357664
Source: Unctad World Investment Report, 2017; OECD,
2011 29519 389962
2018; State Statistics Service of Ukraine, 2017; State
2012 32002 435209 Statistics Service of Ukraine, 2009
2013 33473 442374
2014 36904 677830 The calculation of the correlation-regression model of
2015 46413 789614 dependence of GDP per capita in Poland on FDI within
2005-2016 gave the following results:
2016 55848 903732
The equation of dependence of GDP per capita in Poland
on FDI has the following form:
Source: State Statistics Service of Ukraine, 2009;
Y=1.418Х, (6)
State Statistics Service of Ukraine, 2017
where Y is the GDP per capita in Poland;
Х is the FDI in Poland.
The calculation of the correlation-regression model
R-square is 0.872.
of dependence of GDP per capita in Ukraine on FDI within
A high value of R-square for the equation of dependence
2005-2016 gave the following results:
of GDP per capita in Poland on FDI shows high density of
The equation of dependence of GDP per capita in
indicators. Approximation coefficient in calculation
Ukraine on FDI has the following form:
appeared equal to 28.4%, which proves insignificance and
Y=0.064X (5)
inaccuracy of the model.
where Y is the GDP per capita in Ukraine;
As far as Germany is concerned, GDP per capita within
X is the FDI in Ukraine.
2005-2016 was constantly increasing (Table 9).
R-square is 0.976
A high value of R-square indicates that there is a
close relationship between GDP per capita in Ukraine and
FDI volume. However, verification of the adequacy of the
model using approximation coefficient, which in
calculation was 20.3%, showed that the model is valid and
reliable for further analysis and research. Like in the case

43
Тable 9. Dynamics of GDP per capita in Germany and FDI 2010 58180 39384
within 2005-2016 2011 42200 39646
2012 55446 39902
Direct
2013 51676 40410
foreign GDP per
investments, capita, 2014 44821 41334
USD, mln USD 2015 33003 41909
2005 47421 31366 2016 253826 42365
2006 55686 32397
Source: Unctad World Investment Report, 2017;
2007 80227 33237
OECD, 2018; State Statistics Service of Ukraine, 2017;
2008 8114 33714 State Statistics Service of Ukraine, 2009
2009 23807 32147
2010 65646 37072 Dependence of GDP per capita in Great Britain on FDI
2011 67514 38433 has the form:
2012 28181 38550 Y=0,249Х, (8)
2013 15573 38633 where У is the GDP per capita in Great Britain;
2014 3954 39086 Х is the FDI in Great Britain.
R-square is 0,66.
2015 33312 39416
A low value of R-square for the equation of dependence
2016 9528 39641 of GDP per capita in Great Britain on FDI, like in
Germany, shows medium density of indicators. A high
Source: Unctad World Investment Report, 2017; OECD, approximation coefficient of 51.1% indicates insignificance
2018; State Statistics Service of Ukraine, 2017; State and inaccuracy of the model.
Statistics Service of Ukraine, 2009 Thus, for Germany and Great Britain, as for countries
with highly developed economy, FDI do not affect the
The calculation of the correlation-regression model of volume of GDP per capita.
dependence of GDP per capita in Germany on FDI within It is possible to make a conclusion that FDI do not
2005-2016 gave the following results: influence directly the welfare of the population through
The equation of dependence of GDP per capita in formation of its high income, however, they have an
Germany on FDI has the following form indirect influence through creation of new jobs, promotion
Y=0,66Х, (7) of social stability in the country and other channels of
where Y is the GDP per capita in Germany; influence (Fig. 2).
Х is the FDI in Germany.
R-square is 0,65.
A low value of R-square for the equation of
Employment Social Gender
dependence of GDP per capita in Germany on FDI shows
medium density of indicators. Approximation coefficient in of population stabilization equality
calculation appeared to be 49%, which indicates
insignificance and inaccuracy of the model. A similar Influence of FDI on
situation also was revealed in the calculation of correlation- social economy
regression model of dependence of GDP per capita in Great
Britain on FDI within 2005-2016. Environmental High-quality Increasing
protection management income
Table 10. Dynamics of GDP per capita in Great Britain доходів
and FDI within 2005-2016. Fig. 2. Indirect influence of FDI on social economy
Direct Source: authors’ elaboration
foreign GDP per
investments, capita, A more significant impact of FDI on formation of the
USD, mln USD income of population can be noticed in the countries with
2005 182894 32724 transitive economies. Thus, FDI can act as a potential
2006 147396 33445 source of financing of the social sphere for countries with
2007 176864 34116 transitive economy. Moreover, development of directions in
terms of increasing the FDI inflow to the country is
2008 91798 33865
important in this respect.
2009 89796 32009

44
 Journal of Social Economics, 36 (1/2), pp.105-
In our opinion, the following potential measures 123, https://doi.org/10.1108/03068290910921226
can include: Kumar, A. B. (2012) Impact of Foreign Direct
- Improvement of the investment image and Investment, Trade Openness, Domestic Demand, and
attractiveness of countries for investors; Exchange Rate on the Export Performance of Bangladesh:
- Transparency of investment legislation; A VEC Approach, Economics Research International –
- Stimulation of investment activity of national Available at: http://dx.doi.org/10.1155/2012/463856
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www.oecd.org/investment/statistics
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46
Exploring the Importance and Satisfaction of the Key
Services in Gasoline Stations: A Study on Chinese
Petroleum and Chemical Corporation (CPC) and Formosa
Petrochemical Corporation (FPC)
Keng-Hsiang Cheng, Chinese Culture University, Taiwan
Oumarou Zougmore, Chinese Culture University, Taiwan

This study attempts to examine the core competence of monopoly on petroleum products until June 1996.
gas stations through the foremost energy enterprise in However, since January 1st 2002, the Separate
Taiwan, which is Chinese Petroleum and Chemical Customs Territory of Taiwan, Penghu, Kinmen and Matsu
Corporation (CPC). formally became the 144th Member of the WTO (WTO,
In order to build up CPC’ Management Opportunity 2017). Afterwards, the Ministry of Economic Affairs began
Grid (MOG), six major dimensions were identified and promoting the liberalization of the domestic oil market.
thirty-nine attributes items/service attributes were Thus, CPC began to face up new competitors. Li, Hsu and
developed and analyzed. Furthermore, a Competitive Lin (2004) conducted a study on the market liberalization in
Matrix (CM), based on the Simultaneous Importance- Taiwan’s petroleum refinery Industry in order to evaluate
Performance Analysis (SIPA), was established in order to the impact on Taiwan macro-economy. Chang (2011)
compare CPC and FPC competitiveness. We conducted a analyzed the structure of the oil market based on Taiwan
survey through a questionnaire among CPC's customers, government regulations and the behavior of Petroleum
particularly owners of cars and motorcycles in the northern firms. Wang (2009) also mentioned the great pressure of
part of Taiwan. The data gathered focuses on the price competition among Taiwan’s gas stations. All those
importance score and the degree of satisfaction of these studies revealed that the foremost energy enterprise in
groups of customers on the services of gas stations. Taiwan (CPC Corporation) has had to deal with several
Besides revealing the core competencies that gas new factors such as its competitors and customers'
stations could hold; our findings identified the top ten satisfactions, etc. To obtain a controllable and stable oil
service attributes that score high importance degree, yet supply, CPC has engaged in sole-risk operations with
low degree of satisfaction. foreign governments and cooperative explorations with
Therefore, our research concluded that CPC, by other state-owned petroleum companies or large
prioritizing these service attributes, could enhance its international oil companies. These exploratory operations
service quality and customer satisfaction as well as allow have continued for many years, covering the Americas, the
the firm's management to attain competitive advantage. Asia-Pacific region and Africa (CPC, 2015). Despite this,
how is CPC is perceived in the Taiwan oil supply market?
Are its customers satisfied with its services?
1. Introduction According to information provided on CPC’s website,
their vision for information management is focused on the
The energy industry is the totality of all of the customer – and hence on security, accuracy, user-
industries involved in the production and sale of energy, friendliness, convenience and universal access. Thus,
including fuel extraction, manufacturing, refining and realizing this vision and working towards strategic
distribution. Modern society consumes large amounts of operational targets and competitiveness in the market
fuel, and the energy industry is a crucial part of the requires integration of corporate information systems,
infrastructure and maintenance of society in almost all provision of timely management and decision-making
countries (Sherman, 2013). Nowadays, we are faced with information, integration of virtual and physical channels to
an overall serious energy problem. It appears almost certain expand the industrial value chain, establishing customer
that the oil industry was and is one of the most needed in relations management (CRM) systems and the promotion of
term of demands. Thus, excluding countries that produce knowledge management (CPC, 2015).
crude oil, energy enterprises are always found. In Taiwan, In addition, CPC, engaged in the exploration,
Chinese Petroleum and Chemical Corporation (CPC) had a production, refining, storage, transportation, and the sale of

47
oil and oil products in Taiwan. They have had to deal with most to achieving strategic outcomes. Consequently, core
many local competitors, especially Exxon Mobil competencies warrant an important place in the
Corporation, Formosa Plastics Corporation and Royal performance management process to ensure that the
Dutch Shell plc. workforce in held accountable for behavior as well as
Although many studies have been devoted to CPC results (University of California, Berkeley, 2012)
costumers’ satisfactions (劉永郎，2003) and many tools have Similarly, core competence implies the aggregate
been used to conduct these researches (伍靜雯，2011). This capabilities, technologies and/or knowledge of a company,
study differs from existing literature in many ways. Based which are unique to it and are acknowledged to its
on the importance of the services provided and the members. The core competence has led the company to
satisfaction of its customers, the approach of this study is to where it is and will lead it in the future with an adequate
compare CPC Corporation and its main opponents. A modification or with an addition of another competence
management opportunity grid (MOG) will be established (Lee, 1999)
and a competitive matrix will be developed. Furthermore, it Furthermore, Core competence is related to resource
is inferred that this information will allow CPC Corporation allocation, capabilities, knowledge, skills, and expertise
to improve its exploitation and activities. along with value chain. It needs three elements: skills,
This research aims to analyze the Taiwan oil market resources and processes (Torkkeli, Tuominen and Markku,
through a thorough examination of how CPC can increase 2002), and it is communication, involvement, and a deep
the quality of its services and respond to the needs of its commitment to working organizational boundaries
clients. This will increase the satisfaction of each client and (Franklin and Peter, 1996).
improve client loyalty. This study clearly defines a Therefore, Core competency thinking is a powerful and
management opportunity grid and competitive matrix in widely promoted approach to focus and mobilize an
order to assist CPC in its marketing thus helping this firm to organization's resources (Uysal, 2007). Hence, a core
increase its customers' satisfaction regarding each service competency is defined as an area of specialized expertise
provided and make an individual difference with its that is the result of harmonizing complex streams of
competitors. technology and work activity (Gallon, Mark, Harold,
The research attempts to explore the following: Stillman and Coates, 1995).
1. Examine the core competency and the key service Thus, regarding these few concepts of core competence
items fossil fuels companies are required to hold. (Prahalad and Hamel, 1990). Mwailu and Mercer (1983),
2. Understand whether currently CPC Corporation's Wesnerfelt (1984); Rumelt (1984), Penrose (1959) also
customers get great satisfaction from its services. inherited Resource-Based view; which they defined [as a
3. Lead to CPC Corporation's main competitor basis for the competitive advantage of a firm lies primarily
analysis, discuss the degree of awareness and the real in the application of a bundle of valuable tangible or
satisfaction that customers have regarding the services intangible resources at the firm's disposal. Then to extended
provided by the competitor of CPC Corporation. it concisely to core competence concept. Followed up the
4. Through MOG tool, concretely present how CPC same idea, Prahalad and Hamel (1990) suggested three
Corporation could improve and reinforce the priorities tests, which could be applied in order to identify core
order and recommendations of each service provided within competencies in a company. First, a core competence
a situation where resources are limited. provides potential access to a wide variety of markets.
5. Through CM management tool, analysis of the main Second, a core competence should make a significant
competitor, understand the difference between CPC contribution to the perceived customer benefits of the end
Corporation services and its competitors and concretely product. Finally, a core competence should be difficult for
present methods by which CPC Corporation can improve competitors to imitate. This difficulty will occur as a result
and reinforce its services items in order to surpass its of a complex harmonization of individual technologies that
competitors, within a situation where resources are limited. comprise the core competence, however it could be find as
This study attempts to answer the above questions and a more or less comprehensive pattern of internal
according to CPC's core competency. A sustainable coordination and learning.
framework of competitive advantage will be established, Thus, Prahalad and Hamel (1990) also mentioned
which can be used in the future. that not all competencies are relevant as core competencies,
since core competencies cannot be assets (or things) such as
2. Literature Review patents, brands, production facilities and raw materials.
However, asset management is a valid core competence.
2.1 Core competencies Prahalad and Hamel (1994) described core competences as
"...a bundle of skills and technologies...". Then induced
The core competencies are the specific three dimensions according to firms’ activities, which are
competencies that organizations identify as contributing market-access, product-integration and functionality.

48
Markides and Williamson (1994) define core competences
as a pool of experience, knowledge, and systems that Martilla and James (1977) formulated Importance-
together can act as catalysts that create and accumulate new Performance Analysis (IPA). Blake, Schrader and James
strategic assets. There are nearly as many definitions of the (1978) dubbed it to Action Grid Analysis (AGA). It is not
associated concepts as there are scholars in the strategy just an analysis methodology but is implicitly a theory of
domain. While this dilemma has been acknowledged by behavior. It was introduced as a way of understanding
scholars (Hafsi and Thomas, 2005). clients' needs and desires so as to make good management
Resources are the inputs into the organization’s value decisions about how to respond to them (Huan and
chain. Barney (1991) categorized resources into three Beanman, 2005). Thus, IPA examines two facets of
groups: physical resources such as plant, equipment, expectations in parallel: the importance and performance of
location and assets; human resources such as manpower, particular attributes (Hollenhorst, Olson and Fortney, 1992)
management team, training and experience; and and IPA identifies which product or service attributes a firm
organizational resources such as culture and reputation. should focus on to enhance customer satisfaction (Matzler,
Some resources are tangible and physical such as plant and Bailom, Hinterhuber, Renzl and Pichler, 2004). In other
equipment and others are intangible like brand name. words, The Importance-Performance Analysis conceptually
Each corporation has a bundle of resources, but not rests on multi-attribute models. The IPA technique
every firm can put its resources into best use. Companies identifies strengths and weaknesses by comparing the two
vary in how they leverage their resources. Capabilities refer criteria that consumers use in making a choice: the relative
to the corporation’s ability to exploit its resources. A importance of attributes and consumers’ evaluation of the
competency, the third level in the hierarchy, is a cross- offering in terms of those attributes (Chu and Choi, 2000).
functional integration and co-ordination of capabilities. Typically, data from customer satisfaction surveys or
Core competencies, the highest level in the hierarchy, cross service quality surveys (using SERVPERF model)
Strategic Business Unit (SBU) boundaries (Burns, 1986). (江國良，2003) with pre-consuming measurement of service
attribute importance are utilized to construct a two-
dimensioned matrix. In this matrix, service attribute
2.2 Conceptual definition of Customer satisfaction
importance is depicted along the Y-axis and service
attribute performance (satisfaction or service quality) is
Customer satisfaction is a key factor in formation of
depicted along the X-axis (Smith and Costello, 2009).
customer desires for future purchase (Mittal, 2001).
Service attribute importance is measured using some form
Furthermore, the satisfied customers will probably
of self-stated importance (e.g., rating scales, constant sum
communicate with others about their positive experiences
scales, etc.) or implicitly derived importance (e.g., multiple
(Mosahad, 2010). Several studies and scholars also defined
regression weights, structural equation modeling weights or
it closely.
partial correlation weights). The means of performance and
In the old past year, Hoppe (1930) and Lewin (1936)
importance, commonly utilized in practice, divide the
put forward a definition which states that satisfaction is a
matrix into four quadrants.
psychological state, that is the post-purchase evaluation of
Attributes located in Quadrant I (performance is low
experience of consumption. Satisfaction comes from the
and importance is high) require immediate attention for
comparison between expectations and perceptions.
improvement and are major weaknesses. The management
Aquilani, Serpico, Silvestri and Ruggieri (2014)
scheme for this quadrant is “concentrate here.”; Attributes
presented a perfect overview of the definition of customer
located in Quadrant II (both performance and importance
satisfaction since the first theoretical studies of (Hoppe,
are high) indicate opportunities for achieving or
1930) and (Lewin, 1936). Aquilani et al. (2014) also
maintaining competitive advantage and are major strengths.
mentioned that all of these definitions of satisfaction could
The management scheme for this quadrant is “keep up the
be classified in three different theoretical approaches: an
good work.”; Attributes in Quadrant III (performance and
emotional-cognitive response, a response related to a
importance are low) are minor weaknesses and do not
particular aspect and a response that occurs at a particular
require additional effort. The management scheme for this
time.
quadrant is “low priority.”; Attributes located in Quadrant
As mentioned earlier, all of these definitions are close
IV (performance is high and importance is low) indicate
and focus on some major terms such as product and/or
that business resources committed to these attributes would
service, need and expectation. This study is also based on
be overkill and should be deployed elsewhere. These
customer satisfaction through the service quality of CPC.
attributes are minor strengths. The management scheme for
Do their services meet customer needs and exceed customer
this quadrant is “possible overkill.”
expectations?
The inability to identify these attributes can
2.3 Management Opportunity Grid and threaten a firm’s place in the market and typically results in
Competitive Matrix analysis low consumer satisfaction.

49
 A variant of IPA is the Management Opportunity Corporation, compete with each other in this new idea of
Grid (MOG) (Chakravarity, Widdows and Feinberg, 1996). globalization where things change every single second, and
Similar to IPA, the MOG is also a four-quadrant grid, but it get a clear idea about how CPC Corporation(Taiwan)
uses each attribute's possible impact on loyalty as the perceive a given competitor through competitive advantage.
importance score on the vertical axis (Y-axis) and customer Thus, using a quantitative method allowed building a
satisfaction to represent the performance on the horizontal competitive matrix.
axis (X-axis). The four suggested strategies of the MOG The questionnaire designed for this study followed four
are; (1) doing well-maintain and monitor (high impact/ high crucial stages. The first stage consisted of meetings and
satisfaction); (2) high potential opportunity (high exchanges with the department responsible for the gas
impact/low satisfaction); (3) do something if you have time stations of CPC Corporation. We discussed their main
(low impact/low satisfaction); and (4) no problem (low services provided, particularly the automobile and
impact/ high satisfaction) (Bei and Shang, 2006). motorcycle owners. After these discussions, information on
However, the MOG model does not take into 45 major services provided to this group of customers was
account the performance relative to competitors. In collected. The second stage was devoted to gathering
addition, the competitive strategy was not clearly defined additional resources related to the oil market, core
and therefore, Burns (1986) has suggested a useful way of competence in petroleum industry and costumers
thinking about this by using the simultaneous importance- satisfaction. The third stage referred to some related
performance analysis (SIPA) and added "performance of academic documents and research content. The final stage
competitors" as the third dimension in order to take was devoted to a recapitulation of the important core
competitor related performance into consideration and competence services provided after comparing all of the
follow suggestions made by IPA on managerial decision- gathered data form expects in oil field.
making. The three (3) concepts in SIPA, which are The development of this questionnaire took four (4)
"attribute importance, company performance and months. The content is divided in four primary parts. The
competitor performance", are either in the high or low first part measures the degree of importance of the services
category. By taking the importance of the quality attributes provided by CPC and Formosa Petrochemical Corporation.
and the performance of the company and competitors, For each question, the five-point Likert-scale was used
quality attributes can be classified into eight (8) scenarios. from very unimportant to very important (1=very
Our study, after establishing the MOG of CPC, is based unimportant, 2=unimportant, 3=common, 4=important,
on (Burns, 1986)' SIPA model to analyze all of the key 5=very important). The second part of the questionnaire
services provided (service attribute) at its gas stations. The measures the degree of satisfaction for the overall services
attribute importance and the overall satisfaction of its provided by each company(CPC and Formosa
customers in order to distinguish the eight scenarios Petrochemical Corporation) using the five-point Likert
mentioned through the performance of these two companies scale, from very unsatisfied to very satisfied( 1=very
was simultaneously considered. Moreover, after unsatisfied, 2=unsatisfied, 3=common, 4=satisfied, 5=very
differentiating each scenario and having a clear-cut satisfied). The third part of our questionnaire seeks the
determination of their core competencies, a proposition of opinion of their customers (respondents) and the last part is
sustainable framework of competition strategy was made a brief summary of the respondent’s basic information.
regarding each scenario.
3.2 Data Collection
3. Research Methodology
3.1 Research Design Since quantitative research was being conducted
through the use of a questionnaire, and in order to meet the
The research method used is the research quantitative criteria of reliability and validity of our questionnaire, it
through a questionnaire. Since quantitative research was found necessary to conduct a pre-test by asking 10
attempts precise measurement of something, in business employees of the department responsible for gas stations to
research, quantitative research methodologies usually fill out a questionnaire during our second interview. Hence,
measure consumer behavior, knowledge, opinions, or 39 important and competitive items were identified.
attitudes (Donald R.Cooper, 2014). By choosing this The data has been gathered from many sources. Most
method of research, our choice was motivated by the extra of them have been extracted from special energy websites
huge data that we were faced up. Besides, we would like to such as Organization of the Petroleum Exporting Countries
have a better view of customers' satisfaction of these two (OPEC) and the ABI/INFORM Trade & Industry database.
local gas companies. In addition, information has been collected via special
The aim was to understand deeply how these two local reviews and statistical reviews of world energy. Some
firms, CPC Corporation and Formosa Petrochemical crucial information has been extracted specially from each
firm’s annual reports and magazines.

50
 Nevertheless, given the special character of our  Environmental facilities and security settings–by
research (i.e. a deep exploration of CPC's services and core environment facilities, we refers to external conditions
competence) each statement of our questionnaire could be or surroundings, where people work and means or
concretely answered either by CPC's or Formosa equipment facilitating the performance of the action in
Petrochemical Corporation's customers; however our focal the gas stations. Then, by security settings, this
firm is still CPC. Thus, our sample population is its research refers to something given or pledged to secure
customers, particularly, automobile and motorcycle owners. the fulfilment of a promise or obligation.
The research was focused on the northern part of Through several exchanges and discussions with
Taiwan, especially in Taipei and New Taipei City, where CPC’s sales office and the staff of gas station, 39 major
we have randomly chosen ten (10) gas stations to conduct items/ service attributes were determined. Which allow
our survey. In average, thirty customers from each gas developing the final step of our questionnaire design and
station were willing to answer the survey. In total, over the measurement of gasoline stations’ dimensions of core
three hundred (300) questionnaires were distributed to competencies. The Appendix A shows the major items of
customers in three months (2016/04-2016/06). gasoline stations in CPC and FPC’s gas stations.
3.3 Items of the measurement of the core competence
4. Results
Here some primary variables and items concerning gas
4.1 Descriptive statistics and Sample characteristics
stations services core competence will be explained and
listed. The related information on core competence has
For our research, a written questionnaire survey was
been gathered, not only, by referring to local academic and
distributed at 10 gasoline stations in Taipei and New Taipei
research papers (吳冠杰，2009) as basic source, but also
City. In addition, we went to one Car Wash and valeting in
diverse interviews with some experts and scholars.
the Xinzhuang district. In addition, the students of Chinese
Therefore, in order to achieve accurate results, in
Culture University's and Taxi drivers filled out almost 60
addition to the definition of the core competence in the
questionnaires. Finally, due to the aspect of impartiality,
Chapter 2, the operating philosophy of CPC was also
some respondents were chosen randomly in the street in
considered. Six(6) major dimensions were determined,
order to get accurate answers for both companies i.e. CPC
which are "reliable", "cordial", "efficiency", "innovation",
and Formosa Corporation.
"rational pricing" and then Environmental facilities and
We distributed 300 questionnaires from April 2016 to
security settings.
June 2016 and 279 were returned completed. Only 267
 Reliable—is the ability to perform the promised service questionnaires were usable, bringing the respondent rate to
dependably and accurately (Parasuraman, Zeithaml, 89%.
and Berry, 1988). We used Microsoft Excel 2013 and SPSS statistical
 Cordial—here also refers to empathy, which software to analyze the collected data. As the results show,
Parasuraman et al. (1988) defines as caring, most of the customers refuel at least once per week,
individualized attention the firm provides its representing 44.6% of the respondents. Over a quarter of
customers. the customers have been using CPC's services for over 10
 Efficiency—is the ability to avoid wasting materials, years, that being 28.1%. Only 13.5% of respondents refuel
energy, efforts, money, and time in doing something or at Formosa gas stations. However, those customers who
in producing a desired result. In a more general sense, have been using those two gasoline companies up to 6
it is the ability to do things well, successfully, and months, Formosa gas station comes in front of CPC with
without waste (Robinson, Lakso, and Ren, 1991) 22.8% against 5.6% of the respondents. Therefore, Formosa
(Wikipedia, 2017). gas stations are making new customers and CPC has been
 Innovation—this term can be defined as something keeping some loyal clients at the same period. Regarding
original and more effective and, as a consequence, the gender of the respondents, 63.3% of them were male.
new, that "breaks into" the market or society Then regarding the respondent age between 18 to 24 years
(Frankelius, 2009). old scored higher than the overall, i.e. 52.8%, follow by
 Rational pricing—in our case, is defined as rational those age between 35 to 54 years old with 19.9%.
decisions and thoughts based on reason rather than on Based on the education level of the respondents, those
emotion, regarding the rate pricing of firm’s services. with Bachelor's degrees scored higher (54.3%) than the
The definition is definitely different with the financial overall and regarding the occupation of the respondents,
theory of rational pricing, which defines as a theory 48.3% are students while specialists, managers and
that contends that the market prices of assets will employees scored respectively 16.1% and 22.1%. Finally,
represent the arbitrage-free pricing level for those respondents who earned less than 240.000 New Taiwan
assets (Investopedia, 2017). Dollars per year scored higher than the overall average.

51
4.2 CPC's MOG (Both, automobile and Motorcycle)

Based on our previous mention of the chosen dimensions

Quadrant I: “Concentrate here” that we have made, we can classify them into reliable,
This quadrant is the most important because it is where cordial and rational pricing. These three major dimensions
customers perceive an importance of services provided. refer to CPC’s core competency. Customers feel that the
Unfortunately, they are dissatisfied about the same category speed and attitudes of employees’ reactions, towards
of services. Therefore, for the management of these customers’ complaints and suggestions, are quite slow,
attributes, CPC has room for improvement. These attributes making most of them dissatisfied. During our questionnaire
included: distribution, we had particularly noticed the fact that there
4. The speed and attitude of reactions of employees was a lack of employees in some gas stations as well as a
towards customer’s complaints and suggestions long process of request treatment by the hierarchy of CPC.
8. Staff is very active and take initiatives; they are able In addition, employees are busy to serve customers without
to warn and provide concrete suggestions (employees use really focusing their mind on customers. Finally, as already
proper protocols such as turning off car engine while mentioned, oil price is still a matter for all categories of
refueling etc.) respondents.
29. Reasonable price of oil

Quadrant II “Keep up the good work”

This second quadrant captured attributes with high importance and high satisfaction. Our findings show that the
following attributes are located in

1. Company’s integrity and its reliability cause people (customers) to feel confident.
2. In order to be able to solve problems, employees should have oil related professional knowledge
3. The speed and attitude of reaction in unforeseen circumstances
6. Customers feel safe about the gas station (Safety issues such as fire “conflagration” or traffic flow)
7. Customers feel respected by gas station attendant’s warm and polite
10. Gas station provides washrooms for automobile and motorbike owners
14. There are more gasoline stations throughout the country. (gas stations density)
15. Gas station offers an easy and simple serving procedure (rapid process of payment, changing points to lagniappes)
16. Reduction of time waiting for services (flexibility of the waiting line)
17. 24/7 Operation, convenience of refueling any time.
 22. Station increases the number of self-service equipment for customers who are in a hurry therefore enhancing
convenience.
27. Method of payment, using easy card, stored-value card, one card, happycash, credit card, refuel vouchers, check, and
money transfer.
32. Enjoy membership card, VIP card preferential prices.
33. Clear indications of entrance and exit
34. Clarity of the gas station’s signs and description, easy to find a fuel (oil) pump
35. Location of the gas station
36. Environment of the gas station is in order and shipshape
38. Gas station is equipped with safety equipment (fire extinguisher, monitor, security system).

In this quadrant, attributes [10. Gas station provides washrooms for automobile and motorbike owners.] is obviously the
one which received the highest degree of satisfaction and importance, showing that the third group of research population is
very satisfied with the performance of CPC in that field. In other terms, the mean of attributes 10, which is (4.0441, 4.4853),
compared with the global mean of attributes (3.7255, 4.0939) shows a high gap which is relatively good.
However, attribute [32. Enjoy membership card, VIP card preferential prices.], referring to our graph, is nearly located
on the abscissa line. Thus, CPC has to keep improving the said service. Our findings also show that this group of customers
uses every service provided by CPC’s gas stations the most and could be willing to subscribe for membership or VIP cards,
preferential prices as well as use simple maintenance services. Therefore, CPC has to use that great opportunity. Finally, for
this quadrant “keep up the good work”, some attributes located in have the same degree of satisfaction, but in terms of
importance, automobilists and motorcyclists appreciate these attributes items differently. Those are1: 「1>34」,「13<22」,
「17<6」, 「27<33<7」

Quadrant III : “Low priority”

Attributes located in this third quadrant are those with low degree of importance and meanwhile customers are less
satisfied about the said attributes. In our study, this quadrant captured:

5. Participation in public benefit activities (For instance, showing care for disadvantaged social groups)
9. Service staff actively promote new developing businesses and activities
12. Gas station has WI-FI for its customers, allowing customers to use internet and access online information at any time.
18. Gas station supplies innovative service method, and integrates domestic industries. (ex: honey, household care
products)
19. Station offers customized service based on the individual station in order to fulfil customers’ requirements.
20. Station provides a convenient and fast network platform for consulting, communication and interaction.
21. Station Sells items for cars (auto parts and accessories store)
23. Stations have installed automatic engine oil services pumps in public places (parking lots, department stores).
24. Stations have provided Gogoro engine battery changing services.
25. Stations provide adding water to the radiator and tire inflation services
26. E-tag stored-value system
28. The station is equipped with a vacuum oil extractor.
30. Car wash and valeting services
31. Parking lots
37. Provide Automated Teller Machine (ATM) services.
39. A public telephone is provided.

In this quadrant, we have noticed that attribute [12. Gas station has WI-FI for its customers, allowing customers to use
internet and access online information at any time.], recorded the lowest degree of importance as well as the lowest
satisfaction degree regarding respondents’ views. It is easily to understand the majority of the respondents’ views because
people who live in the northern parts of Taiwan usually have data plans on their phones and do not rely on public
connections.
Our findings show interesting results for attributes [23. Stations have installed automatic engine oil services pumps in
public places (parking lots, department stores).], [37. Provide Automated Teller Machine (ATM) services.], which got the

1
Comparison obtained based on their mean and position on the graph.

53
same degree of importance and satisfaction (3.5882, 3.9265). Most of our respondents think that it will be more convenient
for customers to use these services if they are available and near to them.
Finally, in this quadrant, it also appeared that some attributes have the same degree of satisfaction, but with different
degrees of importance. Which are: 「20<28」, 「12<19」, 「24<31<9」.

Quadrant IV “Possible overkill”

As defined previously, attributes located into this quadrant show that customer satisfaction is high, but for the same
group of customers, the importance of services provided is low. This quadrant captured two attributes:
[11. Gas station has a convenience store, which can be helpful for car owners to purchase essential paraphernalia],
[13. Gas station provides total services such as glasses washing, polishing and simple maintenance of cars.]
Customers who use cars and motorcycles are very satisfied about these two attributes but do not place much importance
on them. This might be a result of the fact that in some areas CPC’s shops do not provide the items or products they need. In
addition, it is rare to encounter a situation where employees help customers to wash clients’ car glasses.

4.3. FPC's MOG (Both, automobile and Motorcycle)

Quadrant I: “Concentrate here”

Service attributes located in this quadrant are important in regards to customers’ perception of FPC; meanwhile they do
not find satisfaction concerning these service attributes. This quadrant captured:
27. Method of payment, using easy card, stored-value card, one card, happy cash, credit card, refuel vouchers, check, and
money transfer.
29. Reasonable price of oil
As mentioned earlier in the MOG of Motorcyclists Error! Reference source not found., the respondents who own car and
motorcycle as engine are also unsatisfied with the performance of FPC in delivery of these service attributes. Therefore, FPC
has a room for improvement for these same services attributes.

54
Quadrant II : « Keep up the good work »
This quadrant captured attributes with high degree of importance and high degree of satisfaction; which are:

1. Company’s integrity and its reliability cause people (customers) to feel confident.
2. In order to be able to solve problems, employees should have oil related professional knowledge
3. The speed and attitude of reaction in unforeseen circumstances
4. The speed and attitude of reactions of employees towards customer’s complaints and suggestions
6. Customers feel safe about the gas station (Safety issues such as fire “conflagration” or traffic flow)
7. Customers feel respected by gas station attendant’s warm and polite
8. Staff is very active and take initiative; they are able to warn and provide concrete suggestions (employees use proper
protocol such as turning off car engine while refueling etc.)
10. Gas station provides washrooms for automobile and motorbike owners
14. There are more gasoline stations throughout the country. (Gas stations density)
15. Gas station offers an easy and simple serving procedure (rapid process of payment, changing points to lagniappes)
16. Reduction of time waiting for services (flexibility of the waiting line)
17. 24/7 Operation, convenience of refueling any time.
22. Station increases the number of self-service equipment for customers who are in a hurry therefore enhancing
convenience.
32. Enjoy membership card, VIP card preferential prices
33. Clear indications of entrance and exit
34. Clarity of the gas station’s signs and description, easy to find a fuel (oil) pump
35. Location of the gas station
36. Environment of the gas station is in order and shipshape
38. Gas station is equipped with safety equipment (fire extinguisher, monitor, security

Our research showed that service attribute [10. Gas station provides washrooms for automobile and motorbike owners]
scored the highest degree of importance and the highest degree of satisfaction. As CPC’s MOG of Automobilists and
motorcyclists, FPC’s MOG for this category of customers had the same attention for this service attribute. Both firms could
innovate and offer cleaner washrooms to their customers.
Our research also found out that several service attributes in this quadrant scored the same degree of satisfaction. By
grouping, we got this: (1; 8), (2; 4; 14), (7; 34), (22; 35).

Quadrant III: “Low priority”

This quadrant captured service attributes with low degree of importance and low degree of satisfaction.

11. Gas station has a convenience store, which can be helpful for car owners to purchase essential paraphernalia.
12. Gas station has WI-FI for its customers, allowing customers to use internet and access online information at any time
18. Gas station supplies innovative service method, and integrates domestic industries. (eg: honey, household care
products)
19. Station offers customized service based on the individual station in order to fulfil customers’ requirements.
20. Station provides a convenient and fast network platform for consulting, communication and interaction.
21. Station Sells items for cars (auto parts and accessories store)
23. Stations have installed automatic engine oil services pumps in public places (parking lots, department stores).
24. Stations have provided Gogoro engine battery changing services
25. Stations provide adding water to the radiator and tire inflation services
26. E-tag stored-value system.
28. The station is equipped with a vacuum oil extractor.
31. Parking lots
37. Provide Automated Teller Machine (ATM) services.
39. A public telephone is provided.

55
 This third quadrant also registers service attributes that scored similar ratings. By grouping these service attributes, we
got (20, 23, 24), (18, 19), (26,37) scored the same degree of satisfaction, respectively (3.0441), (3.1324), (31912).
Besides, service attribute [12. Gas stations has Wi-Fi for its customers, allowing customers to use internet and access
online information at any time] scored lowest, this is quite easy to explain. Basically, Customers of gas stations find this
service attribute less important as well as les vital, because they do not usually stay longer than five(5) minutes while filling
their tanks; except those come in the station for simple maintenance and washing of their cars and motorcycles. Therefore,
FPC has the choice to inject fewer resources regarding the improvement of this service.
Quadrant IV : « Possible overkill »
Customers perceive service attributes located in this quadrant as unimportant service attributes, but they are highly
satisfied with the performance of FPC. This fourth quadrant captured three service attributes:
5. Participation in public benefit activities (For instance, showing care for disadvantaged social groups)
9. Service staff actively promote new developing businesses and activities
30. Car wash and valeting services
Service attributes 5. & 9. well-nigh scored the same degree of satisfaction and almost the same degree of importance
(3.2206, 3.9265)/ (3.2206, 3.9118). Although these two attributes fell into the same quadrant, they do not belong to the same
dimension; reliability and cordiality. Therefore, theoretically speaking, FPC could invest less effort in this aspect.

4.4 Competitive Matrix (CM) Analysis of CPC and FPC

To build the Competitive matrix, this research used the cut-off point of the degree of importance, 4.0464 the global
average (mean) of the service attributes, which are also known as key services of both companies. Besides, 3.6245 and
3.1438 were considered respectively as CPC and FPC key service’s global average of the degree of satisfaction.
The empirical result is represented through Error! Reference source not found., in which eight (8) scenarios of market
opportunity were determined and the corresponding competitive strategic analysis of each scenario/area.

Table 1. Competitive Matrix (CM) of CPC and FPC

Degree of
Attribute Competitive Strategy
Satisfaction
Importance

Services Attributes
CPC FPC
Objective
Performa Performa Simultaneous Result
Data
nce nce

6; 10; 3; 38; 16; 17;

Good (1)Head-to-Head Competition 35; 4; 14;33; 1; 7; 34;
Good
36; 15; 27; 22; 2
High
Poor (2)Competitive Advantage 25
Good (3)Competitive Disadvantage 8
Poor
Poor (4)Neglected Opportunity 29
Good (5) False Competition Nil
Good
Poor (6) False Advantage Nil
Good (7) False Alarm 32; 30; 5
Low
13; 26; 37; 11; 31; 23;
Poor
Poor (8) Null opportunity 24; 9;20; 39; 28; 19;
12; 18; 21

56
 (1)Head to head competition (High, Good, Good): The achieve customer satisfaction with its service performance
importance of this service attribute is high and company and gain an advantage in this aspect.
performance is equal to its competitor, meaning the (5)False competition (Low, Good, Good): Although the
company should at least maintain strategies (Lee and Hsieh, company and competitors have positive evaluations from
2011). customers, the attitude does not affect purchasing decisions
We further learned that CPC in many aspects performs (Lee and Hsieh, 2011).
better than FPC. Especially for service attributes like [10. That is to say, service attributes located in this area,
Gas stations provide washrooms for automobile and based on customers’ perceptions, are those service
motorbike owners] and [6. Customers feel safe about the attributes with low degree of importance but scored high
gas station (Safety issues such as fire “Conflagration” or degree of satisfaction. Furthermore, even CPC & FPC do
traffic flow)]. The degree of satisfaction is significant and not invest much effort in these service attributes; it could
higher than FPC’s In terms of location, CPC’s gas stations always get positive reactions from its customers for this
are spread all around Taiwan. In any gas station, a category of service attributes. Error! Reference source not
washroom is a likely fit out and employees work diligently found. shows that both firms are using their resources
to keep them clean. efficiently because no service attribute dropped into.
(2)Competitive advantage (High, Good, Poor): The (6)False advantage (Low, Good, Poor): Though the
importance of the service attributes is high and the company performs better, the importance of the service
company performs better than its competitor does, and attribute is low. This implies the company might be placing
successfully differentiating the company from others in the too much effort or resources into this attribute (Lee and
market (Lee and Hsieh, 2011). Hsieh, 2011).
Besides, service attributes of the core competencies of Our research shows that no service attribute is
CPC located in this area reveal that CPC is performing considered as false advantage item. Therefore, we conclude
better than FPC. For service attributes [25. Gas stations that customers degree of perception is low in this case,
provide adding water to the radiator and tire inflation meanwhile CPC performance is higher the global average,
services], it is obvious that customers, who do some simple which is not the case with FPC.
maintenance in CPC gas stations, are quite satisfied with (7)False alarm (Low, Poor, Good): Though the
this service attribute. FPC should therefore work to enhance competitor performs better than the company does, this
its services in this field. does not affect customer brand preference or purchases
(3)Competitive disadvantage (High, Poor, Good): The (Lee and Hsieh, 2011).
importance of this service attribute is high, but the company Basically, service attributes located in this area do not
is inferior to its competitor, which is a drawback and it affect CPC brand awareness. These service attributes are
requires improvement. [32. Enjoy membership card, VIP card preferential
CPC has to pay more attention to the cordiality of its prices.], [30. Car wash and valeting services] and [5.
employees because FPC takes advantage of this field. CPC Participation in public benefit activities (For instance,
should not neglect service attribute [8. Staff is very active showing care for disadvantaged social groups)].
and take initiative; they are able to warn and provide (8)Null opportunity (Low, Poor, Poor): Even though
concrete suggestions (employees use proper protocol such the company and competitors, both deliver adequate quality
as turning off car engine while refueling etc.)]. services from the standpoint of customers, service attributes
Nowadays, customers expect more regarding the located in this area do not affect competition.
employees of gas stations’ attitudes. If CPC wants to win In other words, services located in this area scored a
customers loyalty, gas managers have to take in low degree of importance as well as CPC and FPC degree
consideration the active attitude of its employees. of satisfaction. Several service attributes are located into.
(4)Neglected opportunity (High, Poor, Poor): The
importance of this service attribute is high, but neither the 5. Conclusion
company nor its competitor meets the satisfaction level
expected by customers (Lee and Hsieh, 2011). 5.1 Research Finding
Service attribute in this area is [29. Reasonable price of The purpose of this study was first to examine the core
oil]. Although the pricing of the other services attributes in competency and the key attribute items fossil fuels
its core competence are perceived by customers as rational, companies require to hold in its gasoline stations. In
automobilists and motorcyclists are not satisfied with the addition, the purpose was also to analyze the Taiwan oil
pricing of gasoline in these two main local petroleum market through a thorough examination of how CPC can
companies; which is an opportunity for both to take over increase the quality of its services and respond to the needs
the opponent. of its clients. More specifically, this study was clearly
Therefore, if CPC or FPC can implement effective designed to define an MOG and Competitive Matrix
quality planning and improvements in this field, it can
towards each group of customers for CPC gas stations. This "efficiency", "innovation", "rational pricing", and
section gradually answered our research problems. "environmental facilities and security settings". After
Our research, based on customers' perception, analyzing, our findings have shown the following attribute
identified six major dimensions and third-nine service items/ services provided as the ten (10) top attribute items.
attributes. The dimensions include: "reliable", "cordial",
Table 2. Top 10 service attributes of importance.
Importance Core
Rank Attributes Items
score competency dimensions
6. Customers feel safe about the gas station (Safety 4.4869 Reliable
1
issues such as fire “conflagration” or traffic flow)
29. Reasonable price of oil 4.4569 Rational pricing
2
10. Gas station provides washrooms for automobile 4.4457 Cordial
3
and motorbike owners
3. The speed and attitude of reaction in unforeseen 4.4382 Reliable
4
circumstances
38. Gas station is equipped with safety equipment (fire 4.4195 Environment facilities and security setting
5
extinguisher, monitor, security system).
16. Reduction of time waiting for services (flexibility 4.4157 Efficiency
6
of the waiting line)
7 17. 24/7 Operation, convenience of refueling any time. 4.3521 Efficiency
8 35. Location of the gas station 4.3408 Environment facilities and security setting
4. The speed and attitude of reactions of employees 4.3296 Reliable
9
towards customer’s complaints and suggestions
14. There are more gasoline stations throughout the 4.3296 Efficiency
10
country. (gas stations density)

Referring to Error! Reference source not found., our Thirdly, [Cordial] dimension also registers one (1)
analysis reveals that gas stations core competencies can be service attribute. Gas stations, by providing [10…
summarized and classified as follows: Reliable, Rational washrooms for automobile and motorbike owners] increase
pricing, Cordiality, Environment facilities & security customers’ degree of satisfaction, somehow. Therefore, Gas
settings, and Efficiency. The results show that customers stations should invest more efforts on this related service,
care more about some basic aspects such as safety and because dirty and smelly washrooms could disrepute the
speed of reactions of the gasoline companies. This is likely image of the gas stations, which could affect the brand of
different from the core values/ competencies mentioned and the gasoline company.
orderly ranked by CPC on its website, which are Integrity, Fourthly, [Environment facilities and security settings]
Innovation, Talent development, Safety, Security, Caring have two (2) service attributes; [38. Gas station is equipped
for the environment, and Social responsibility (CPC, 2017). with safety equipment (fire extinguisher, monitor, security
By summary, [Reliable] dimension registers three (3) system)] and [35. Location of the gas station]. Customers
services attributes. The very first one is [6. Customers feel expect convenience and security from gas stations. Thus,
safe about the gas station (Safety issues such as fire gas stations should consider the exits and entrances, the
“conflagration” or traffic flow)]. Gas stations that are able refueling lines, as well as the position and visibility of signs
to make customers feel safe, enhance and improve the and nameplates. Customers perceive all these aspects and
image that customers have regarding the gasoline company details as crucial.
indeed. Besides, [3. The speed and attitude of reaction in Lastly, [Efficiency] dimension has three (3) service
unforeseen circumstances] and [4. The speed and attitude of attributes: [16. Reduction of time waiting for services
reactions of employees towards customer’s complaints and (flexibility of the waiting line)], [17. 24/7 Operation,
suggestions] can have significant impact on customers’ convenience of refueling any time], and [14. There are
satisfaction, perception, and loyalty. more gasoline stations throughout the country (gas stations
Secondly, [Rational Pricing] dimension has one (1) density).]. Reducing the time of waiting by increasing the
service attributes and it is relative to the [29. The number of employees during pick-times could solve the
reasonable price of oil] at pump. Gas stations should long waiting time, which is a net gain in terms of customer
consider again their offer rate of pricing to its customers. satisfaction. In addition, operating 24/7 and having more
gasoline stations throughout the country reduces the painful

58
time of searching for the nearest gas station. The more gas particular aspect” and “response that occurs at a particular
stations are available and close to customers, the more time”. Besides, following previous study on gas stations in
customers are satisfied. Taiwan, which were mostly focused on customers’
Exception, our research shows that customers of gas satisfaction (汪澄仁，2009) (Chen, 2013) (Yang, 2010).
stations do not see the [Innovation] dimension of the core Moreover, this study used the Management
competencies as important dimension as scholars Opportunity Grid (MOG) tool (Chakravarity, Widdows and
mentioned. Even Innovation is seen as important factor in a Feinberg, 1996) probing the degree of importance and the
firm survivor and could help organizations to defeat degree of satisfaction that customers perceive regarding gas
competition and win new customers (Urbancová, 2013). stations’ services provided. Then considering the influence
Schumpeter (1942) pointed out the fundamental role that that CPC itself and its opponents/ competitors’ core
innovation plays for the survival of firms competing in the competency have on customers’ satisfaction. After
market. However, customers of gas stations expect more analyzing the data, an overall comparison between the two
about the Reliability, Cordiality, Rational pricing, companies helped us to suggest feasible and concrete plans.
Environment facilities & security and the efficiency of gas Finally, we established a competitive matrix (Burns,
stations. Our research suggests that CPC and FPC take in 1986), where eight (8) scenarios are determined, and
consideration these aspects, moreover some crucial aspects corresponding suggestions and directives are mentioned in
such as the speed of reaction, the cordial attitude while order to improve CPC and its opponent market strategies.
innovating its products and services. Innovation is not only
costly for a firm; it could also be insignificant for customers
when a firm do not focus on its core competencies.
7. Practical implications
Therefore, gasoline companies should focus on the above
five most important core competencies. Wu (2009)’s study showed that, by strengthening and
focusing on its employees training, gas stations could
5.2 Theoretical and practical implications enhance its customer’s satisfaction and create customers
loyalty in a long-term period. Our research has confirmed it
6. Theoretical implications and it is primordial that CPC & FPC reconsider this aspect
in the politic of management. Besides, a good
communication and a frequency of contact with customers
This study focused on customers’ perception on gas could enhance customers’ satisfaction. CPC always faces
stations’ services provided and identified the core high customers’ complaint requests; for instance the exit
competencies and key services attributes, then discussed the and entrance lines, oil prices, oil quality, speed of reactions,
degree of importance and the degree of satisfaction. As a attitude while serving customers and so on. Therefore, the
result of resources-based concepts, MOG tool, and CM company should develop its marketing communication,
model; as well as through our literature review and after which could arouse customer to develop positive attitude
analysis of the data gathered. We put forward concrete and toward its gas stations services.
substantial dimensions of competitive advantage, which For automobilists who usually use parking lots,
every gasoline company could possess in order to hold a washing services and simple maintenance services…a
competitive position in the oil market. reduction of waiting time is an aspect that all gas stations
Therefore, we specifically determined the core should pay close attention.
competencies of the gas stations based on resource-based In addition, gas station customers are expecting more
view (Wesnerfelt, 1984) and the Core Competence of the about the conveniency of payment’s methods. 34.1% of our
Corporation (Prahalad and Hamel, 1990). Those scholars respondents find important and 44.9% of them think that it
mentioned and suggested a test to be applied in order to is very important that gas stations offer to customers other
identify core competency in a company. Then, Barney options of payment. Therefore, our research recommend
(1991) categorized resources into three groups, (physical that CPC and FPC should introduce [mobile technologies at
resources, human resources, and organizational resources). the pump] online payment by using their smartphone.
Then finally, a questionnaire was designed with questions Furthermore, by having some ATM services in its gas
that represent the key attribute items of gas stations, which stations, it would allow customers to withdraw cashes for
is in line with the scientific methodology. minor purchases or in case of lack of cash on them to pay
Secondly, previous researches also focused on their fuel’s bills or fuel fares.
customers’ satisfaction. The most specific definition was Moreover, regarding to the reasonable price of oil; like
mentioned by Aquilani et al. (2014), hence showed a cigarettes, alcohol it is essential to mention that oil price is
perfect overview of customers’ satisfaction definition. They also subject to government regulations. In this field, FPC
mentioned that customers’ satisfaction definition could be has a great policy. The oil prices in affiliate stations and
classified in three different theoretical approaches, which wholesale price of oil are likely the same, thus getting in
are “emotional-cognitive response”, “response related to a

59
advance on CPC, even with its status of public company. consideration foreign firms existing in the oil field,
Unfortunately, several factors still influence the perception especially their own country’s firms.
of the customer regarding the oil pricing in FPC such as the
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 Proceedings of
Plenary Session II

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The Role of HR in Responding to Terrorist Threat:
A Systemic Approach
Benjamin Bader, Leuphana University of Lüneburg, Lüneburg, Germany
Carol Reade, San José State University, San José, CA, USA

In this Extended Abstract, we introduce our systemic Lee, 2012) typically in developing and emerging
approach for the role of HR in responding to terrorist economies.
threat. The level of terrorism is an important consideration for
MNCs and their employees. Objective measures of
Research on terrorism and violent conflict, despite still terrorism levels take into account frequency of terrorist
a small field, is increasingly gaining momentum (e.g., incident, number of people killed or injured, and amount of
Bader, 2015; Bader, Berg, & Holtbrügge, 2015; Reade, property damaged. Countries with high levels of terrorism
2009; Czinkota, Knight, Liesch, & Steen, 2010; Harvey, thus refer to those with a relatively high frequency of
Dabic, Kiessling, Maley, & Moeller, 2017). A number of terrorist incidents, number of civilian casualties, and/or
research studies have been published in recent years dealing amount of terrorism-induced property damage (IEP, 2017).
with the implications of terrorism for HRM-related issues These differentiations on terrorism are necessary to
(e.g., Bader, Froese, & Reade, 2017; Bader & Berg, 2013; delineate our framework. To further delineate our systemic
2014; Bader & Schuster, 2015; Beutell, O’Hare, Schneer, & approach we include categories of the people in MNCs who
Alstete, 2017; Paulus & Mühlfeld, 2017; Reade & Lee, are affected.
2012; 2016). These studies have mostly been at the
individual level, utilizing different theoretical perspectives MNC Employees Affected
such as stress theory, social identity theory, and social
support theory. The HR function of the MNC has a global,
However, there is no comprehensive theoretical organization-wide responsibility for staffing. While there
approach at the organizational level relevant to HRM. In are currently many different types of international
our article, we address this shortcoming by examining assignments (Collings & Isichean, 2017), we consider for
extant literature on the influence of terrorism on HRM- the purpose of our systematization two main categories of
related issues and introducing an MNC organization-wide employees: expatriates and local employees. These
systemic approach for HR response to terrorism as a basis categories include parent country nationals (PCNs), third
for theory development. country nationals (TCNs), and host country nationals
(HCNs). All are crucial for the effective management of the
Characteristics of Terrorism MNC’s HR function (McNulty & De Cieri, 2011).
Regarding the staffing of a given subsidiary, for example,
Terrorism can be defined as “the threatened or actual an MNC needs to decide on the mix of local employees
use of illegal force and violence by a non-state actor to (HCNs), people from its home country (PCNs), or those
attain a political, economic, religious or social goal through from other units in the global network (TCNs). We know
fear, coercion, or intimidation” (Global Terrorism Index from previous research that employee and HR response to
[GTI], 2016: 8). This definition takes into consideration terrorism may be different for expatriates compared to local
both the physical act of terrorism as well as the employees (Reade & Lee, 2012). Therefore, since PCNs
psychological impact on people and society that is highly and TCNs are generally considered to be expatriates, we
relevant for individual and HR responses to terrorism. categorize PCNs and TCNs together as expatriates, and
We differentiate between dimensions and levels of categorize HCNs as local employees.
terrorism. The dimensions are international and domestic
terrorism. International terrorism generally targets Western Terrorism-Response Grid
businesses and persons, whether located outside or inside
their home country, while domestic terrorism accompanies Based on this systematization, we derive a two by two
various forms of ongoing sociopolitical violence, armed matrix, clustering the respective HR responses to terrorist
conflict or civil war (Hironaka, 2005; IEP, 2016; Reade & threat. On the x-axis, we differentiate between the

65
dimension of terrorism, i.e., domestic versus international. Journal of International Management, 21(1), 63–77.
On the y-axis, we differentiate between the MNC Beutell, N. J., O’Hare, M. M., Schneer, J. A., &
employees affected, i.e., local employees versus expatriates. Alstete, J. W. (2017). Coping with fear of and exposure to
All four fields are additionally affected by the level of terrorism among expatriates. International Journal of
terrorism. Environmental Research and Public Health, 14(7), 808-
This allows us to derive four different, generic HR 821.
terrorism response strategies. The purely domestic response Collings, D. G., & Isichei, M. (2017). The shifting
is appropriate when the dimension of terrorism is domestic boundaries of global staffing: Integrating global talent
and only local employees are affected. A coordinated management, alternative forms of international assignments
domestic response should be chosen when domestic and non-employees into the discussion. International
terrorism affects expatriates. A coordinated global response Journal of Human Resource Management. Online first.
is appropriate when international terrorism affects local Czinkota, M. R., Knight, G. A., Liesch, P. W., & Steen,
employees. And finally, a global response is required when J. (2010). Terrorism and International Business: A Research
international terrorism affects expatriates. Agenda. Journal of International Business Studies 41(5),
826–43.
Conclusion Harvey, M. G., Dabic, M., Kiessling, T., Maley, J., &
Moeller, M. (2017). Engaging in duty of care: Towards a
Our model integrates and extends several perspectives terrorism preparedness plan. International Journal of
on how terrorism research has been conducted in IB and Human Resource Management, online first.
HR research. Doing so, we demonstrate how a variety of Hironaka, A. (2005). Neverending Wars: The
theoretical angles can be woven into a unifying framework International Community, Weak States, and the
at the organizational level. We consider this the foundation Perpetuation of Civil War, Cambridge, MA: Harvard
of an HR terrorism-response theory that awaits empirical University Press.
testing. The four generic strategies of our model can be Institute for Economics and Peace [IEP]. (2016).
considered a guideline for MNCs to reconsider their Global Terrorism Index. Sydney, New York, and Oxford.
terrorism-preparedness plans. Institute for Economics and Peace [IEP]. (2017).
Global Terrorism Index. Sydney, New York, and Oxford.
McNulty, Y., & De Cieri, H. (2011). Global mobility in
References the 21st Century: Conceptualising expatriate return on
investment in global firms. Management International
Bader, A. K., Reade, C., & Froese, F. J. (2017). Review, 51(6), 897–919.
Terrorism and expatriate withdrawal cognitions: The Paulus, P., & Mühlfeld, K. (2017). Host country
differential role of perceived work and non-work language skills and expatriates’ cross-cultural adjustment in
constraints. International Journal of Human Resource the presence of fear of terror. Journal of Global Mobility,
Management, online first. 5(4), 418–442.
Bader, B. (2015). The power of support in high-risk Pinto, L. F., Bader, B., & Schuster, T. (2017).
countries: Compensation and social support as antecedents Dangerous settings and risky international assignments.
of expatriate work attitudes. International Journal of Journal of Global Mobility, 5(4), 342-347.
Human Resource Management, 26(13), 1712–1736. Reade, C. (2009). Human resource management
Bader, B., & Berg, N. (2014). The influence of implications of terrorist threats to firms in the supply chain.
terrorism on expatriate performance: A conceptual International Journal of Physical Distribution & Logistics
approach. International Journal of Human Resource Management, 39(6), 469–485.
Management, 25(3–4), 539–557. Reade, C., & Lee, H.-J. (2012). Organizational
Bader, B., & Berg, N. (2013). An empirical commitment in time of war: Assessing the impact and
investigation of terrorism-induced stress on expatriate attenuation of employee sensitivity to ethnopolitical
attitudes and performance. Journal of International conflict. Journal of International Management, 18(1), 85–
Management, 19(3), 163–175. 101.
Bader, B., Berg, N., & Holtbrügge, D. (2015). Reade, C., & Lee, H-J. (2016). Does ethnic conflict
Expatriate performance in terrorism-endangered countries: impede or enable employee innovation behavior? The
The role of family and organizational support. International alchemic role of collaborative conflict management.
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analysis in Afghanistan, India, Pakistan, and Saudi Arabia.

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Europe’s Multimorphosis and Glocal Political Risk Analysis
Heinrich Matthee, Hanze University of Applied Sciences, Netherlands

landscape (Eidelson, 1997; Miller & Page 2007) and

Turbulent local, regional and international politics seascape. Landscape is used here as a metaphor for the
pose challenges to European firms and their political risk relatively more structured and iterative processes and
management. In Europe, a process of multimorphosis is environment that co-constitute European actors and in
underway, with divergent trajectories between different which they participate. Seascape is used as a metaphor for
regions and a re-selection of elites and institutions. Outside those processes and environments that are more fluid and
Europe, a triad of identity politics, resource politics and fickle, showing some patterns but presently beyond the
geopolitics in Asia, the Middle East and Africa is control of or domestication by European actors.
manifesting in assertive political actors, economic and European business will be shaped by multimorphosis in
cultural protectionism, and weak property rights. Political Europe and multipolarity in the international system.
risk analysts for business will have to recalibrate their Multimorphosis was already visible before the UK’s Brexit
frameworks, giving attention to country-level risks but also referendum, and the new relations between the U.S. and a
tracing the diverse glocal forces and complex systems more powerful Asia will change Europe’s position. The
shaping regional and global interactions. political economies of a more assertive Russian-dominated
region, the turbulent Middle East and North Africa
(MENA), and those of Europe are envisaged here as a
Introduction constellation of co-evolving complex adaptive systems.
Felin and others criticize the limits of a landscape
European business is sailing in turbulent international metaphor in evolutionary economics, which assumes a
seascapes. A process of multimorphosis and divergent search for a knowable list of opportunities. “Not only do we
trajectories in eastern, southern and western Europe is not know what will happen, we typically do not know what
underway, while Britain’s exit from the EU or Brexit has can happen” (Felin, Kaufman, Kolle & Longo, 2014, p. 12).
further weakened underperforming EU institutions. Europe There are sets of still-empty possibilities that may be
is also co-evolving with turbulent regional systems and turned, within enabling constraints, into value propositions
assertive actors on its southern and eastern flanks. European by entrepreneurship and innovation. Assuming this is the
business will continue to be active outside of Europe due to case, it is proposed here that for European business, the
its export-focused economies, some limits to its own metaphor of an emergent seascape interacting with a
market, value chains, and the resources and markets it landscape would be sufficient to encompass this different
wants and needs. However, the continued high and often focus. This paper will discuss dimensions of the emergent
increasing impact of local, national, regional, and seascape.
international politics on European business may also
demand recalibrated frameworks of political risk
management.
Europe trapped on local fitness peaks?
Current EU institutions have now stumbled or failed in
Multimorphosis and multipolarity short succession, regarding four major issues. One issue has
been the Euro crisis since 2008, alongside the related
This paper proposes that trends and events in Europe Greece crisis, with Portugal, Spain and Italy still presenting
point to a strong process of what could be termed potential flashpoints. The recession brought forward by
multimorphosis (Matthee 2014). Sociopolitical decades the point to 2030 when the health, pension and
multimorphosis is seen as a new reality in Europe with an education costs of the baby boomer generation will become
impact on economies: institutional contestation, iteration unsupportable (Kaletsky, 2010). Previously successful
and imperfect self-replication, partial slowdowns and adaptations have possibly trapped many European Union
breakdowns, selection and non-linear self-organization, member states on local fitness peaks from which the higher
emerging forces and bifurcation, trial and error. peaks are not directly accessible (Davenport, Leibold &
They are attempts to provide new chances to achieve Voelpel, 2007).
higher levels of fitness in the emerging and interactive Two foreign policy crises have indicated the limits to

67
European policy responses, cohesion and power: what was and higher taxation of financial transactions (Hix, 2016).
known as the Arab Spring, which led to major instabilities
in Libya, Syria, and Europe’s southern neighborhood, as An EU of different speeds
well as Russia’s activities since 2014 in Ukraine and in
Europe’s eastern neighborhood. In past years, and The combined activities of European Union member
especially in 2015, several national governments and EU states make the dynamics of innovation increasingly
institutions were also largely unable to achieve policy complex. Pockets of stability remain. However, uneven
objectives and maintain EU rules regarding external political support for the EU institutions will continue.
frontiers, internal freedom of movement and migration in Brexit also represents a qualitative change in the nature of
the face of unprecedented flows of asylum-seekers, EU membership. Other countries with preferences that are
refugees, and economic migrants (Matthee, 2015; De Wijk, too divergent to be easily accommodated might more
2016). readily consider opting out of the core of European
Another issue has been the growing mistrust of integration, instead preferring membership in the European
electorates of EU and media institutions, reflected in results Economic Area or a free trade agreement.
of referendums and elections of the European Parliament Since 2008, there has been a renewed emphasis in
(Mudde, 2012). This state of affairs partly reflects the shift member states on subsidiarity and regaining more decision-
from the EU’s initial focus on breaking down internal making competences from the EU institutions. Most
market barriers toward also emphasizing a more hegemonic demands relate to more competences for the governments
Europe-wide harmonization of rules. Although incremental of states (Schmidt and Wood, 2017). Member state
change has pushed the system toward possible bifurcation competences will remain especially important in the EU.
at the critical point of issues, a slight majority of British This will also be true for energy policy, which remains
voters chose to support the Brexit option. The EU closely allied to foreign and security policy. Internal energy
institutions, whose limited responsiveness to UK concerns path dependencies, forces, and interactions in the EU are
and proposals for more subsidiarity also played a role, not aligned and are not likely to be aligned well soon
thereby lost a member that constituted its second largest (European Parliament, 2017). When renewables form an
economic power and its largest military power (Jensen and important source of European countries’ energy,
Snaith, 2016). geopolitical interdependencies may then shrink to the size
of the grid that connects producer, transit, and consumer
Post-Brexit recalibration countries. One implication would be that countries with
certain capacities would become more influential, changing
As a result of the UK’s withdrawal, the EU itself has the patterns of influence and power in Europe. For example,
been confirmed as a limited middle power. The EU’s better-placed countries would be those with considerable
impact on foreign policy in the UN will also decrease, and storage capability, high reserve capacity, the ability to
its global economic, political and military influence will be produce renewable electricity at times of high demand, or
diminished. EU institutions will retain capabilities that are large interconnector capacity that allows the balancing of
not negligible, but they will have to reduce their ambitions outputs of different areas (Scholten and Bosman, 2016).
and rhetorical claims (Hobolt, 2016). However, there are also continuing demands for more
Brexit, combined with other events like the increased competences and even autonomy for nations within
economic and nationalist protectionism under President plurinational states. There are an estimated 87 cultural
Trump in the U.S. and pressures from Europe’s southern groups in greater Europe, of which 33 dominate nation
and eastern flanks, will be one milestone on the way to a re- states. The remaining 54 differ in their efforts to pursue
selection of political elites, institutions, and dominant claims regarding language rights and non-territorial cultural
discourses in Europe. It will sometimes entail emergent councils (Pan and Pfeil, 2006; Smith, 2014). The expansion
novelties that political and economic actors may use for of impersonal markets and associated norms and discourses
innovation and entrepeneurship. Often, however, these at the expense of other forms of integration in southern and
novelties will force companies to give more attention and eastern Europe are often seen as forms of material and
resources to political risk management. symbolic dispossession (Hann and Hart, 2011). Different
Pushing for trade liberalization was one of Britain’s socio-economic trajectories in southern, eastern and
main contributions to the EU, and the Brexit event could northwestern Europe persist.
increase the strength of potentially protectionist member Continued autonomy campaigns, sometimes also
states. Brexit would also alter the European Parliament’s involving disputes about resource transfers within a
party landscape and ideological composition. Possible country, are visible in Catalonia, Scotland and northern
policy implications would therefore affect an increased Italy, and to some extent, in Flanders, too. In the case of
regulatory burden on EU businesses, weaker copyright Catalonia, it has resulted in a political crisis which the
protection in the EU, a stronger push for tax harmonization, Spanish government tried to resolve since 2017 by resorting

68
to legalistic, re-centralizing and sometimes strong-arm include some cities, such as the virtual city-states of greater
tactics. As a result, Catalonian trust in the relatively young Paris and London. Regions such as Bavaria, Catalonia,
tradition of rule of law in modern Spain has been damaged Flanders, South Tyrol, and northern Italy are also among
and the crisis has not been resolved.(Martinovich, 2017) these actors. Also included are mega-regions such as the
While Catalonia as a brand has become established, for Italian one from Milan through Rome to Turin and the
better or worse, indigenous business and European cross-national one spanning Amsterdam-Rotterdam-Ruhr-
multinationals in Catalonia continue to be affected. Cologne, Brussels-Antwerp and Lille, and northwestern,
Many coordination issues will reinforce the value of southern, and eastern European political-cultural axes
the EU institutions. They range from moderating potentially (Florida, Gulden & Melander, 2008). European cities with
clashing group and state interests to ensuring a single historical and locational advantages and specializations will
market and dealing with transnational challenges. However, also become more prominent in international commercial
after Brexit, the above forces and different levels of diplomacy.
competences reinforce an EU of different poles and speeds.
New combinations of individualist, communitarian, Populist forces and political re-selection
cosmopolitan, and environmentalist ideas and actors will
arise and shape business contexts. A realignment within political elites, bureaucracies,
and electorates is underway in Europe. Assertive actors and
Cities as sociopolitical sites diverse pressures from outside Europe, in a world where
Europe’s influence is past its apex, are reinforcing this
Failed and failing cities outside Europe will constitute process of re-selection among political elites, institutions,
a key driver of future change, in addition to reinforcing and dominant discourses. Anti-establishment or populist
migrant streams to Europe. Technological developments parties with economic, national, or cultural protectionist
will allow migrants to maintain close links with their home demands are also among the drivers of this realignment.
communities and to transfer issues from the home country Their growth indicates that segments of the electorate have
into the host country (Heinsohn, 2003; Rinke & Schwägerl, lost their trust in the responsiveness of mainstream parties
2012). Some of them will be economically successful in to their concerns and the adequacy of mainstream
Europe, with resulting social tensions, informal economies, frameworks to give meaning to their experiences or to
transnational dimensions and sometimes violent ensure appropriate policies (Albertazzi and McDonnell,
interactions with others who may not be as successful. 2015; Inglehart and Norris, 2016).
European cities rather than nation states may also become In many countries of Europe, the higher support for
new sites of migrant identity. these opposition forces means that the political options of
This situation is reshaping the local environment of centrist mainstream parties have shrunk. Coalitions with
European business, generating costs and benefits, as well as more parties are necessary in proportional systems, and
new market segments, rules of the game, and models of co- sometimes, such coalitions or policy choices will become
existence. Market re-segmentation, for example, Islamic stuck unless there is some form of accommodation with
consumerism and age, gender or family lifestyles, boycotts anti-establishment parties. In addition, smaller political
and buycotts related to MENA causes, competitiveness to niche entrepreneurs can enter or grow in proportional
become accepted partners, and brand development, will systems, reinforcing fragmentation and policy complexity.
become part of the abovementioned processes in Europe Many mainstream parties in Germany, Austria,
(Boubekeur, 2012). Denmark, the Netherlands, the pre-Brexit UK, and France
Social ecosystems between some cities and smaller have shifted to incorporate some of the views and potential
towns and more distant regions may diverge more. constituencies of the anti-establishment parties (Balfour,
Persistent poverty, neglected constituencies in post- 2016). Even if the anti-establishment parties gain influence
industrial heartlands, youth unemployment, concerns of the and occasional power, the complexity of socio-economic
elderly, and an internally diverse underclass in many cities challenges will often be beyond their current reach. Various
will be features in the future, too (Reinecke, 2015; Börsch- backlashes by incumbent political actors and iterations of
Supan, 2015). A decreasing sense of security and control dominant discourses may also occur. Nevertheless, the total
over events, sometimes more mediatized than real, is likely effect has been one of a partially transformed metapolitics
too. Architecture and spatial planning focused on optimal and politics, in which challenges to the status quo are more
combinations of status, connectivity and quality of life, likely.
security, and perhaps greater self-sufficiency will become
in demand among higher-income groups. Europe’s southern and eastern flanks
A positive feature for European business is that smaller
emergent actors of various kinds pursuing their own fitness Conducting international business in diverse socio-
peaks constitute a new economic reality in Europe. They

69
political regions and countries has always been challenging. sanctions, has opened up new opportunities to European
One hundred years ago, European actors constituted a much business, actively supported by many European national
larger and powerful component of the world population and and regional governments. However, remaining and
world economy. In the case of commercial or related possible re-imposed U.S. sanctions by the Trump
political disputes with non-European actors, certain rules of government and also non-complementary business systems
the game and incentives operated, negotiations often in Iran have already slowed down the process and could
occurred from a position of relative strength, and the forms even close the current window of opportunity for European
and costs of compliance differed. multinationals. (Motevalli, 2017). Even such a development
Today, Europe’s relative global power has weakened would not necessarily affect the increased opportunities for
and is weakening further. There are key dependencies on smaller European businesses absent from U.S. markets and
outside actors regarding energy and rare minerals (De able to gain finance.
Ridder, 2013). At the same time, major parts of European The interactive triad of identity politics, national
countries and societies still have competitive advantages politics, and geopolitics will continue to shape the southern
that will carry-over. Co-evolution in the new environment and eastern flanks of Europe. Already, different
will occur. Under certain circumstances, Europe’s relative frameworks of identity politics are emerging or dominant in
position in some sectors may turn out to be competitive or Russia, the Visegrad countries and perhaps Austria. The
allow for creative forms of coopetition. decline or re-emergence of Russia as a regional power will
Socio-political disruption of polities and the crumbling be an important driver of change in Europe’s eastern
regional order in the Middle East and North Africa neighbourhood, and in the western Balkans, Central Asia,
(MENA) is reshaping the context of European business and the South Caucasus. If Russia eventually declines
there. The authoritarian bargains in many MENA countries, demographically and economically, the emerging vacuum
consisting of governments providing services and may persuade eastern European alliances to adopt a more
government jobs for quiescence by citizens and assertive policy to the east (Friedman, 2010). The balance
communities, have eroded. New socio-political orders are of power in Europe may in time move slightly eastwards,
in formation, sometimes violently. Population growth and with eastern Europe relying on U.S. support and becoming
insecurities regarding water, food, and jobs are exhausting more important as the demographic weaknesses of
bloated bureaucracies and budgets and will continue to fuel Germany and France have effect.
instability (Cammack, Dunne, Hamzawy, Lynch, Muasher,
Sayigh, & Yahya, 2017). In some areas, new social Contesting frameworks of political
contracts with local actors will be required to gain or keep a
license to operate. risk analysis
The contagious impact of regional instability was The metapolitical and political contests between
already visible during the Arab, Amazigh, and Kurdish Europe’s actors will also reshape risk management
rebellions in the region since 2011. The close intertwining paradigms and their specialized companies. The existing
of economics and politics and the strong involvement of the worldviews of bigger European business actors are highly
political and military apparatus in the economy will path-dependent. They are rooted in symbolic discourses and
continue to shape the environment and options of European socio-political settlements that became dominant during
business. However, these systems do not operate in the previous eras with specific characteristics: largely stable bi-
same way. Partiality in the distribution of rent income, polarity or uni-polarity in the international sphere,
rising bureaucratic brokerage, and institutionalised Atlanticist alliances, discourses about universal and
interpersonal modes of access differ (Redman, 2014). This disembodied liberal capitalism, relative regional peace and
state of affairs will increase the complexity for European economic prosperity, and expanding institutions at the EU
business and occasionally, its opportunities. Meanwhile, the level.
growth of anti-Israeli statements and boycott campaigns in Dominant discourses can act to “protect” a political
Europe signal a trend that will constitute new challenges to order from the inputs of external reality. However, this
some European businesses (World Council of Churches, internal model is a truly effective mechanism only if the
2016). learned preferences and constructed intentions allow actors
Iran will constitute one relatively stable regime in the and institutions to execute appropriate responses as the
region. However, different US and EU interests and environment changes (Witt, 2013). An interactive triad of
projection power will continue to affect European business identity politics, national politics and geopolitics within and
in Iran. The Joint Comprehensive Plan of Action (JCPOA) outside Europe – as well as chance events and policy
nuclear accord between Iran, the EU, Germany and five responses - have exposed the partial adaptation and blind
permanent members of the UN Security Council in 2015, spots of dominant west European discourses. In the past
and the resulting termination of UN and some EU few years, many policy analysts and media pundits,

70
particularly in western Europe, have regularly made wrong Islamic, and African and Latin American cosmopolitanisms
assessments on EU abilities to influence the Arab Spring or will become more prominent among new middle classes
the Eurozone crisis, migration pressures, an assertive outside Europe. These actors will also generate business
Russia and Turkey, Islamist terrorism, and urban discourses and practices that will recast the international
underclasses. Their record has included a marked order to the advantage of actors outside Europe.
underestimation of the victories of the Brexit camp and the Innovations by European business firms will be subject to
Trump presidential campaign (Jennings and Wright, 2016), different selective mechanisms in diverse landscapes
as well as direct or indirect populist successes in Austria, (Hölzl, 2005), including techno-nationalism or techno
Germany, France and the Netherlands. identity politics. In such cases, research and innovation are
Dislocation events, structural changes and learning by driven by sentiments and ambitions to service the greater
key actors mean that many of these frameworks have now good, already visible in great powers such as China, Russia,
lost the ability to give meaning to new experiences or to India, Iran, and other countries (Cunha, 2015). It will also
comply with criteria of adaptation (Glynos and Howarth, shape strategic competition by economic, security and
2007). A contestation of dominant frameworks of analysis political actors, the willingness to infringe on intellectual
and related institutional struggles will mark European and other property rights, and policies ranging from
academia and media in the next decade. Many major industrial espionage to selective protectionism.
companies providing political risk management services are Even before the Trump presidency and its assertive
rooted in certain class and urban constellations in Britain, protectionist statements in the U.S., the WTO noticed a rise
the US or France. Their dominant paradigms may clash or in protectionism among G20 members (World Trade
result in tense interactions with the paradigms of important Organization, 2016). The turn towards more protectionism
SME clients or even smaller providers of political risk is likely to be visible in European government policies and
management in different countries of Europe. Based on the reshape economic priorities and investment, entrepreneurial
recent record, political risk analysts need to give renewed and consumer behavior, and market actors and incentive
attention to their frameworks’ ability to assess accurately, systems.
to generate fruitful options or to assist actors sufficiently in
instituting appropriate measures. Europe’s public and private security
New frameworks - also in the internal models of
policy-makers and risk analysts - are emerging around five sector
interactive themes: security, socio-economic systems,
identity politics, civil rights, and a new period in European business will, in any case, experience the
geopolitics. The view of globalization as an inevitable strong influence of both government and non-state political
process of borderless and disembodied capitalism will actors on their business operations in Asia, Latin America,
possibly be of little use to European business in the next the MENA countries, and Africa. European business will
decade. Glocalization will often be a better framework of face the risk of becoming targets of more or less
analysis and predictor of trends. Here, the term is more sophisticated forms of scapegoating and extortion if the
widely redefined as the shaping of political economies by political authorities do not perform or experience popular
global connections and interests but also by very particular pressure (Oprach, 2012).
local sociopolitical forces and formations. European business operating internationally will have a
changing and weaker security umbrella. Brexit has
reinforced this trend and Russia’s growing influence in the
Emerging new frameworks Middle East has underlined the limits of the security
umbrella. These developments may create not only new
Elements of the dominant frameworks will undergo redundancies but also new incentives for innovation in the
iterations and will also change as a result of new European defense industries. These industries will remain
sociopolitical constellations and chance events. Time-bound largely national in character, but industry interdependence
learning processes will also form a part thereof (North between the UK, France and Germany will continue. The
1990). New frameworks dealing with international business renegotiation of the pro-Atlanticist political and economic
need to give attention to cooperation and interdependence relationships between European states and the U.S will be
but also to economic protectionism, competition, and important.
coopetition. They may re-emphasize the embodied forces, Growing and new actors and market segments related
sociopolitical formations, and glocal dimensions shaping to diverse private security goods and services will be
connectivity involved in sea lanes, energy pipelines, important, as well as in cybersecurity. Private security
railway tracks, airports, internet cables, tunnels, and various providers will in some contexts also become part of their
chokepoints of global supply chains, rather than the too government’s foreign policy projects, or even of those of
disembodied versions discussed in Khanna (2016). other governments. Major Western providers of political
More particularist but also internally contested, Asian,

71
risk management services are servicing major Chinese management. Involvement with one faction may also
companies in Africa, the Middle East and in China itself. preclude opportunities linked to another faction or losses
New rules of the game are already emerging. after political struggles. Competitors from other powers
An important and related new economic reality is that with different frameworks and fewer scruples or strings
the international and regional rules of the game are attached to operations may win out.
changing on the seas, in the air, and less noticeable, in outer
space. The change in the maritime order is especially Diverse property regimes and political
significant for the export-oriented economies of Europe, for
whom secure and open sea lanes are important. The risks
potential security guarantor role of the U.S. navy will be
more important for European business, but less self-evident. European business will continue to encounter different
Russia has also shifted to a more assertive naval posture, so business discourses and property regimes in different parts
that the Eastern Mediterranean again is a contested area. of the world. Property rules are universally significant in
When European powers perceive that international restraining and shaping production and consumption (Hann
commerce is under threat, they may delegate the protection and Hart, 2011). Franz von Benda-Beckman refers to a
function to internationally sanctioned maritime coalitions or property regime, which is constituted by four factors. One
to private security firms (De Nevers, 2015). The increased factor comprises cultural or ideological discourses, which
importance of navies and the maritime sector for those contain the ideals of a person and collectivity, imposing a
European countries that have one will be a new economic reality check on hyper-commodification. Another factor is
reality. political and legal regulation, a plurality of registers, which
specify forms in which it can be kept, ownership and
entitlement. Social relations and the way land use are tied to
The impact of political authorities forms of kinship, which constitute the third factor. The
fourth factor encompasses practices that change or reinforce
A process of institutional selection and variation in the other three factors. Incentives are aligned between the
countries and regions outside Europe will shape and exercise of the means or ownership of production and
constrain the international reach of European state models performance (Hann, 2005)
and European business (Lange, 2017). It will also challenge European business will periodically encounter
European business schools and thinkers to renew their authorities worldwide that weaken their self-defined
approaches in preparing business for new political property rights and reshape the relational contracts of
economic realities. property regimes. This will occur in sectors ranging from
One of the important effector tools encompass state- agriculture and construction to energy and mining. Since
linked corporations or privately-owned national corporate 1990, over 75 emerging economy governments have
champions, well-positioned as potential competitors of nationalized foreign investments or have been sued for
European business. For example, in many states worldwide, unlawfully devaluing foreign holdings (Wellhausen, 2011).
states or state-linked corporations dominate the energy In several non-OECD countries, a form of “double
sector, whether in oil, gas, or renewable energies. These movement” is constituting a new economic reality. The
companies often form part of the government’s foreign scope of property is continuously modified, both from
policy and operate in accordance with both strategic and above, through the regulations of states and other
economic imperatives. More than 80% of the world’s oil authorities, and from below, through the actions of citizens,
and gas reserves are now controlled by national energy consumers, and communities. (Bremmer and Keat, 2009).
companies (Bremmer, 2010). However, especially outside The presence of non-European guarantors in other
the OECD countries, this dynamic is often also visible in regions may encourage actors in these regions to
other sectors, such as banking, infrastructure, electricity, renegotiate or break previous commitments, both economic
telecommunications, aviation, shipping, and the space and political. The non-renewal of bilateral trade treaties
sector. with some European states by the government in South
In many locales in Africa, Asia, Latin America and the Africa, while retaining those treaties with Russia and China,
Middle East, different political actors, sources of is one example. As the political and business leaders of
legitimacy, claims and understandings of public authority, many emerging powers see that the power gap between
and resources co-exist in multiple spaces of authority within them and European powers narrow, some will be even more
the public sphere. Diffused authority or the mediated state motivated to turn the balance of power in their favor or to
may be some terms to express this reality (Menkhaus, 2008; gain politically-useful benefits. European business will
Boege, 2009). For European business, it remains often have to contend with higher risks that politicians will try to
challenging to identify or correctly assess the meaning of avoid opposition or gain support from important power
informal political shifts and to reconfigure their stakeholder bases by rewriting the terms of a deal. This will not only be

72
the case outside Europe. Spain retroactively reduced and Roy, O. (eds.) Whatever Happened to the Islamists?
subsidies for solar power producers, and Norway changed Salafis, Heavy Metal Muslims and the Lure of Consumerist
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State Capture, Political Risks and International Business:
Evidence from Ukraine under Yanukovych*
Hannes Meissner, Competence Centre for Black Sea Region Studies, University of Applied Sciences
BFI Vienna, Austria
Johannes Leitner, Competence Centre for Black Sea Region Studies, University of Applied Sciences
BFI Vienna, Austria

* Conference Paper – Work in Progress – Do not Quote

Merging approaches from Political Science and state capture (in the post-Soviet space). The empirical part
International Business Studies, this paper develops an focuses on their impact on European enterprises in Ukraine
innovative approach to political risk factors connected to under Yanukovych, and their coping strategies.

Introduction
Ideally, states provide security for doing business by a reveals, state capture as a source of political risks has not
legal-institutional framework, enterprises can rely on. State yet been systematically operationalised.
institutions work in a legal-rational, predictable and In the search for an approach leading to a deeper
effective manner. Relations between officials and private understanding of political risks associated with state
actors are formal and impersonal. In the OECD-area, this is capture, this paper draws on the political science concept of
a constellation often taken for granted. In many countries “neopatrimonialism”. The concept delivers insights into
worldwide, however, the reality looks different. Private how specific factors of political risks are embedded in a
actors seize public institutions and processes to realize their political system. This focus has not yet gained much
particularistic interests of accumulating power and private attention in the literature on neopatrimonialism. Research
wealth. For this purpose, they systematically “abuse, side- has so far dealt with political and, to a substantially lesser
step, ignore or even tailor” formal institutions to their own degree, with economic consequences of this specific mode
needs in order to accumulate power and ever more wealth of organisation. International business aspects, however,
(Amundsen, 1999, p. 3). Such forms of “state capture” are have been widely neglected. In international business
associated with weak state institutions, legal uncertainty, studies, the concept of neopatrimonialism has not been
rampant corruption and the detrimental behaviour of ruling considered likewise. The lack of related studies is first of all
elites, fostering their own business interests (“favouritism”) due to a general lack of interdisciplinary approaches
while harming independent enterprises. These are specific between political science and business studies.
“political risks”, international businesses are confronted From the empirical point of view, this paper focuses on
with, when operating in affected countries. political risk factors to European businesses, along with
There is a lack of clarity about the term “political risk” coping strategies which they developed under the rule of
as such. In international business studies, there is no Yanukovych. According to Fisun (2003), the characteristic
universally accepted definition, let alone any universal features of the system Yanukovych were the ‘wide strata of
concept of political risks. However, despite the neopatrimonial rent-seeking actors, acting together with/or
heterogeneity, there is at least a shared notion of political in place of governmental institutions via clientelistic
risk. Drawing on a literature review, Leitner (2017) defines networks of patronage and pork barrel rewards’, as well as
Political Risks as “any occurrence in the international a high level of competition. Fisun therefore characterises
business context where public actions or non-state actors the system as ‘oligarchic neopatrimonialism’ (Fisun, 2003,
that are active in the host country of the international p. 6; cf. also Franke et al., 2009, p. 80). However, the
activities interfere with private international businesses and system was not only dominated by oligarchs, as regional
adversely impact the performance of the international politicians of networks, entrepreneurs and ‘wealthy
operation.” (Leitner, 2017, p. 29) As Leitner (2017) further businesspeople’ all turned out to be major players as well

77
(cf. Pleines 2012, p. 128). The central broker in the whole well studied, the general environment in particular often
configuration is the president. He maintains ‘a system of remains underexposed, even though it subsumes two key
personal ties, (…) based first and foremost on regional (…) factors which can have a tremendous impact on the
unity, as well as on present-day rent-seeking interests.’ He business, namely the political and institutional framework
maintains power by capturing state resources and of a market (Lawton & Rajwani, 2015; Grosse, 2011). This
redistributing them to his own clientelistic network (Fisun, non-market environment describes all those influencing
2012, p. 3). Menon and Rumer (2015) provide an in-depth variables not subsumed in an economic context, ie. that do
analysis of the inner workings of this system under not follow market logic, but instead find themselves in a
Yanukovych, including its large-scale corruption schemes, social and political context. In order to make this very
centred on the president’s network. As the authors broad field manageable for companies, we refer to the
highlight, such practises were treated as ‘no secret’ by literature on political risks, a strand in international
president Yanukovych (Menon et al., 2015, p. 48). Marples business administration, dedicated specifically to the risk
(2015) describes this system as ‘a Donetsk-based regime of factors of the political environment (Sottilotta, 2017). This
apparatchiks and gangsters with their own private mansions environment includes factors such as bureaucratic quality,
and assets abroad’ (Marples, 2015, pp. 15). judicial independence and the rule of law, transparency in
In order to conceptualize political risk factors related to public tenders, or the importance and influence of informal
state capture, section two introduces the political science networks. The more transparent and predictable the political
concept of neopatrimonialism. It derives three factors, in and institutional environment, the better a company can
particular institutional ambiguity, systemic corruption and adapt to general conditions and optimise processes in order
systematic favouritism. The empirical part of this chapter to work as efficiently as possible.
focuses on the impact of these three factors on European Political risk refers to all acts or decisions of public
enterprises in Ukraine under Yanukovych (section four), institutions and / or non-state players that are present in this
and, finally, their coping strategies (section five). In this foreign market and have an influence on the business
regard, section three gives a brief overview of the data activities of the international company and a negative effect
collection process and the analysis method applied. on its performance (Leitner, 2017, p. 29).
The internationalisation is usually associated with an Political risks can be identified at three different levels
increased risk. The risks arise from the fact that the of analysis: the geopolitical level, the macro level -
company is entering a new market that may differ whereby further differentiations can be made between
culturally, socially, economically, legally, politically- internal and external factors - and the micro level. At the
institutionally as well as structurally – ie in the constellation geopolitical level, factors such as global terror, geopolitical
of the competition and local market preferences. Above all, power strategies from different countries, or even global
the transformational economies in the post-Soviet region conflicts are examined more closely and their possible
incur a heightened risk portfolio (Hoskisson et al, 2000; effects on the company examined. The micro level deals
Meschi, 2005; Alcantara & Mitsuhashi, 2013). In addition selectively with those market risk factors specifically
to socio-economic and market risks, there are also specific relevant to a single company or project. The macro level, on
political risk factors that have a significant influence on the other hand, deals with the political risk factors that arise
international business activities (Leitner & Meissner, 2017). in a country due to domestic and foreign policy dynamics,
In this context, risk refers above all to the possible negative but also due to specific regime typology (Robock, 1971;
consequences for the company's business activity and Alon & Martin, 1998; de la Torre & Neckar, 1988).
profitability in the respective foreign market due to Political risk refers to all acts or decisions of public
unforeseen changes in the business environment (March institutions and / or non-governmental players present in
and Shapira, 1987; Al Khattab et al., 2007). The business this foreign market and who have an influence on the
environment refers to all variables that define the business activities of the international company and a
framework for entrepreneurial activity in a particular negative effect on its performance (Leitner 2017, p. 29).
market, and includes both microeconomic and At the macro level, external political risks include
macroeconomic indicators, as well as those found in the factors such as regional or bilateral conflicts or the quality
political and institutional context (van Wyk, 2010). of diplomatic relations. Of equal importance may also be
Three areas are specifically relevant to identifying risk the basic ideology and agenda in comparison with
factors that can have a negative impact on business: these international companies in a particular foreign market. The
are company-specific factors, the sectors and, as a third more hostile the political attitude towards international
area, the general environment of the company in the foreign companies, the higher the political risk (Kobrin, 1979). The
market (Miller, 1992; Müller, 1993; Werner et al.; 1996). external factors refer to all those risk factors arising from
While the sector and company-specific variables have been the foreign policy dynamics of a country.
factors resulting from the domestic political constellation.
In contrast, the internal perspective focuses on those This includes, for example, political stability, which

78
comprises factors such as insurrections or strikes, but also the specific political risks of differently structured
to what extent a state can exercise its monopoly of power democracy constellations is also discussed in this area
throughout the state territory, or how regulated regime (Jensen, 2008; Jensen et al., 2013).
change takes place in a state (Miller, 1992). The question of

Table 1. Analysis Levels for Political Risks

State Capture and Political Risks: Insights from the Concept of Neopatrimonialism

The roots of the concept of Neopatrimonialism go back administrative relations, constitute personal relations
to the studies of Max Weber, who drew a distinction (Erdmann et al. 2007, p. 105).
between two “ideal types,” in particular patrimonial Neopatrimonialism does not stand for a particular
systems of rule and modern ones (cf. O’Neil, 2007, p. 2). institutional, social or economic system as such. It rather
As pointed out by Erdmann (2012), neopatrimonialism describes ‘a social and political order of conflicting modes
refers to a system in which two forms of logic and of organisation and their legitimation’ (Robinson, 2013, p.
institutional patterns exist side by side: the patrimonial 137). It is a mode of organisation in which ‘the public and
system of personal rule, clientelism and patronage and the the private, the political and the economic, the individual
legal-rational system of modern statehood (Erdmann, and the collective, the `old´ and the `new´’ all overlap. In
2012). At the same time, the two spheres overlap. ‘The this context, certain groups of individuals dominate the
patrimonial system (of personal rule) penetrates the legal- system. Formally, they rule ‘within the framework of, and
rational system, twists its logic, functions and output (…), with the claim to, legal-rational bureaucracy or ‘modern
as formal and informal institutions and behaviour are stateness´.’(Erdmann et al., 2007, p. 105) In fact, however,
intimately linked to each other in various ways and to they appropriate gains, privatise public resources and use
varying degrees and this mixture becomes institutionalised’ them for private consumption (Sindzingre, 2010, p. 4). In
(Erdmann, 2012, pp. 47). In this respect, neopatrimonialism other words, formal state bureaucracies are infused with the
differs from ‘patrimonialism,’ under which all power particularistic politics of the rulers (Soest et al. 2011, p. 4).
relations between ruler and ruled, political as well as Regarding the relations between neopatrimonialism and

79
regime types, it is noteworthy that authoritarian regimes classic example of the insecurity inherent to institutional
provide an appropriate basis for neopatrimonial rule and ambiguity is found in the practice of bribing. According to
vice versa. This is mainly, though not only, due to the informal rules, bribing might be rational in certain
specific structure of institutions and power relations in situations and constellations. However, corruption may also
authoritarian states. The preservation of power due to the entail legal prosecution. In the worst case, it might even
absence of free and fair elections, top-down processes due provide grounds for blackmailing. In other words, under
to vertically-organised structures in state and society, the such conditions, the ‘legitimate rules of the game’ are
lack of rule of law, and the dominance of the executive, unclear (O’Neil, 2007, p. 3). Actions of state institutions
altogether serve as a breeding ground for clientelism and and officials are not (fully) calculable (Erdmann et. al,
patronage. Yet, as Soest (2010) stresses with regards to 2007, p. 19). International companies are particularly prone
authoritarian regimes, they are not necessarily dominated to this form of insecurity, since they are aliens with regards
by neopatrimonialism (Soest, 2010, p. 6). However, such to local patrimonial systems and thus lack decisive insights
conclusions are merely theoretical in nature, given a lack of into the whole logic of the process. At the same time, no
research in this field. general code exists which prescribes how to behave under
Patrimonial systems provide for security according to such conditions, since each and every neopatrimonial
their own logic. The system is dominated by a patron who system stands unique. In fact, praxis shows that there is a
appoints the administrative apparatus, which is, in turn, fluent transition between the two poles of legal-rational and
responsible for reporting back to this strongman. The ruler patrimonial rule. In other words, the share of patrimonial
delegates jurisdiction to deputies who maintain a certain vs. legal-rational domination invariably differs from
degree of discretionary power. Actions taken tend to be country to country.
arbitrary. They are based on subjective reasoning and Ambiguity of formal institutions furthermore, entails
follow ad hoc procedures. At the same time, operations are that procedures, regulations and laws are unclear or even
mostly informal or off the record. Important orders are contradictory. In such cases, it is due to the fact that ruling
often given orally. They draw on historical memory, based elites tailor them to fit their particularistic interests. This
on local traditions. In official procurement and sales, verbal form of arbitrariness is strongly associated with legal
agreements are used. As administration is a means of insecurity. While the legal/constitutional framework
clientelistic politics, benefits are the reward for personal provides for legal certainty in theory, legal decisions in
connections with political leaders. In other words, rules are practise frequently make little or even no reference at all to
applied with partiality (Brinkerhoff et al. 2002, pp. 6) abstract, general and non-retroactive laws. The result is that
Under such conditions, security depends on and is secured international companies have to deal with a lack of security
best through personal connections and/or professed loyalty and predictability, both of which in terms of the
to the leader. environment they are acting in. In this context, political-
Neopatrimonial environments are not automatically judicial trials are a popular strategy for harming or even
associated with insecurity. ‘Within this system, people have getting rid of competitors. As Robinson (2013) highlights,
a certain degree of choice as to which logic they wish to in such constellations, foreign investment is impeded by
employ to achieve their goals and to best realise their weak property rights and high transaction costs. At the
interests’ (Erdmann, 2012, p. 48). In other words, they can same time, property and contract rights are secured best
either draw on the formal legal-rational system of modern through personal connections. However, the development
statehood or on the informal system of patrimonial rule. of such measures proves to be highly costly to ‘outsiders’
However, the mixture of formal and informal patterns (Robinson, 2013, p. 138).
characteristic of neopatrimonial systems is, at the same This leads to another political risk factor which
time, associated with specific factors of systemic insecurity. European businesses are confronted with, and that is
One of those factors is institutional ambiguity. systematic favouritism. In the present case, it involves
Ambiguity can appear both between formal and informal private actors systematically using public office to foster
institutions and among formal institutions. Concerning the the business interests of the ruler himself or the ruler’s
first case, Robinson (2013) points out that under clientele, while impeding initiatives by actors who are not
neopatrimonialism, formal and informal rules are not part of the ruler’s network. According to this understanding,
mutually supportive but rather work against one another systematic favouritism is a non-monetary form of
(Robinson 2013: 138). This results in insecurity about corruption. In this context, rulers distribute licenses,
which rules are to be enforced (O’Neil, 2007, p. 3). As contracts and public projects to their own business
Erdmann (2012) puts it, all actors are confronted with networks. As a result, political elites accumulate more and
insecurity ‘about which rules or which relationships are best more wealth. They often control significant shares of the
applied or mobilised in any particular situation in order to national economy (Robinson, 2013, p. 138). Systematic
achieve a specific goal – either the legal-rational (formal) or favouritism thus poses major risks to European businesses
the patrimonial (informal)’ one (Erdmann, 2012, p. 48). A as certain markets are freely accessible only at first sight.

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Businesses of the ruling elite are favoured while predicts that firms would expand their operations in relation
international companies suffer from difficulties in gaining to their learning experience. With the degree of knowledge
any (sustainable) access to such networks. However, once or experience a firm acquired in their internationalization
they have succeeded in connecting with local networks, endeavors; the more risk can be taken in subsequent
they can gain major benefits. Such relationships are most expansions. Perceived uncertainty rises with the increasing
likely in such cases when the ruling elite and European dynamic of the environment because it might reduce the
businesses benefit from win-win constellations. Such availability of knowledge or experience which fits to
relationships are, however prone to insecurity at the same respond to the new environment. The gap between the
time. If (international) actors tread on the logic of the available knowledge/experience in relation to the
respective patrimonial system, and/or if the cooperation environmental challenges results in uncertainty for the
loses attractiveness, they may well lose their position at any organization. Consequently, what might be perceived as
time. As the rule of law is weak, this this might lead in the risky or uncertain in the eyes of one organization, might be
worst case, to expropriation without compensation. perceived as irrelevant or at least not threatening for
Another factor of systemic insecurity which European another organization which beliefs it has the necessary
businesses are confronted with lies in corruption in knowledge/experience to cope with these risks. An
monetary form. As Bratton and Van de Walle’s (1997, pp. organization perceiving the environmental changes as risky
63-68) point out, corruption constitutes an integral part of and the expected risk level exceeds the organization’s
neopatrimonial orders, going hand in hand with the threshold of risk acceptance, has two options available It
(informal) concentration of power and systematic either (i) accumulates knowledge which prepares the
clientelism (Soest et al., 2011, p. 7). Systemic corruption company to respond to the new uncertain situation, or (ii)
involves members of the ruling elite (both politicians and the company reduces its commitment in the respective
bureaucrats) utilizing their authority to sustain their status market. Five reaction-modes are discerned by the authors to
and wealth by systematically extracting bribes. A result adjust the company’s commitment to the perceived
thereof is that corruption becomes an integrated part of the uncertainty levels (Figueira-de-Lemos & Amjad Hadjikhani
public system and is therein systemic. In such 2014, p. 337):
environments, international companies are confronted with (1) Increase Learning Commitment is recommended
demands for entrance fees, kickbacks as well as payments in a situation where the company combines a low level of
necessary to ward off unjustified claims by tax authorities, commitment in a market with a moderate to high level of
the security service or the customs authority (etc.). In this perceived risks.
context, corruption is always associated with a significant (2) Increase Investment Commitment in markets,
degree of arbitrariness and a lack of predictability, even if where the firm is confronted with low to moderate risk
certain ‘going rates’ apply. In that vein, corruption tands a levels and low to moderate commitment.
major risk to Western companies in particular, since such (3) Decrease Investment Commitment in markets with
practises conflict with their compliance standards. either moderate or high levels of risk in combination with
This section introduced three political risk factors moderate to high levels of commitment. An important
associated with state capture, in particular, institutional prerequisite for this option is that the firm has the
ambiguity, systematic favouritism and systemic corruption. knowledge available to evaluate the results of the
As neopatrimonialism is the prevalent form of organisation environmental dynamics and knows which assets must be
in non-OECD countries (Soest, 2010, p. 2), the factors are divested. A sub-strategy here would be to Wait and See in
universal, hence not only characteristic of post-Soviet extreme cases of high risk and high market commitment
Ukraine. The empirical focus of this chapter hones in on the because the firm would not have the required knowledge to
case of Ukraine however, to illustrate this phenomenon. To react accordingly to environmental changes.
that end, the following section introduces the process of (4) Wait and See with Increasing Learning
data collection and analysis. Commitment seems to be the right answer to environments
How do organizations perceive risks in a certain market with moderate to high risk levels and moderate to high
and how do they adapt their entry strategies? Departing investment commitments.
from a broader perspective, Figueira-de-Lemos and Amjad (5) Leaving the market is advised if the company is
Hadjikhani (2014) investigate internationalization strategies present in a market with low to moderate investments but
in relation to the perceived stability or instability of the moderate to high risks because the companies do not have
target market. What this study brings into the discussion of the possibilities to acquire the necessary knowledge to cope
political risk is the subjective construction of uncertainty. with increasing risk levels.
Knowledge and experience are concepts that were Prior learning opportunities for an organization would
introduced by Johanson and Vahlne (1977) into the improve forecast results of political dynamics and would
internationalization literature as the foundation of their help design according mitigation strategies which leaves the
incremental internationalization theory. Their theory organization much better prepared for politically hazardous

81
markets. Their empirical analysis among Japanese firms high level of risk and tend to trust in high commitment and
that expanded overseas supported the assumption that those high control entry strategies (wholly owned subsidiaries) if
firms that follow the incremental model of a relatively low level of risk is thought to affect the
internationalization, i.e. they gained experience with operation in the host country. The findings of Datta et al.
operating in politically risky markets, show less objections (2015) confirm the previous results that managers opt for
for entering politically uncertain markets (Delios & Henisz entry strategies which convey less risks for the company in
2003, pp. 1161). uncertain political environments. This piece of research
Notwithstanding these results, Jimenez (2010) argues examined under which circumstances managers with equity
that companies do not necessarily see political risk as a ownership opt either for greenfield investments or for
barrier, but could exploit advantages through entering acquisitions when internationalizing their business. They
politically risky markets if they assume that they could found that political risk has a moderating effect and is
manage such markets better than their competitors. highly relevant for managers with significant equity
Drawing on a sample of Spanish multinational enterprises ownership. When entering politically risky markets, these
(MNEs) and their scope of internationalization, i.e. the managers prefer acquisitions to greenfield investments
number of countries which they cover, he shows that only a because they allow for quicker and relatively safer returns
part of the organizations follow the path as predicted than greenfield investments (Datta et al., 2015, p. 608).
through the incremental internationalization model. In A different approach to the market entry process into
contrast, some MNEs move directly to high risk markets politically risky markets is opted for when researching
without following the expected learning curve. The internationalization into markets that are characterized by
explanation is that organizations with higher political high levels of informality and/or corruption. Both factors
capabilities profit from a competitive advantage in are part of the political risk array as has been pointed out
politically risky markets (Jimenez, 2010, p. 627). Jimenez previously in this chapter. The empirical work of
and Delegado-Garcia (2012) show that Spanish MNEs’ Uhlenbruck et al. (2006) looks at how host country
performance is better in high risk countries. These findings corruption impacts on entry strategies. Corruption is
confirm the argument that obviously Spanish MNEs view analyzed along two dimensions, (i) pervasiveness, which
political risk not as a threat to their business but as an refers to the likelihood that a firm is confronted with
opportunity and try to actively exploit advantages that corruption in its normal interaction with public authorities;
emerge through political risks. Yet another study (Jimenez and (ii) arbitrariness, which is the ambiguity associated
et al. 2014) digs deeper into the question whether political with corrupt actions. Ambiguity means that the firm does
risk might be conceived as an opportunity rather than a not know if the corrupt act will lead to the intended
threat for organizations. Previous exposure to risky markets outcome. The results of their investigation suggest that
allows the organization for accumulating experience in MNEs do not restrain from entering corrupt markets, but
dealing with politically risky environments and learning adapt their strategy. They tend to enter countries with
how to apply political strategies such as lobbying, litigation, higher pervasiveness via nonequity modes, i.e. all strategies
campaigning, and coalition formation helps reduce the where the entering firm does not assume any ownership in
perceived uncertainty, transaction costs and improve the target market. A nonequity entry allows the company
sustainability (Jimenez et al., 2014, p. 301). The value of for exploiting the business opportunity while avoiding
political strategies has recently been shown by a number of partly the associated risks of corruption. The level of
authors (Schuler et al., 2002; Rajwani & Liedong, 2015; arbitrariness, however, seems to play a crucial role in the
Nell et al., 2015; Puck et al., 2013; Darendeli & Hill 2016). evaluation of the overall risk level as arbitrariness adds
The effect was stronger for companies in highly regulated ambiguity to the pervasiveness of corruption. Therefore,
industries (e.g. telecommunications, electricity, energy, companies that opt for an equity entry strategy prefer joint
banking and finance, air transport and infrastructure ventures over wholly owned subsidiaries in markets with
projects) as compared to firms from less regulated high arbitrariness. (Uhlenbruck et al., 2006, pp. 410) The
industries (e.g. textile, pharmaceuticals, food, tobacco, results of the impact of political risk on the entry strategy
steel, electronics, chemicals, machinery, etc.). The options are questioned by Meschi (2005) who found in his
explanation is that companies from highly regulated areas study on the survival rate of international joint ventures no
were more exposed to previous interactions with public statistically supported effect of political risk variables on
authorities either in foreign markets or in their domestic the survival rate. He argues that the decision to form joint
markets, which provided them with more learning ventures is rather a response to economic uncertainty in the
opportunities. (Jimenez et al., 2014, p. 309) target market (Meschi, 2005, p. 150). Nevertheless, these
Brouthers (1995) found that market entry modes results are methodologically not as convincing as the results
depend on the perceived level of risks in the target country. generated by Uhlenbruck et al. (2006) as they refer to a
Managers tend to opt for more independent entry strategies more fuzzy variable of overall political risk (Meschi 2005,
(licensing, franchising) in case they perceive a relatively p. 147) in comparison to the narrowly defined and clearly

82
operationalized concept of corruption. Slangen and van Rob 2013 and one in Bratislava in March 2013. In addition, nine
J.M., Tulder (2009) reiterated that MNEs prefer joint out of 30 interviews were carried out with local academics
ventures over wholly owned subsidiaries when entering in Kyiv in February/March 2013. These interviewees were
markets with higher environmental uncertainty. Straub all well-educated, of different ages and held a
(2008, p. 259) again confirms the effect of political risk in fundamentally critical attitude towards the political
shaping the MNEs market entry approach through a cross- situation in their country. Among them were two journalists
country panel analysis. and at least one political scientist. They worked in local
research institutes, think tanks and Non-Governmental
Organisations (NGOs). One of them was a member of the
Data Collection and Analysis State Committee for the Fight against Organised Crime and
Corruption. They were tracked down by internet, based on
The empirical study draws on 30 qualitative interviews research from local country experts.
in total, carried out by Competence Center for Black Sea The interviews were semi-structured, taking between 1
Region Studies. The interviews were conducted with and 1.5 hours each. Those conducted with business
business representatives from companies of varying sizes, representatives mainly focused on experiences and coping
operating in different sectors, such as, chemical strategies applied in terms of institutional ambiguity,
distribution, automotive trade, insurance services, systematic favouritism and systemic corruption. In the case
pharmaceutics, trade of basic materials, construction, real of the interviews with local academics, the exchanges were
estate, logistics, trade of paper and packaging material as merely directed at gaining broader background information
well as law, business and tax consulting. All these on the country, the specific form of state capture, along
companies were connected to the chamber of commerce in with the three factors of systemic insecurity, including its
Vienna. However, not all of them were Austrian companies, roots and changes over the course of time. The data analysis
as there were also European multinational companies was done hermeneutically, establishing categories
among them. For this reason, this chapter refers to inductively. Moreover, most interviews were embedded in
European companies. The business representatives were of broader overall discussions on political, economic and
Austrian, German and Ukrainian nationality. 14 of these social matters of contemporary Ukraine.
interviews were carried out in Kyiv in February/March
2013, seven in Vienna between July 2012 and February

Political Risks in Ukraine under Yanukovych

All interview partners were well informed about the sphere is based on interpersonal connections.’ It is a system
fact that Yanukovych misused his public position for in which ‘property and power are interconnected. Using
private business purposes. Such issues received comparably power to obtain property is not a crime in this line of
high public attention in Ukraine under Yanukovych, not thinking. The ones who are linked to the rulers get
least since people were confronted with its consequences in privileges’ (Interview Partner XXVIII, 2013). Similarly, the
daily live. However, in terms of the concrete constellation head of a local think tank stressed that ‘everybody tries to
of state capture and its consequences, several capitalise on their social contacts. Gaining political
representatives of European companies emphasised that influence means you will get preferential treatment,
they only learned about it after the market entry. As an particularly when you have access to the president’
international business representative put it, ‘for us from the (Interview Partner XIX, 2013). As a member of the ‘State
West, the state structure of Ukraine looks strange. It is a Committee for the Fight against Organized Crime and
mixture of oligopoly and clan-networks’ (Interview Partner Corruption’ highlighted, the state has systematically been
XXI, 2013). This raises the question then of how exactly privatized for the purpose of generating privileges. ‘They’
were European businesses confronted with Political risks developed ‘a scheme’ in order ‘to place their people inside
related to state capture in their daily operations? government agencies’. Now ‘they run the system.’ They
Answers are found in an array of details. First and ‘influence public procurement,’ ‘develop policies’ and
foremost, systematic favouritism constituted a core feature ‘make regulations’ (…) ‘according to their particularistic
of this system of state capture. As the senior researcher of a needs’ (Interview Partner XXX, 2013).
Kyiv based research institute put it, ‘the entire economic
The country representative of an international company tax paid in export business, 3), state subventions,
for basic materials and capital goods identified (dis- particularly in the field of coal mining, and 4), ‘unfriendly
)favouritism in four different fields and manners: 1) in the takeovers’ of companies (Interview Partner XXI, 2013). In
context of privatization of state enterprises, 2) the refund of all these areas, politically well-connected people proved to

83
be the beneficiaries. However, other interview partners country manager of an international car manufacturer
stated that favouritism was rooted in the field of public reported a case wherein drugs were planted in his cars. He
procurement (Interview Partners XVII, XIX & XXIX, was able to solve the problem by paying a bribe of $1,000
2013). A Kyiv based investigative journalist reported in order to avoid the initiation of inquiries by a state
regular cases in which members of the Yanukovych- prosecutor. ‘You have to stop such things in the very
network used state tenders to strengthen their businesses, beginning. As soon as it proceeds by way of formal action,
while independent enterprises faired no chance of winning you are trapped. Then it will get really expensive or even,
the tender (Interview Partner XV, 2013). the game is over’ (Interview Partner IV, 2013).
Furthermore, systematic favouritism means that Yet, the overall view was that big international
independent businesses are categorically disfavoured, companies were still less prone to such risks than local ones
insofar as they are prevented from obtaining access to the (Interview Partners IV, VII, XIX & XX, 2013). The
sectors dominated by oligarchs and the ruling family. As situation for international companies was however
the manager of a local subsidiary of an Austrian supplier for sufficiently poor that the representative of an international
construction components emphasized, he has ‘no friends insurance company emphasized that he had been fighting
and contacts’ in government which he would however need with ‘oligarchic structures’ for more than six years, as he
in order to receive a public contract. ‘In this field, the game experienced ‘extreme pressure from all sides of politics to
is too complicated and allowed for a certain group of people sell his business’ (Interview Partner V, 2013). The country
only. This is not only a barrier, but also a border you cannot representative of an international company from the
cross’ (Interview Partner XI, 2013). At the same time, transport sector reported, furthermore, that his company had
independent companies are often confronted with had to struggle with the withdrawal of an important licence
regulatory barriers (Interview Partners VI & XXX, 2013). when they sold their shares in another company to a
The country manager of an international pharmaceutical consortium rather than to an oligarch who was among the
company complained about laws in the fields of product bidders (Interview Partner I, 2013). Likewise, an
registration, fees and patent protection against international international construction company was first awarded a
standards: ‘they were made because there is a very strong contract by the city of Kyiv to reconstruct a historical
connection between political forces in this country and building. However, they were later confronted with the
those who do business in this sector’ (Interview Partner IX, allegation their licences were insufficient for doing
2013). Likewise, a country representative of an business: ‘in my opinion, they tried to push us out as hard
International Bank expressed how he felt ‘disappointed as they could.’ This took place not only by ‘verbal threats’
about the few illusions his institute initially had’ concerning but also by actions aimed at undermining the company’s
the market entry in Ukraine. A key reason is that the state position as a general contractor vis-à-vis subcontractors
and the economy are ‘controlled by a few people’ (Interview Partner XVI, 2013). The country manager of an
(Interview Partner VI, 2013). international car manufacturer concluded that ‘in this
State power was also strategically and deliberately country, it is not merely about doing and developing
applied to cause damage to competitors. According to a business’. In fact, ‘keeping the company alive, resisting the
member of the ‘State Committee for the Fight against pressure of judicial and tax authorities, is already a huge
Organized Crime and Corruption,’ there were regular cases, success’ in and of itself (Interview Partner IV, 2013).
where the state fiscal service, the police and the security As the aforementioned cases reveal, a strong
service were used ‘to develop the business of the family’ connection is at hand between favouritism and legal
(Interview Partner XXX, 2013). Though difficult to verify, insecurity. Given this backdrop, an international lawyer
several business representatives reported second-hand stated that Ukraine suffered from ‘massive problems in
stories of how the secret service SBU, the police and tax terms of property rights’ (Interview Partner XXVI, 2012).
agencies (Interview Partners II & IV, 2013), the national Likewise, a company representative complained that
bank (Interview Partners III & VI, 2013) and the judiciary ‘investments of foreign companies are not safe.’ The
(Interview Partner VII, 2013) had been systematically problem is that ‘profitable companies can be attacked by
employed to put pressure on independent businesses. A people in power,’ relying on ‘very well educated lawyers’,
Western investor in real estate unveiled the case of an $55 using ‘exits in Ukrainian regulations’ (Interview Partner
million investment project in Southern Ukraine that came XXIII, 2012).
under serious pressure, when a unit of the ministry of The latter statement indicates that ‘systematic
interior against organised and economic crime visited the favouritism’ and legal insecurity are in turn connected to
construction site in order to demand protection money in the ambiguity attached to formal institutions. In fact, under
the amount of $300,000. When they refused to pay, a public Yanukovych, Ukraine featured a well-established system,
prosecutor initiated inquiries against the company. The with legislators constantly implementing new, contradictory
conflict was finally solved by paying local intermediaries ‘a or unclear laws. ‘There are no clear rules and people try to
sum less than $300,000’. (Interview Partner VII, 2013) The take advantage of that,’ commented one interviewee

84
(Interview Partner XXIII, 2012). Laws ‘are so verdicts cost between $20,000 and $40,000 (Interview
underdetermined that they can interpret them how they Partner VII, 2013). However, another interview partner
need. They are full of gaps. (…) This was done on purpose’ noted that, despite such schemes, foreign businesses had no
(Interview Partner IV, 2013). This phenomenon applied to chance of winning when members of the ruling elite were
all areas of trade, economic and tax law, as well as to involved in legal disputes (Interview Partner VII, 2013).
administrative regulations. Nevertheless, the interview Yet, under specific circumstances, there was still at
partners often pointed to deficient tax and fire regulations, least the possibility of winning public tenders if one
in particular (Interview Partner XXV, 2012; Interview acquiesced to paying bribes. A local anticorruption activist
Partners III, V, VI, VII, VIII, IX & XII, 2013). stated that in public procurement, ‘going rates’ of between
Such strategies were not only used to harm independent 30 and 50 percent of the contract value applied (Interview
businesses. They were rather part of an omnipresent Partner XVII, 2013). The country representative of an
corruption system, affecting virtually every sphere of public international construction company commented, for
life. A common strategy was to establish bureaucratic example, that they withdrew from the contractor when they
hurdles and to provoke law violations in order to extract received the signal to pay between 15 and 17 percent of the
money (Interview Partner II, VII, XII, XXII & XXX, project value in cash (Interview Partner XVI, 2013). In
2013): ‘the idea behind [it] is that the more bureaucratic the other cases, foreign companies were asked to invest in
system, the easier it is to collect bribes. This is why the social projects and infrastructure, thereby using local
bureaucracy of this country shows incredible things’ companies as contractors (Interview Partner XXII, 2013).
(Interview Partner II, 2013). In this context, it was Many interview partners regarded corruption as a
particularly popular to use tax audits and fire inspections as political phenomenon, rooted in all levels of government
a front for conjuring up unjustified fees and fines (Interview (Interview Partner XXIII, 2012; Interview Partners I & III,
Partner II, IV, V, VI, VII, XI, XII & XXII, 2013). 2013). There was also a widespread view that corruption
Businesses not accepting this ran the risk of getting was controlled centrally (Interview Partners III, IV & XII,
seriously impeded in their operations. In the worst case, 2013) or even represented a part of a pyramid system with
local authorities would halt production altogether until the the Yanukovych family and close allies as final
company paid up (Interview Partner XXIV, 2012). beneficiaries at the top (Interview Partners II, VII, X, XIII,
Corruption schemes also applied in the fields of licensing XIX, XXII & XXX, 2013). Others confirmed this, but
and registration. The construction and real-estate sectors stressed that the true picture would probably be more
were particularly prone to such methods. As an complex (Interview Partners X & XV, 2015). In fact, the
international tax advisor concluded, ‘foreign investors have structure of the informal system is difficult to determine, as
to fight a constant battle against the bureaucracy, tax and it is a black box. However, the general view on this seems
cartel authorities. They regard them as cash cows’ to be influenced by Soviet memory and pre-Soviet memory
(Interview Partner XIV, 2013). to a large extent. This became evident in background
At the same time, the judiciary was highly affected by conversations with interviewees, who regularly pointed to
corruption. ‘There is little sense going to court, because the fact that the system of centralised corruption and the
corruption prevails’ (Interview Partner I, 2013). Likewise, misuse of public office for patronage and clientelism (“state
the country representative of an international insurance capture”) dates back to Soviet and pre-Soviet times. Such
company revealed that as soon as a case ends-up at court, practises are perceived as widespread phenomena
his company writes off the disputed amount of money. throughout the entire post-Soviet space. Irrespective of the
‘You cannot win. We have lost a lot of money this way’ details, European businesses perceived corruption as a
(Interview Partner XX, 2013). The general perception was financial burden and a high risk (Interview Partner XXVII,
that verdicts could be purchased (Interview Partners I, IV, 2012; Interview Partners IV & XVI, 2013).
VI, VII, IX, XVI, XVIII, XX & XXX, 2013). Though
difficult to verify, a company representative stated that

Coping Strategies of International Businesses

European businesses responded to such political risks country (Interview Partner VII, 2013). Still others declared
in different ways. Some big companies/MNCs were in the to be reasonably satisfied with their business operations in
middle of preparing to leave the country or taking this step Ukraine, having found ways of coping with political risks.
into consideration at the time of the interview. However, However, in terms of additional investment, most
most companies denied having such plans in the short- and companies proved to be reluctant (Interview Partners V,
mid-term. One smaller enterprise professed to be tied to XXIII & XXIX). At the same time, the representative of an
their investments and therefore was not able to leave the international consulting company specialised in Ukraine

85
mentioned that his company would also be a beneficiary of establishing a fully operating local subsidiary.
this difficult political and economic constellation (Interview Subsequently, the core processes are left with the parent
Partner III, 2013). company in the home country (Interview Partners I & IX,
One coping mechanism was found in “systematic 2013) (Leitner et al., 2015).
favouritism” and all its consequences, insofar as doing Other companies preferred to outsource activities to
business with independent “private” partners. The aim is to local business partners. Such cooperations were particularly
interfere with politics as little as possible (Interview Partner frequent in the field of sales and distribution. In this
VI, 2013). As the representative of an Austrian construction context, local business partners often act as redistributors,
company admitted, they had decided not to take part in drawing on their local business networks (Interview
public tenders anymore. However, independent tenders Partners XI & XVI, 2013). In addition, they also provide
were rare and hardly predictable. For that reason, the local for security, as they know which rules and which
office was equipped with the absolute minimum managerial relationships are best applied or mobilised, particularly in
staff necessary to maintain basic operations. In case the case of ambiguity between formal and informal institutions
company won a tender, they sent expats and sub-contracted (Interview Partners XX & XXV, 2013). At the same time,
workers for a limited period of time (Interview Partner XII, they can handle corruption claims, which keeps “your
2013). Nevertheless, doing business with private partners company clean from [the] inside at least” (Interview Partner
does not mean companies can entirely circumvent systemic XXV, 2013). As the country manager of an international
corruption. As the company representative further stated, car manufacturer put it, “you need a local partner dealing
“you still need your building permit. They have the militia, with the issues you do not want to know about. (…) You
their inspectors. They will all come to your construction site know he has to do things, not compatible with your norms
and ask for bribes” (Interview Partner XII, 2013). and values” (Interview Partner IV, 2013). At the same time,
Some rosier areas could be pinpointed however. some company representatives emphasised that establishing
Western companies offering high-tech products needed by joint ventures with local partners is again a risky
local companies were in a comparably good position undertaking, as there is “no basis of trust” (Interview
(Interview XXXI). The same held true in case of win-win Partner IV, 2013), and moreover, no legal system to rely on
constellations: “Western investors are tolerated when they in case of conflicts or fraud (Interview Partners IV and VII,
fit into the business model of the nomenklatura or when 2013).
they complement their interests” (Interview Partner XVI, There is the alternative of approaching local
2013). However, as the country manager of an international “consulting companies” or “lobbyists” for assistance in
bank pointed out, in terms of reliable business cooperations, these matters (Interview Parterns II, IV, V, VI, VII, XIII,
there were also enormous differences between the XX, XXIV, XXVII & XXXI, 2013). Such “companies” are
individual oligarchs. While Akhmetov would be a good in fact one-man enterprises, operated by locals with
business partner relying on Western standards, the bank personal contacts to high-ranked officials. They act as
refused to do any business with Kolomoyskyi or Firtash brokers or intermediaries. Many of them used to be state
(Interview Partner XIII, 2013). officials or managers of state enterprises themselves
In light of these conditions, some companies decided to (Interview partners II, VI, XXVII, XXXI & XXXII, 2013),
shift their business activities into such areas which are less some of them dating back to Soviet times. These persons
affected by systematic favouritism. Eventually, businesses can “open the door” and connect people to the highest level
relying on high-tech and specific know-how managed to of the neopatrimonial order, which is, in the local context,
establish themselves in a comparably safe position. This also referred to as “Krysha” (Interview Partners VII, XIII &
held particularly true for IT-companies, as well as for the XXX, 2013). By doing so, they can provide protection.
consulting industry (Interview Partners III & XXXII, 2013). They defend attacks by officials, judges and local
A case to point out is a smaller enterprise tied to the businessmen: “you do not have any networks. You do not
Ukrainian market due to high investments done, which know how this culture of bribing works. And you do not
shifted their activities from real estate investments to know where to go. So basically what you need, you need
consulting and facility management (Interview Partner VII, somebody, who provides you with these services”
2013). (Interview Partner XXXII, 2013). However, such practises
An approach for coping with the risk of expropriation entail a high risk of fraud (Interview Partner XIII, 2013).
is to make reference to property. Some companies avoided Moreover, informal networks are prone to instability
concentrating assets in the country (Interview Partners I & (Interview Partners XII & XVIII, 2013). As an international
IV, 2013). (cf. Leitner et al., 2014): “my office is rented, company representative put it, when a new president comes
also the building for the call centre. We have not built any into power, your informal network will break away. As a
facility. This was a conscious decision. We do not work like result of that, companies not only face the challenge of
this in other countries” (Interview Partner I, 2013). Another rebuilding their networks, but they also have to cope with
related strategy is to set up a local branch instead of hostilities and attacks by the new people in power, who

86
regard them as a friend of their enemy (Interview Partner II, operations on a smaller scale (Interview Partner, XIII,
2013). 2013), by not advertising publicly and not giving any
Such brokers are also there to handle corruption claims. interviews to the media (Interview Partner, II, 2013). The
In this regard, one can speak of a strategy of outsourcing strategy of attracting no attention also applies vis-à-vis the
corruption: “Western companies pay consulting companies tax administration. This entails neither declaring high
for paying illegal money. By doing so, they can avoid profits, nor losses (Interview Partner, XII and XIII, 2013).
having ‘unofficial fees’ show up in their reports. This way What’s more, the amount of money in Ukrainian bank
they keep clean” (Interview Partner XIII, 2013). Likewise, accounts should not exceed day-to-day needs (Interview
an international company representative declared they Partner, IV, 2013). This represents, however, no guarantee
would not pay “big sums” of bribery themselves, as this is that the tax administration will not start any manipulative
“dangerous and criminal.” They only pay “operational attack proceedings. As some company representatives
money” up to 20,000 Euro, as in the case of manipulated expressed, in such cases, they fight against the attack with
fire inspections. One interview explained: “when things all judicial instances available. The goal is to tire out the
become too big, we engage our lawyer, telling him we do opponent, which makes future attacks less likely (Interview
not want to hear and know anything about it” (Interview Partner, XIII, XIV & XXIV, 2013). Yet, apart from this
Partner IV, 2013). Another case in point is found with an specific case, International companies rather avoid going to
international construction company, having engaged a court in Ukraine. Some MNCs circumvented having trials
“customs broker. We do not need to worry, who will ask for under Ukrainian law by choosing a third country as the
money. He knows everything and he will pay. In the end, place of jurisdiction (Interview Partner, XVIII, 2013).
we will only get a hefty bill” (Interview XIII, 2013). Concerning systematic favouritism, institutional
Yet despite its rampant practice in everyday business, ambiguity and systemic corruption, Western companies not
most companies surveyed nevertheless denied paying only turned to local agents, but to international agencies as
bribes. Some of them argued it would not be possible due to well (Leitner et al., 2015). As several company
their compliance laws and due to audits (Interviews XI, representatives noted, political pressure through embassies,
XXIII, XXVII & XXVIII, 2013). Others feared losing their national chambers of commerce, European Union
reputation (Interview VIII). Another argument was that institutions or high level home government officials
there is an element of insecurity inherent to corrupt regularly turns out to be effective. Such institutions prepare
dealings. As the company representative of an international lists of companies facing specific threats. They then address
construction company put it, it is a vicious circle leading to the problem at the highest diplomatic level (Interview
additional claims and, as such, an incalculable financial risk Partners I, II, III, IV, IX, XIV, XXI, XXVII & XXXII,
(Interview Partner XVIII, 2013, also Interview Partners 2013).
IXXII, XXVI & XXVII, 2013). Others stressed that bribing Finally, the recruitment strategy plays a major role
might entail legal prosecution or might even give grounds when coping with political risks (cf. Leitner et al., 2015). In
for blackmailing (Interview Partners II & XXII, 2013), Ukraine, a company’s most critical organisational
though you can again pay your way out of it (Interview departments are accounting and legal services (Interview
Partner III, 2013). Yet others argued that they are Partners II, III, VII & XX, 2013): “you need a reliable
transparent and compliant with local law and, as a result of accounting department; people that are well versed, as this
that, do not offer any basis for corruption claims (Interview is an area full of traps” (Interview Partner II, 2013).
Partners XIII & XIV, 2013). Another company Another interviewee offered: “the accounting department is
representative declared that they would be the in position two in terms of significance to a company”
subcontractor, and as such not exposed to corruption (Interview Partner III, 2013). As the country representative
claims, which does not however hold true for the main of an international bank explained, for accounting purposes,
contractor (Interview Partner XII, 2013). Yet others argued he would employ three times as many people as in Austria
they could refuse paying any bribes, as they rather hold (Interview Partner XX, 2013).
their weight through the high quality of their services In all these areas, international companies mostly
and/or products (Interview Partners IX, XI & XII, 2013). In employ locals, although they simultaneously aim at
contrast, others stressed that corruption is part of the system maintaining full control over organisational processes by
and as such impossible to avoid (Interview Parnters II, XXI, expats (Interview Partner II, III & IX, 2013). In this context
XVIII & XXIX, 2013): “recently, a German expat from the again, the reason is that only locals know which rules and
pharmaceutical industry told me they would never bribe. I which relationships are best applied or mobilised in any
can only smile about this. The one who brings ethics into given situation (Interview Partner II, III, IX & XIII, 2013).
play, should not go to Ukraine” (Interview Partner VII, As a company representative highlighted, only locals know
2013). the necessary networks and how to avoid or handle attacks
Yet another coping strategy is found in attracting as by government authorities: “you need local personnel for all
little attention as possible. This can be done by keeping that. People who know how all these machinations work.

87
Otherwise you can close down your company” (Interview Partner XII, 2013).

Conclusions

The way a firm could be affected through political risks Max Weber’s differentiation between modern and
is a combination of two dimensions. The one dimension traditional forms of rule. Ideally, states provide security by
refers to the probability of the potential event. The second a legal-institutional framework, which citizenry can rely on.
dimension relates to the impact the event might have for the Under patrimonialism, however, rules are applied
organization. Consequently we can derive four squares informally and with partiality. Security depends on personal
through this 2x2 matrix if we divide probability and impact connections to the leader. Neopatrimonial states are, in turn,
into low and high respectively. According to this matrix, we characterised by a mixture of modern and patrimonial
find events that might occur quite rarely with only a minor systems, since formal institutions are seized in place by
expected impact on the organization. Also, we can define a clientelistic networks. As the mixture becomes
square that describes events which do happen quite often institutionalised, international businesses have a certain
but still have little impact. Moving on to the north-west in degree of choice. In order to gain security, they can either
the matrix we see the square which describes events that are draw on the formal legal-rational system of modern
expected to happen rarely, but will have an enormous statehood or on the informal system of patrimonial rule. At
impact for the organization. And, finally, in the north-east the same time, this mixture of formal and informal patterns
of the matrix we find those political risks which are highly is associated with specific risks. They are systemic
probable and at the same time are supposed to have a high corruption, systematic favouritism and institutional
impact on the company. (McKellar, 2010) When ambiguity.
prioritizing the respective risk factors with regards to the
resources that should be deployed to manage them, the The empirical part of this chapter first provided
north-east quadrant should be of highest priority since its evidence to that effect, depicting the characteristics of these
impact will be very severe. risks under the reign of Yanukovych. It also revealed that
If an organization has to formulate strategies on how to European businesses were heavily affected by these factors.
react or manage a certain political risk factor, four generic It then examined their coping strategies. Coping strategies
strategies are available, which range from acceptance, via entail methods of minimising the insecurity in the business
mitigation and transfer, to avoidance. The acceptance environment. In this respect, the empirical data revealed
strategy implies that the company accepts the associated three basic options. The first possibility lies in minimising
political risks, and starts the operation. The mitigation the exposure to political risk factors inherent to the local
strategy aims at either reducing the probability of a certain neopatrimonial system. This can be done by doing business
risk coming true or reducing the potential negative impact with independent “private” partners, creating win-win
of the risk event. This could be done for instance through constellations, shifting business activities into safer
adapting the market entry strategy, through political business areas, avoiding concentrating assets in the country,
strategies, stakeholder management and other risk setting up a local branch instead of establishing a fully
mitigating activities. Another option is that the company operating local subsidiary and/or attracting as little attention
transfers the risk to a third party which is willing to bear the as possible. The second option is to rely on local partners
risk in exchange for compensation. An example is a risk who know which rules and which relationships are best
insurance firm which covers your risks for a certain applied or mobilised in the local neopatrimonial context.
premium. Sometimes, risky activities in the business Related strategies aim at outsourcing activities to local
process are outsourced to partners who are willing to take business partners, employing locals and/or employing
the risk, such as selling the products to local agents who are brokers or intermediaries. The latter particularly provide for
then responsible for delivering the goods to the final security by connecting businesses to the highest level of the
customer. In some countries, especially if public authorities neopatrimonial order, which is, in the local context, also
are involved, this step in the business process might be referred to as “Krysha.” The third option is to mobilise
highly exposed to corruption claims and therefore poses a external agents in order to enforce the legal-rational system
political risk. Finally, if the company evaluates that a of modern states, according to international standards. In
business opportunity simply is associated with too high this regard, international businesses regularly rely on
political risks, than the decision would be to not follow this embassies, national chambers of commerce, European
opportunity and avoid the business. Union institutions and/or high level home government
This paper examined the relation between state capture officials.
and political risks. For this purpose, the chapter drew on

88
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Further Literature
Leitner, Johannes; Meissner, Johannes (2017) State Capture, Political Risks and International Business. Cases from
Black Sea Region Studies, London: Routledg

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92
Strategic Responses of Trade-Dependent firms to rising
Trade Protectionism
Louise Curran, Toulouse Business School, France
Jappe Eckhardt, University of York, UK

In the face of the major economic shifts in activity in negative sentiment on international trade?
recent years, rising skepticism on the merits of trade and In relation to CPA, three key findings emerge from the
globalization has become a political reality across several limited literature that looks at CPA by trade-dependent
key developed countries. This poses challenges for trade- firms. Firstly, the way that issues are framed and their
dependent firms and requires new strategic responses. In salience for voters are both vital to success in public policy
this paper, we draw on existing research to propose a debates. (Destler, Odell and Elliot 1987; Farrand, 2015). In
framework of corporate Non-Market Strategies – through this context, it is crucial for trade dependent firms to be
both Corporate Political Activity and Corporate Social vocal in defending trade and highlighting the costs of
Responsibility - to address trade protectionism. protection (Destler et al., 1987). Secondly, timing is
important. When faced with anti-trade advocacy, early
In recent years high unemployment and/or counter-organisation is vital. Thirdly, lobbying against
underemployment in developed countries, together with the protectionism is more effective when undertaken with grass
shift in economic importance towards emerging countries, roots networks and NGOs and within broad coalitions,
has encouraged the growth of anti-globalization sentiment including transnational networks (Destler et al. 1987;
in the developed world. Existing liberal trade policy Schnietz and Nieman, 1999; Brook 2005; Kolk and Curran,
prescriptions are often considered to have failed a large 2017; Curran and Eckhardt, 2017; Eckhardt and De Bievre,
segment of the population and this has fostered profound 2015).
dis-illusion with both the ‘elite’ and their global vision In the CSR domain, existing corporate activity could be
(Kobrin, 2017; Morgan, 2016). leveraged to counter anti-globalization rhetoric and policy.
In this context, the legitimacy of standard business However, there is little evidence that such linkages are
models is being questioned. In particular, the idea that it is being mobilized. Scholars increasingly refer to the concept
legitimate for companies to distribute their production of political CSR (PCSR), which ‘…suggests an extended
systems globally, at will, is widely debated and the trade model of governance with business firms contributing to
policies which facilitated these global production networks global regulation and providing public goods.’ (Scherer
are being criticized. Some governments are actively and Palazzo,2011: 901). In this context, companies are, of
revising their stance on trade, posing challenges for trade- necessity, taking greater responsibility along their supply
dependent companies. This paper explores this challenge of chains, including for public goods, which are usually
rising trade-skepticism and protectionism for trade- provided by states. Such PCSR activities could help to
dependent companies and highlights potential non-market mitigate the potential negative effects of trade on vulnerable
strategic responses which they could adopt. It reports initial developing countries and their people. However, there is
findings from preliminary interviews with trade little discussion in the literature, or evidence from company
associations. activism, of leveraging such activities in his way.
Shifts in government and consumer attitudes to trade Although PCSR, almost by definition, brings
and globalization have their roots in a wide range of socio- companies’ CSR activities closer to their CPA activities,
economic factors (Kobrin, 2017; Mansfield and Mutz, scholars have recently noted a surprising lack of
2013; Mansfield et al., 2015). They thus require corporate coordination between the two (Anastasiadis, 2013; den
action on several levels, through coordinated market and Hond et al, 2014; Lock and Seele, 2016). Companies thus
non-market strategies (NMS) (Baron, 1995). In this paper, seem to be failing to capitalize on an important potential
we draw on existing research, especially on corporate NMS, political resource – its links to civil society - which could
international economics and international political potentially be leveraged to build broader coalition in
economy, to develop a framework of potential corporate support of wider political objectives (Dahan, 2005).
strategies to address rising trade skepticism. Specifically, Building on the literature above, we propose an
we address the question of what non-market strategies can integrated framework for trade dependent corporate NMS
be mobilized by multinational companies faced with rising to address trade protectionism, summarised in Figure 1.

93
 threats to their business models. This paper has highlighted
Figure 1 – Non-Market strategies to address trade some potential strategies for trade dependent companies
protectionism and reported some initial findings from exploratory
interviews. However, further empirical research at firm and
industry level is needed to illuminate the extent to which
different strategies are mobilized in different circumstances,
as well as the crucial question of their effectiveness.

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In the CPA arena, we would expect MNEs to mobilise packaging.’ Review of International Political Economy,
in defense of their interests and in support of openness, at 24(1), 87-118.
home and abroad. As discussed above, such lobbying would Dahan, N. (2005). ‘Can There Be a Resource-Based
be more effective if coordinated with grass roots networks View of Politics?’ International Studies of Management
(Brook, 2005; Destler and Odell, 1987; Schnietz and and Organisations, 35 (2), 8–27.
Nieman, 1999). In a context of low trust in business, the den Hond, F., Rehbein, K. A., de Bakker, F. G. A. and
linking of existing CSR cooperation with NGOs and Trade Kooijmans-van Lankveld, H. (2014). Playing on Two
Unions with wider corporate advocacy activities, would Chessboards: Reputation Effects between Corporate Social
provide opportunities to regain legitimacy. However, many Responsibility (CSR) and Corporate Political Activity
consumers and voters in developed countries are deeply (CPA). Journal of Management Studies, 51 (5), 790-813.
skeptical about free trade (Mansfield et al., 2015; Mansfield Destler, I. M., Odell, J. S., & Elliott, K. A. (1987). Anti-
and Mutz, 2009; 2013), undermining the chances of protection: Changing forces in United States trade politics.
creating sustainable alliances with civil society actors. Washington, DC: Institute for International Economics.
In exploratory interviews with trade associations in Eckhardt, J. and de Bièvre, D. (2015). ‘Boomerangs
Brussels in late 2017, the authors found that, although the over Lac Leman: Transnational Lobbying and Foreign
latter were active in lobbying against trade protectionism, Venue Shopping in WTO Dispute Settlement.’ World Trade
there was little evidence of individual companies Review, 14(3), 507-530.
mobilizing in the debate. At the same time, although CSR Farrand, B. (2015). ‘Lobbying and Lawmaking in the
efforts were intensive across all the industrial sectors European Union: The Development of Copyright Law and
interviewed, there was no evidence that such activities were the Rejection of the Anti-Counterfeiting Trade Agreement.’
being leveraged in the trade debate. Informants considered Oxford Journal of Legal Studies, 35 (3), 487-514.
that drawing attention to CSR efforts in this context could Kobrin, S. J. (2017). Bricks and Mortar in a Borderless
backfire, especially if it led to stronger calls for regulation World: Globalization, the Backlash, and the Multinational
on CSR requirements. Thus, the lack of coordination Enterprise. Global Strategy Journal, 7(2), 159-171.
between CSR and CPA activities highlighted by earlier Kolk, A. and Curran, L. (2017). ‘Contesting a Place in
studies (Anastasiadis, 2013; den Hond et al. 2014; Lock and the Sun: On Ideologies in Foreign Markets and Liabilities
Seele, 2016) is confirmed in our research. of Origin.’ Journal of Business Ethics, 142 (4), 697–717.
What is clear from this brief overview of the existing Lock, I and Seele, P. (2016). ‘Deliberative Lobbying?
literature is that strategic responses to trade protectionism Toward a Noncontradiction of Corporate Political Activities
have attracted relatively little recent academic scrutiny. and Corporate Social Responsibility?’ Journal of
Given the global rise in protectionism, there is an urgent Management Inquiry, 25(4), 415-30.
need to better understand how firms mobilize, both Mansfield, E. D., and Mutz, D. C. (2009). ‘Support for
collectively and individually, in the face of emerging free trade: Self-interest, sociotropic politics, and out-group

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anxiety.’ International Organization, 63, 425–457. Scherer, A. G. and Palazzo, G. (2011). ‘The New
Mansfield, E. D., and Mutz, D. C. (2013). ‘US versus Political Role of Business in a Globalized World: A Review
them: Mass attitudes toward offshore outsourcing.’ World of a New Perspective on CSR and its Implications for the
Politics, 65 (4), 571–608. Firm, Governance, and Democracy.’ Journal of
Mansfield, E.D., Mutz, D. C. and Silver, L. R. (2015). Management Studies, 48 (4), 899-931.
‘Men, Women, Trade, and Free Markets.’ International Schnietz, K. E. and Nieman, T. (1999). ‘Politics
Studies Quarterly, 59: 303–315 Matter: The 1997 Derailment of Fast-Track Trade
Morgan, G. (2016). ‘Brexit and the elites: the elite Authority.’ Business and Politics, 1 (2), 233-251.
versus the people or the fracturing of the British business
elites.’ Socio-Economic Review, 14 (4), 825-829.

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96
The Effect of Herd Behavior on Stock Markets during the
Election Times: Evidence from Borsa Istanbul
Zeliha Can Ergun, Adnan Menderes University, Turkey

The main purpose of this study is to examine the Totally, during these years there are thirteen election
evidence of herd behavior during the general, local and periods in Turkey. Between the periods 1997 and 2017, six
referendum election times in Borsa Istanbul (BIST) between general elections, four local elections, and three
the periods 1997 to 2017. The second aim of this study is to referendums were realized.
investigate whether the pattern of herd behavior changes In the following parts, firstly the related literature was
based on the uncertainty level of these election periods. summarized. Secondly, the methodology was clarified.
Based on the regression results, it is found that there is no Finally, results and concluding remarks were discussed in
evidence of herd behavior in Borsa Istanbul. These results the last section.
may be interpreted as investors did not intend to imitate
others’ financial decisions during election times in Turkey. Literature Review
The main argument of behavioral finance is that Many researchers conducted studies about the evidence
investors are not behaving rationally always. In contrast to of herd behavior in developed (such as USA and England)
the major classical finance theories such as Efficient Market and developing (such as Turkey and Brazil) countries’
Hypothesis and Modern Portfolio Theory, behavioral markets. The literature mostly intends to find evidence of
finance does not assume investors as rational while making herd behavior in various markets by using different types of
important economic decisions, and it argues that measurement and time intervals (i.e. Choe, Kho and Stulz
information is not available to everyone. As a result of the (1998), Altay (2008) and Demirer, Kutan and Chen (2010)).
irrationality of the investors, stock anomalies, speculative However, recently some studies focused on some special
market bubbles, and crashes are more likely to occur events or periods. For example, Galariotis, Rong and
(Ricciardi and Simon, 2000). Behavioral finance argues that Spyrou (2014) examined herd behavior in the U.S. and
investors make financial decisions with mental shortcuts U.K. during the periods of crucial macroeconomic
and these may cause some biases. Mental shortcuts are announcements. Their study based on the announcement
called as heuristics, and some examples are overconfidence, dates of macroeconomic events such as changes in the U.S.
representativeness, and availability heuristics. Herd federal funds rate or changes in the Bank of England base
behavior is one of them and it is the focus of this study. rate. Consequently, they found significant evidence of herd
Basically, herd behavior is defined as imitating others’ behavior during these times. Another example is the study
decisions regardless of one’s own private information of Gavriilidis, Kallinterakis and Tsalauoutos (2015) where
(Bikhchandani and Sharma, 2000, pp. 281). they investigated herd behavior in Ramadan. Their starting
Many researchers conducted studies about the evidence point was that during Ramadan, investors have positive
of herd behavior in developed (such as USA and England) mood so there can be higher tendency for herd behavior
and developing (such as Turkey and Brazil) countries’ during these days. Their analyses were based on the seven
markets. However, to the best of author’s knowledge, there majority Muslim countries and they found significant
is no study that focused on the evidence of herd behavior in evidence of herd behavior during Ramadan in most of
the election periods. Based on this gap, the main purpose of sample markets.
this study is to examine the evidence of herd behavior Besides, there are several studies that investigate the
during the general, local and referendum election times in effect of unexpected events on investor psychology. One of
Borsa Istanbul (BIST) between the periods 1997 to 2017. these studies was conducted by Peterson (2002) and it is
The main research question is “Do the investors in BIST analyzed that how the investor psychology and security
exhibit herd behavior during the election times?” The pricing are affected when there are anticipated events such
second aim of this study is to indicate whether the pattern as earnings reports, national elections or Federal Reserve
of herd behavior changes based on the uncertainty levels Board announcements. It is concluded that security prices
between these election periods. To test the hypotheses by generally decrease when the outcome of an event is equal or
following Chang, Cheng and Khorana (2000); non-linear better than “expectations”. A similar study was conducted
regression analysis method was used.

97
by Mehdian, Nas and Perry (2007) in Turkey, and they Furthermore, there are few studies that analyzed the effects
examined the reactions of investors to the unexpected of election periods on stock returns in Turkey. Mandaci
political and economic information. They found that (2003) examined the effect of general elections (1991,
investors systematically set security prices below their 1995, 1999 and 2002 elections) in Turkey on the BIST-100
fundamental values during these times, and this situation index returns. The main argument is that before the
makes the equity market riskier. Therefore, it is obvious elections, if there is an uncertainty about the results it is
that security prices are related with the anticipated events expected that there will be stagnation and withdrawals from
and investor psychology. Moreover, in the literature there the market. But if the election results can be predicted
are many studies that suggest that there is an effect of before, this time it is expected there will be a recovery in
political risk on stock returns (such as Diamonte, Liew and the market and with these positive effects investors will
Stevens (1996), and Kim and Mei (2001)). tend to purchase more stocks immediately before that
Gokceler (2010) stated that, there are two main period to obtain high (abnormal) profit. She used the event
properties of political risk which are called as political study to analyze the returns 15 days before and after the
uncertainty and instability, the examples that cause these election days, because in emerging markets such as Turkey,
properties can be given as elections, wars and collective the effects of elections are assumed to be short-term. As a
actions. In these situations, the outcome and the probability result, she found that in the determined period abnormal
of its occurring are both uncertain. As argued by Gokceler returns are experienced in certain days such as third day
(2010), in a democratic system a major uncertainty is before and second day after the 1999 elections.
national elections, and it presents uncertainty to both As shown in the literature above; elections cause
domestic and foreign investors. Also, she pointed out that in uncertainty both in the social and economic environment of
emerging markets there is more political uncertainty. the country. Parker and Prechter (2012) emphasized that
Moreover, as indicated by Pantzalis, Stangeland and Turtle based on the socioeconomic theory, when there is
(1999, pp.1576) there are many political events that affect uncertainty; people tend to imitate others due to
market participants, but political elections are particularly evolutionary reasons. The underlying reason is that people
important for three reasons: (1) With elections investors can think unconsciously that “sometimes others actually do
influence the medium and long-term economic policies of a know”, so according to them under uncertainty following
country. (2) With elections information is disseminated into others or showing herd behavior increases the overall
the financial markets since the elections attract the attention chance of survival (Parker and Prechter, pp.5). Therefore,
of media, pollsters, and political and financial analysts who under uncertainty it is probable that investors also tend to
are the mediators that filter information between politicians herd while making crucial investment decisions.
and the public. (3) Investors change their previous
probability distributions of policies when the election Methodology
outcomes become more certain.
The effect of national elections on stock returns has
been researched by several studies. One of the primary In this section firstly, the elections during the indicated
studies that were conducted by Foerster and Schmitz (1997) period is summarized; secondly, the aims and the
examined the effect of United States (U.S.) election cycle in hypotheses of the study are clarified; thirdly, the data and
an international context. They observed exchange rates of the sample are defined; and lastly methodology was
18 countries during the period 1957 to 1996, and they found explained in detail.
that U.S. election cycle helps to predict both U.S. and
international stock returns. Similarly, Pantzalis, Stangeland Elections in Turkey
and Turtle (1999) examined the stock market indices of 33 Totally, during these years there are thirteen election
different countries during the political election time periods periods in Turkey. Between the periods 1997 and 2017, six
between 1974 and 1995, using event study methodology general elections were realized:
Their results indicate that two weeks before the elections - 18 April 1999: As a result of this early general elections
there is a positive abnormal return, and these are strongest the coalition government was established that composed of
for elections with the highest degrees of uncertainty. They Democratic Left Party (DSP), Nationalist Movement Party
argued that especially the countries with low political, (MHP) and Motherland Party (ANAP).
economic and press freedom are exposed to abnormal - 3 November 2002: The results of the elections indicate
returns more than other countries. Moreover, Kapopoulos that the Justice and Development Party (AKP) won the
(2007) analyzed the movements of stock prices on the election with nearly two-thirds of the seats in the
Athens stock exchange based on the changes in political parliament, and hence government has changed.
environment. One of the crucial results that they reached - 22 July 2007: AKP again won the election, and the one-
was that when the election times get closer, the stock party government continued. Moreover, as a result of the
market volatility increases explicitly. election some crucial political changes emerged such as the

98
alliances of Kurdish nationalist and socialist parties entered periods.
the parliament with 22 seats. H4: There is herd behavior on BIST on the 18.04.1999,
- 12 June 2011: The government was still AKP. Therefore, 07.06.2015 and 01.11.2015 general elections.
it can be concluded that during these times AKP was the To test the four hypotheses by following Chang, Cheng
sole government, and there was stability. So, it can also be and Khorana (2000); non-linear regression analysis method
said that during these periods there was not much was used.
uncertainty in the political environment.
- 7 June 2015: The election resulted in an unclear The Data and The Sample
parliament and AKP lost its majority in Tukey’s Grand Sample includes all the stocks available on day t at
National Assembly. A new government could only be BIST between the periods 1997-2017. The event study was
formed through a coalition between different parties, but applied in the beginning of the analyses and the periods
since they could not agree on forming coalition this election were separated by using dummies for each period. Mandaci
was redone on 1 November 2015. (2003) stated that in emerging markets such as Turkey, the
- 1 November 2015: The AKP has won this election. effects of elections are assumed to be short-term, and that is
However, since these last two elections were repeated, it why she had taken into consideration 15 days before and
could be stated that they have uncertain environment after the election days. Based on this study the event
relative to the previous ones. window for the analysis is 15 days before (dummy 1) and
Between the given periods, there were also four local after (dummy 2) election dates. There are thirteen election
elections. The first one was held on 18.04.1999, the second periods in this study. As a market indicator BIST-All index
one was held on 28.03.2004, the third one was held on daily closing prices was used. To calculate the dispersions,
29.03.2009, and the latest one was held on 30.03.2014. daily returns of the stocks and of the BIST-All index were
Since local elections are held in all regions of Turkey, their calculated. The data was collected from Finnet Analyse
results are more uncertain relative to general elections. database (www.finnet.gen.tr). The data was organized in
Lastly, there were three constitutional referendums in the Microsoft Excel and then the regression analyses were
this period. One was held on 21.10.2007, other one was applied in the E-views software.
held on 12.09.2010, and the last one was held on
16.04.2017. The constitutional changes were accepted in all
elections by the public. However, this may also contain Methodology
uncertainty and political risk because of the changes in the In this study, to investigate herd behavior on BIST, the
constitution. non-linear multiple regression was used following Chang,
Cheng and Khorana (2000). Basically, the expectation is
that when there is herd behavior in the market, the
Aims and Hypotheses
dispersion will be relatively low. They measured dispersion
In the light of the above explanations, a gap in the
by cross-sectional absolute deviation (CSAD) in period t as:
finance literature about the effects of herd behavior in the
stock markets during the election periods is determined. For
∑𝑁
𝑖=1 |𝑅𝑖,𝑡 −𝑅𝑚,𝑡 |
this reason, the main aim of this study is to investigate the 𝐶𝑆𝐴𝐷𝑡 = (1)
𝑁
relationship between the election periods and herd behavior
in the stock market, namely Borsa Istanbul. The results of In Equation (1), Ri,t is the return of stock i in period t,
the elections can be both certain and uncertain based on the Rm,t is the return of BIST-All index in period t, and N is the
situation of the country. When the structure of general number of stocks.
elections is analyzed, it could be seen that after 2002 there As emphasized by Demirer, Lee and Lien (2014) based
is stability about the government, and it seems the political on the Capital Asset Pricing Model (CAPM), which
environment is relatively certain. However, the 1999 early assumes investors are rational, the return dispersion
general elections, 2015 elections, all local and referendum increases with the absolute value of market return. The
elections have more uncertain structures. Therefore, the reason is the sensitivity of each asset in the portfolio is
second aim of this study is to indicate whether pattern of different from each other, so each reacts differently to the
herd behavior changes based on the uncertainty among market shocks. In contrast, as pointed out by Chang, Cheng
these election periods. and Khorana (2000) when the investors behave in a similar
Based on these aims the following four hypotheses are way in the market, asset returns will gather around the
tested: overall market return. Also, they suggest that linear models
H1: There is no herd behavior on BIST on the general can be insufficient to detect herd behavior; therefore, the
election periods (except 1999 and 2015 elections). non-linear model gives more accurate results. The non-
H2: There is herd behavior on BIST on the local election linear regression equation is:
periods. 𝐶𝑆𝐴𝐷𝑡 = 𝛼 + 𝛾1 |𝑅𝑚,𝑡 | + 𝛾2 𝑅𝑚,𝑡2
+ 𝜀𝑡 (2)
H3: There is herd behavior on BIST on the referendum

99
 In Equation (2), the statistically significant negative γ2 When the coefficients are evaluated, in the first sub-
coefficient provides an evidence of herd behavior and non- period of 3.11.2002 elections, and second sub-period of
linearity. The positive γ1 shows that there is an increase at a 12.06.2011 elections γ1 is negative and this may imply that
decreasing rate in dispersion with an increase in the market CSAD decreases when the absolute value of the market
return. As stated by Caporale, Economou and Philippas return increases, but they are not statistically significant. On
(2008), the reason why the absolute values are used is that the other hand, in the remaining periods γ1 is positive and
the focus is on the size of the return, not on its sign. Note this may imply that CSAD increases when the absolute
that this model is called as non-linear model because of the value of the market return increases, but they are not
relationship between dependent and independent variable. statistically significant. According to this model, γ2
However, it is linear with respect to the model parameters coefficient must be negative and statistically significant to
γ1, because the parameter exponents are equal to 1. point herd behavior in the market. However, γ2 is positive
for first two general elections, and for the last election γ2 is
negative. The negativity of this coefficient may reflect the
Results higher degree of uncertainty level and the evidence of herd
Before implementing the regression analysis, the
behavior for this pre-election period, but it is not
preliminary assumptions were checked for each period.
statistically significant. Therefore, this shows there is no
There were some outliers in the dataset, but they were not
evidence of herd behavior on BIST. As a result, since it was
excluded, because CSAD is not affected from the outliers
hypothesized that “there is no herd behavior in BIST on the
too much as indicated by Christie and Huang (1995) and
general election periods (except 1999 and 2015 elections)”,
Chang, Cheng and Khorana (2000). Therefore, these
the first hypothesis cannot be rejected.
outliers were kept in the dataset to hold the observations in
the periods stable. Moreover, based on Jarque-Bera Table 1. Regression Results for the General Elections
normality test it seems residuals are normally distributed for
the all periods. P Constant γ1 γ2 Adj. R-Square F-Statistics
The second assumption that should be checked is 0,021* -0,114 12,248*
3.11.2002

1 0,946 124,616*
linearity. However, because the regression model that is (20.219) (-1.058) (5.889)
0,028* 0,19 2,296
used is a curvilinear (or quadratic) model, the linearity 2
(7.499) (1.268) (1.972)
0,893 59,270*
assumption could not be provided for it. As linear 0,015* 0,034 11,407*
22.7.2007

1 0,933 98,435*
(15.807) (0.251) (3.494)
regression assumes linearity for the relationship, curvilinear 0,017* 0,126 7,081
2 0,875 49,974*
regression assumes appropriate kind of curve for the data. (11.554) (0.771) (2.059)
0,013* 0,896 -24,201
Thus, for the quadratic function the assumption is the data
12.6.2011

1 0,364 5,014*
(6.721) (2.038) (-1.352)
are quadratic; therefore, it seems there is no linearity 2
0,014* -0,065 23,105
0,703 17,585*
(13.942) (-0.246) (1.814)
problem in the model. The third assumption that should be *The coefficient is significant at 5% level.
checked is autocorrelation, and it was tested by using t-statistics are reported in parentheses for the corresponding coefficient.

Breusch-Godfrey Serial Correlation LM Test. It is found

that for the all periods it seems there is no autocorrelation As exhibited in Table 2, according to the F-statistics
problem for this dataset. except the first sub-period of 28.03.2004 and second sub-
The fourth assumption is the multicollinearity which is period of 30.03.2014 local elections, the model is
tested by correlations among independent variables, and it statistically significant and valid. For the first sub-period of
is found that there is also a multicollinearity problem for all the 28.03.2004 elections and the second sub-period of the
periods. But it is very normal, because the second 30.03.2014 elections, according to the adjusted R-square
independent variable is just the square of first independent values, adjusted R square is 16.9% and 18.8% respectively,
variable. So, multicollinearity had already been expected in and they are too low, but the models and the coefficients
this model. This is one of the limitations of the quadratic already are not significant. For the other periods adjusted R-
models. The last assumption that should be checked is square values range between 51-91 % which means; that
homoscedasticity. It is found that there is no amount of the total variation of CSAD explained
heteroscedasticity problem based on the White test for all respectively by the regression model consisting of absolute
the periods. value of return and square of return.
After those preliminary tests, multiple regressions were When the coefficients are evaluated, except the first
implemented to test each hypothesis. As exhibited in Table period of 30.03.2014 elections, γ1 coefficients are not
1, according to the F-statistics the model is statistically statistically significant for none of the periods. On the other
significant and valid for all the periods in general elections. hand, γ2 coefficients are statistically significant but
The adjusted R-square values range between 37-95 % positive. For the first period of 28.03.2004 elections
which means; that amount of the total variation of CSAD although the γ2 coefficient is negative, it is not statistically
explained respectively by the regression model consisting significant. Therefore, for the local election periods there is
of absolute value of return and square of return. also no evidence of herd behavior in the market. As a result,

100
since it was hypothesized that “there is herd behavior in are not statistically significant. Therefore. there is no
BIST on the local election periods”, the second hypothesis evidence of herd behavior during the 1999 and 2015
is rejected. election periods, and the fourth hypothesis that was stated
that “There is herd behavior on BIST on the 18.04.1999,
Table 2. Regression Results for Local Elections 07.06.2015 and 01.11.2015 general elections” shall be
rejected.
P Constant γ1 γ2 Adj. R-Square F-Statistics
0.021* 0.34 -7.011 Table 4. Regression Results for 1999 and 2015 Elections
28.3.2004

1 0.169 2.423
(14.931) (0.962) (-0.402)
0.024* -0.569 22.337*
2 0.575 10.444*
(12.434) (-1.874) (2.810) P Constant γ1 γ2 Adj. R-Square F-Statistics
0.023* -0.162 13.029*
30.3.2014 29.3.2009

0.029* 0.028 0.642

18.04.1999
1 0.628 12.805*
(23.846) (-0.921) (2.462) 1 0.722 12.743*
(5.913) (0.322) (0.311)
0.021* 0.269 1.565
2 0.506 8.177* 0.034* 0.117 2.049
(7.862) (0.830) (0.215) 2 0.414 4.188
(6.309) (0.300) (0.614)
0.0127* 0.324* 3.459
1 0.911 72.844* 0.0114* 0.461 -3.379
(14.716) (2.670) (1.229)

7.06.2015
1 (5.0926) (1.427) (-0.366) 0.622 12.556*
0.015* -0.067 14.529
2 0.188 2.621
(10.923) (-0.179) (0.756)
0.0099* 0.6834* 1.806
*The coefficient is significant at 5% level. 2 0.925 88.584*
t-statistics are reported in parentheses for the corresponding coefficient. (2.604) (2.3764) (0.5032)
0.0126* 0.815 -41.727
1 0.233 2.983*
(15.341) (1.937) (-1.458)

1.11.2015
As exhibited in Table 3, according to the F-statistics 2
0.0137* 0.268* 0.422
0.852 44.153*
(16.888) (2.043) (0.181)
except the second sub-period of 21.10.2007 and 16.04.2017
referendum elections, the model is statistically significant *The coefficient is significant at 5% level.
t-statistics are reported in parentheses for the corresponding coefficient
and valid. Among the statistically significant models, the
adjusted R square values range between 68-85 %. When the
coefficients are evaluated, γ2 coefficients are not Discussion and Conclusion
statistically significant. Only for the first sub-period of The main argument of the behavioral finance is that
16.04.2017 referendum elections, γ2 coefficient is investors are not behaving in a rational way always. and it
statistically significant, however since the indication of herd argues that investors make financial decisions with mental
behavior is the negative coefficient for the referendum shortcuts and these may cause some biases such as herd
election periods there is also no evidence of herd behavior behavior. Basically, herd behavior is defined as imitating
in the market. As a result, since it was hypothesized that others’ decisions regardless of one’s own private
“there is herd behavior on BIST on the referendum election information (Bikhchandani and Sharma. 2000: 281). This
periods”, the third hypothesis is also rejected. study has contributed to the literature in two ways. The
main aim of this study was to examine the effect of general.
Table 3. Regression Results for Referendum Elections local and referendum elections on herd behavior on BIST
between the periods 1999 to 2018. The results of the
P Constant γ1 γ2 Adj. R-Square F-Statistics
elections can be both certain and uncertain based on the
0.014* 0.296 7.932
situation of the country. Parker and Prechter (2012)
21.10.2007

1 0.7 17.35*
(4.281) (0.663) (0.640) emphasized that under uncertainty it is probable that
2
0.014* 0.297 -3.231
0.288 3.835 investors are also tending to herd while making crucial
(8.202) (1.150) (-0.419)
0.013* -0.253 67.112
investment decisions. Thus, the second aim of this study
12.9.2010

1 0.679 15.786*
(9.913) (-0.493) (1.779) was to indicate whether pattern of herd behavior changes
0.015* 0.137 13.596
2
(13.865) (0.520) (1.220)
0.696 16.998* based on the uncertainty among these election periods.
1
0.0127* -0.114 18.205*
0.850 38.881*
BIST-All index was used as an indicator for the whole
16.04.2017

(20.636) (-0.705) (3.316)

market. and the event study was applied. The periods were
0.0131* 0.427 -24.186
2
(23.056) (1.197) (-1.012)
0.119 0.811 separated by using dummies for each period. Event window
*The coefficient is significant at 5% level for the analysis was 15 days before (dummy 1) and after
t-statistics are reported in parentheses for the corresponding coefficient.
(dummy 2) election dates. To test the hypotheses Chang.
Lastly. the early elections that was held on 18.04.1999 Cheng and Khorana’s (2000) non-linear regression analysis
and the local elections that was held on the same date, method was used. and CSAD was used as dispersion
7.06.2015 and 1.11.2015 general elections were measurement. After examining the descriptive statistics and
investigated. As exhibited in Table 4, according to the F- test of assumptions of all variables, regression analyses
statistics the model is statistically significant and valid were applied. Based on the regression results, the γ2
except in the 18.04.1999 second sub-period. The adjusted R coefficients were not found to be statistically significant or
square values range between 23-92 %. When the negative. Therefore, based on these findings, it can be
coefficients are evaluated, it is observed that γ2 coefficients argued that not only there is no evidence of herd behavior
in BIST, but also there is no evidence of non-linear

101
relationship between CSAD and mean return during these results require further testing under the considerations that
periods. Hence, the linearity result is consistent with the were mentioned above. As this study is one of the first
rational asset pricing models’ predictions. Moreover, since under literature that considers herd behavior during
there is no evidence of herd behavior in the given periods, a elections times, the research methodology could be
change in the pattern of herd behavior based on the improved to include terms of econometric models and
uncertainty among election periods cannot be determined. periods.
There were some limitations in this study. First, since In conclusion, if the other factors that influence stock
the model is quadratic, there is a high multicollinearity market are disregarded, from the findings it can be
problem, and this may influence the results of the concluded that Turkish stock market is a good option to
regression equation. The violation of this assumption may make an investment. Herd behavior may increase the
decrease the predictive power of the regression model and volatility of the market. Hence, absence of herd behavior
coefficients. But for these types of equations the second may be the indicator of stability in Borsa Istanbul.
independent variable is just the square of first independent However, other factors as it is mentioned before should also
variable, so it could not be corrected. Secondly, although it be considered to make efficient investment decisions.
seems the sample size provides the 5:1 rule, the included
sample was too low for the financial dataset, because in References
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than a thousand-sample size. Finally, there may be some Altay, E. (2008). Sermaye Piyasasında Sürü Davranışı:
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methodology was preferred in this study. However, against Borsa Istanbul. (Unpublished Master Dissertation). Izmir:
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behavior on BIST, the recent methodology which is called Caporale, G.M., Economou, F., and Philippas, N.
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uncertainty, still there is no evidence of herd behavior Investors Herd in Emerging Stock Markets?: Evidence
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598. Parker, W.D., and Prechter, R.R. (2012). Herding: An
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German FDI in Turkey: An Analysis under the Recent
Developments
Emin Akcaoglu, University of Applied Sciences Würzburg-Schweinfurt, Germany
Rainer Wehner, University of Applied Sciences Würzburg-Schweinfurt, Germany

Germany and Turkey historically have had very close interviews with managers from German companies as well
relations since the World War I. Their relations have been as business associations in Turkey. Due to the interviewees’
strengthened since the beginning of the 1960s by the concerns, we do not disclose their names or affiliations.
Turkish guest workers large-scale migration to Germany. The paper will follow a very brief historical
Throughout the decades some of the German Turks have perspective and then the focus will be on trade and
gained German citizenship, employer status and even also investment relations. This will be followed by the recent
political power. With the help of such special connections, political developments before analyzing the effects of such
Germany has now been the largest trading partner of events. Finally, a very short conclusion will be provided.
Turkey and also one of the largest foreign direct investors (We here kindly acknowledge the Bavarian Research
in the country. However, the relations between these Alliance, Bayerische Forschungsallian, for their financial
countries have recently been negatively affected due to a assistance for our field research.)
number of political developments. In this respect, the aim of
this paper is to analyze German direct investors’ Special Partners: Germany and Turkey
perceptions regarding Turkey as a host country under such
developments, and therefore to understand if there are Though there was also fairly large interactions earlier,
significant concerns over political risks for further Turkey’s special relations with Germany first started during
investment activities. the Ottoman period when both countries were close allies in
the World War I. Then, in the late 1930s and early 1940s
Germany is one of the biggest exporters as well as some German academics escaping from the Hitler’s regime
investors in the world. In fact, the export performance of actively involved in the development of the Turkish
Germany cannot be separately analyzed and understood university system as well as restructuring various public
from its performance as a foreign direct investor. OECD organizations and regulatory issues. After the World War II,
statistics on direct investments indicates that Germany has due to the labor shortage in Germany, some Turkish guest
an investment stock of over $1.7 trillion. workers went to the country in the 1960s for rebuilding the
German foreign direct investment is absolutely economy. This has created a closer psychic distance
important for Turkey as well. Germany is the largest trading between the two societies. Also with the help of such
partner of Turkey, and there are more than 7 thousand interactions, both countries have significant economic and
German companies which have direct investments in commercial relations throughout the time. Germany is
Turkey. Recently, some political tensions have been raised currently the largest trading partner and the fifth largest
between the German and Turkish governments and such direct investor for Turkey. In other words, since the
events have caused a number of concerns in the business Ottoman period, both countries have had significant
community as well regarding whether such issues may historical, social, economic, and cultural ties.
affect the German companies’ future operations in Turkey. Interestingly, the labor migration has constituted one of
With this regard, this paper aims to investigate and the most important and sensitive issues between these
analyze the German outward direct investments in Turkey countries. Interestingly, some of the ‘recent political
in terms of the recent political developments’ effects on developments have also been directly related to the Turkish
political risk perceptions of German multinationals. In other diaspora in Germany. There are different estimates about
words, we will look at the German FDI in Turkey from a the so-called Turkish German population: One estimate is
political risk management perspective and the importance between 2.5-4 million; over 1.5 of them already holds
of inter-governmental relations between the home and host German citizenship (Conradt, & Langenbacher, 2013).
countries. Another one is approximately 3 million, and nearly 1.2
To this end, we have undertaken a basic secondary data million are German citizens and can vote in German
analysis over the financial press before having a number of elections. The very important point is that nearly 1.43

105
million of the Turkish Germans can also vote in Turkish value chain depending on labor-costs or logistical
elections (Zsabo, 2018). This is a huge political power and advantages. In such cases, Turkey has been chosen as a
when there is a knife-edge balance in any election, it can be manufacturing location either for its domestic market or as
absolutely critical. an export base for its locational proximity to the regional
target markets. Bus-manufacturing could be a good
German FDI in Turkey example of this. In other words, the main motive of many
German investors in Turkey has been building up of a sales
As of the end-2017, there were 7.111 German and service network, and when necessary manufacturing.
companies operating in Turkey (Turkish Ministry of In line with the Turkish industry’s structural locational
Economy) with a total FDI inflow of over $9 billion distribution, the German companies also prefer Istanbul and
(OECD Stats). the Marmara region as the major investment location. This
With this amount, Germany follows the Netherlands, area is followed by Izmir, Bursa, Antalya, Ankara, and
US, Austria, and the UK in the largest direct investors list. Mugla.
(However, for instance, the Netherlands’ tax-related
position should be separately analyzed. In many instances, Trade between Germany and Turkey
foreign or even domestic investors use the Netherlands for
corporate tax avoidance purposes. Therefore, some German Another important indicator of bilateral economic
companies may also have significant ‘pass-through FDI’ relations between countries is how much they export to
over the Netherlands to Turkey.) each other. Turkish-German foreign trade is historically in
Though there are also the cases for investments the favor of Germany due to the fact that German goods are
through acquisitions, German FDI in Turkey has largely widely sought-after worldwide and Germany is one of the
been ‘greenfield’ since the 1960s when an import biggest exporters in the world. For instance, according to
substitution policy was adopted by the then-government. the German National Statistics Office, in 2017 Germany
Foreign investments played a significant role in the exported goods worth $1.571 trillion and imported goods to
successful implementation of this policy. Some German the value of $1.270 trillion, and hence had a trade surplus of
investors of that period are still very active in the Turkish over $300 million. In the same year, Turkey sold only over
industry. Allianz, BASF, Bayer, Daimler-Chrysler, $15.2 billion worth of goods to Germany and imported
Deutsche Bank, Deutsche Messe, Dresdner Bank, Dr. $21.3 billion of goods. When we compare the Turkish-
Oetker, Henkel, MAN, Metro, Nordstern, Robert-Bosch, German bilateral trade with Germany’s worldwide trade
Siemens, Ströer, Volkswagen, and Westdeutsche activity, it is just a tiny section.
Landesbank are some of these well-known German In this framework, the trade balance has been
companies operating in Turkey for very long years. Turkey, constantly against Turkey. In other words, in the bilateral
with a population of about 80 million, has been a huge trade, Turkey has the "net importer" and Germany has the
market for these companies, many of which have large "net exporter" position. However, Germany has been the
production plants in the country. The estimated current largest export market of Turkish goods for decades.
value of such productive assets is around €9 billion and the Turkish products that are exported to Germany are not
total employment generated is about 140 thousand people. limited to textile-apparel, and agricultural products. Turkey
For instance, only clothing manufacturer Hugo Boss exports large-scale automotive, chemical, electrical,
employs more than 3.800 people in its plant at the Izmir electronic, machinery, and iron and steel products to
Free Trade Zone while BASF employs 800 at different Germany as well. However, we should note that that some
production plants in six cities. of the biggest Turkish exporters are in fact German
German FDI in Turkey has generally been in companies’ subsidiaries such as Bosch (the 9th biggest
manufacturing and service industries. In manufacturing, exporter in 2016), Mercedes-Benz (the 11th), Ferrero (the
German companies are mainly concentrated in machinery, 13th), Bosch-Siemens Household Appliances (the 14th). In
vehicle parts, electrical-electronics, chemical products, other words, German multinationals’ subsidiaries have been
food, and ready-to-wear production; in the services sector, at the top of the exporters’ list for decades.
they are in the trade, retailing, tourism, communication, Germany’s superior export performance has also ties to
banking and investment financing. export financing schemes of the German government next
Therefore, a large part of German FDI has been either to the German technology, quality and reliability. To
‘market-seeking’ or ‘efficiency-seeking’. There are also support the German economy at difficult and risky markets,
‘resources-seeking’ (i.e. mining or agricultural) German the Germany government supports its multinationals and
investments, but their importance is rather insignificant. exporters against economic and political risks of export
Even ‘efficiency-seeking’ investments can be considered transactions as well as political risks of foreign investments
‘market-seeking’ when manufacturing is organized partly by providing export credit and investment guarantees. Such
locally for the low-end of value-added segments of the guarantees are also of significant importance for Turkish

106
imports from Germany. Germany’s earlier standing in the negotiations with Turkey
though she was openly favoring a privileged partnership.
Turkish – German Business Council With that regard while Germany did not block negotiations,
Mrs. Merkel seemed to discourage Turkey by allowing the
In 1996, the Turkish-German Business Council was negotiations to be dragged out by some other member
formed with the aim of developing economic and states. This started to cause resentment and disappointment
commercial cooperation between the two countries as well in the Turkish government and also in the Turkish society
as promoting Turkey as a favorable host country for in general. These events were also paving the way towards
German investments. The Business Council’s activities the current situation.
have been carried out in cooperation with the German-
Turkish Chamber of Commerce and Industry (AHK) and Recent Developments
the Turkish-German Chamber of Commerce and Industry
(TD-IHK) located in Istanbul. AHK Turkey (the Germany There was a military coup attempt on 15 July 2016 in
Foreign Trade Office) is also tasked with supporting the Turkey. Since then, there have been important political
bilateral trade relations. AHK Turkey has currently more developments in the country. For example, just after the
than 860 members from all sectors. coup attempt, the state of emergency was declared; and then
a referendum was held on 16 April 2017 to amend the
country’s constitution to replace the existing parliament-
Political Background based government with a presidential system. The state of
emergency has not been ended since its first declaration. As
Germany’s approach to Turkey’s EU membership a result, some European politicians started to voice their
application has always been a crucial aspect of German- serious concerns whether Turkey was evolving into an
Turkish relations. The Turkish side knows that Germany’s authoritarian regime. As a reaction to such criticisms, the
role and influence are vital to shaping the EU policies Turkish president accused those countries’ governments to
towards Turkey. For decades, Germany has acknowledged support the opposition in Turkey. The high and erratic
Turkey as an important strategic partner that should not be uncertainty caused by political developments like these was
isolated from Europe. However, since Mrs. Merkel’s a harbinger of a new era when Germany and other
appointment to the office, Germany has voiced a different European countries are not called anymore “close friends”
perspective, called ‘privileged partnership’ instead of or “partners”.
Turkey’s full membership. This has been formulated as an Following the failed Turkish coup attempt in July
extension of the existing Customs Union between Turkey 2016, many arrests were made and hundreds of Turkish
and the EU. The same approach was, in fact, earlier adopted military officers asked for asylum in Germany. Mr.
during the former Chancellor Helmut Kohl’s period. Mr. Erdogan has called Berlin to extradite these people. But the
Kohl wanted to keep Turkey anchored to the EU, and hence German government rejected these calls by alleging that
pushed the other European countries to enter into the rule of law and judiciary in Turkey is not strong.
Customs Union with Turkey. This experiment was the first Later, a Turkish-German journalist was arrested and
in history as normally a non-member was not allowed to jailed in Turkey in February 2017. This resulted in banning
enter in the Customs Union before becoming a full member. Turkish politicians from campaigning in Germany for the
However, Mrs. Merkel’s standing brought a policy approval of the constitutional referendum of April 2017. As
shift to Germany’s approach to Turkey. This was because said earlier, nearly 1.43 million Turkish people living in
between the two conservative governments, the Social Germany can vote in Turkish elections. These actions, in
Democrat-Green coalition was in power from 1998 to 2005. turn, led Mr. Erdogan to accuse Germany and Mrs. Merkel
In this period, the-then Chancellor Gerhard Schröder and of using ‘Nazi methods’.
Foreign Minister Joschka Fischer were significantly Then the German parliament, Bundestag voted to
supportive for Turkey’s EU candidacy. Subsequently, the withdraw the German troops from the Incirlik base in
EU started accession negotiations with Turkey in October Turkey and to redeploy them in Jordan. In July 2017, the
2005. Turkish government canceled a planned visit by a German
When the accession negotiations started, Mr. parliamentary delegation to the NATO base in Konya while
Erdogan’s Justice and Development Party was already in the Turkish government was accusing Berlin of providing
government in Turkey following a clear victory in the 2002 asylum to coup plotters. As a result of all these
elections, and this party’s foreign policy then seemed developments, first the German officials warned German
substantially pro-European. This period for Turkey and nationals against the risks of traveling to Turkey, and then
Germany as well the EU was like a honeymoon year. Mrs. Merkel declared that Berlin would start considering
Later, however, conditions started to change for all sides. economic sanctions against Turkey and hence reduce its
After her election in 2005, Mrs. Merkel carried on

107
economic cooperation with Ankara. In this line, the German For instance, by referring to the mentioned list of
Foreign Minister also mentioned reviewing Hermes companies which allegedly supporting terrorist activities,
investment guarantees among the economic measures to be Kurt Bock, the chairman of BASF said to the German News
taken against Turkey. As these guaranteed are issued by the Agency (DPA) that: "This was not an event that increases
government to German companies for their investments in confidence to Turkey. Everyone knows that there is a need
Turkey, this issue further enhanced concerns among the for basic stability for investments. The rule of law and
business community. recognition of laws is also a part of it.” Similarly, German
As a result of these entire process, both sides lost trust Industry Association Vice President Thomas Bauer worried
to the other party. In this beleaguer environment, a new about the developments in Turkey. Mr. Bauer, also heading
event came to the agenda when the German newspaper Die Bauer Construction Company, said in his statement to the
Zeit reported in July 1917 that Turkey had provided the German Economy News Agency (DPA-AFX): "Of course,
German authorities with a list of over 680 German firms on the question of what will happen tomorrow is being asked.
suspicion of supporting terrorism. This list was including This is because Turkey has a maverick regime. The
such large multinationals as Daimler and BASF. Obviously, possibility of imposing sanctions against Turkey or warning
this particular development created substantial unrest people to travel to the country are significant risks. Though
among the German companies operating in Turkey. As a we currently continue to do the existing business as usual,
result of the reactions of the business community to this when viewed prospectively Turkey has lost her
news, the Turkish government tried to assure the German attractiveness. Now I would not buy a company in Turkey.”
investors. The Turkish Deputy Prime Minister, Mr. Bekir Another German investor Heidelberg Cement, a
Bozdag, said that there was a "communication error" with construction materials manufacturing company, is also
the mentioned list and there was no legal investigation into cautious about new investments in Turkey. Company’s
German companies. chairman Bernd Scheifele said to the news agency Deutsche
In addition, the Turkish Prime Minister Mr. Binali Welle that “Despite the good opportunities, the purchase of
Yildirim also assured the German companies at a meeting a new company is not planned.” Volker Treia, foreign trade
with the senior representatives of some leading companies officer at the German Chamber of Industry and Commerce
such as Bosch, Siemens, Mercedes, Metro Group, Frankfurt (DIHK), is not optimistic either about the country. He said,
Messe and Thyssen Krupp. He stated that “I am very clear "If the political situation does not change, it is not possible
that we do not consider you German companies. We see for German companies to think about making new
you as the companies of this country.” investments” (Deutsche Welle, 20.09.2017). Martin
Also at the same meeting, the Turkish Minister for Wansleben, CEO of the Association of German Chambers
Economy, Mr. Nihat Zeybekci, requested the of Commerce and Industry (DIHK), the largest Germany
representatives of the German multinationals to have business association told Anadolu Agency that “German
meetings at their headquarters in Germany to explain the firms with experience of operating in Turkey were investing
Turkish government’s approach to their CEOs. for the long-term, despite the country’s current economic
Interestingly, shortly after these developments, a problems.”
business consortium comprising Germany’s Siemens was Similarly, one of the interviewed company managers
awarded a tender for the construction of a 1,000 MW power said that “There is huge market potential for their products
plant and wind turbines by beating out eight other bidders. in the energy sector due to growing energy needs of
Reuters (03.08.2017) commented on this by stating that Turkey. With this regard, they want to enlarge their
“Turkey picked Germany’s Siemens as the winning bidder production capacity. But the head office in Germany is
for a $1 billion wind power project on Thursday, a sign significantly concerned with the recent developments in the
Ankara wants to keep business separate from the widening country. Therefore, they do not know how they can move
diplomatic row between the NATO allies.” forward by adopting which type of investment strategy.”

German Multinationals’ Reactions Conclusion

All these recent political tensions between Turkey and For foreign direct investment, one of the major
Germany have naturally led to unrest in the business world. concerns of multinationals is definitely the political risks
German multinational companies have been concerned that faced in the host country. In this respect, the trust relations
Turkey's political environment may also cause significant between the home and host countries are extremely
risks for their investments in the country although those important. In addition, multinationals are also concerned
representatives of the German companies represented at the with the predictability of risk factors in connection with
prime minister’s meeting told journalists that they had government policies. Furthermore, the predictability issue is
agreed with Mr. Yildirim that Turkey-German relations directly related to the legal infrastructure of the host
should continue ‘more silently’. country, as well as formation and operation of the host

108
government. The recent developments regarding the minister reassures German investors in Turkey.”
Turkish and German governments interactions over a http://www.hurriyetdailynews.com/turkish-prime-minister-
number of different areas together with the German reassures-german-investors-in-turkey-116029
multinational companies operations in Turkey may give Paul, A. and Schmidt, J. (2017). Turkey's relations with
interesting clues about these subject areas. Of course, all Germany and the EU: Breaking the vicious circle. Policy
these should be explored and then analyzed in detail. Brief 2 October 2017, European Policy Centre.
Reuters (21.07.2017). “Turkey has over 680 German
References firms on terrorism blacklist: security source”. Reuters.
https://www.reuters.com/article/us-turkey-germany-
Anadolu Agency (15.02.2017). “German companies companies/turkey-has-over-680-german-firms-on-
investing in Turkey's future - Head of German business terrorism-black-list-security-source-idUSKBN1A61DN
chambers says firms aware of potential despite current Reuters (03.08.2017). “UPDATE 1-Germany's
problems.” https://www.aa.com.tr/en/europe/german- Siemens wins tender for Turkish wind power project”.
companies-investing-in-turkeys-future/751267 https://af.reuters.com/article/energyOilNews/idAFL5N1KP
Brink, C. H. (2003). Measuring Political Risk - Risks 6E5
to Foreign Investment. Routledge, New York. Rubin, A. J. (11.03.2017).”Erdogan Calls Dutch ‘Nazi
Conradt, D. P. & Langenbacher, E. (2013). The Remnants’ After Turkish Minister Is Barred”. New York
German Polity, Rowman & Littlefield Publishers. Times. https://www.nytimes.com/2017/03/11/world/europe/
Deutsche Welle (20.09.2017). “Türkiye'deki Alman turkey-netherlands-ban-referendum.html
firmaları tedirgin” [German companies in Turkey are Szabo, S. (2018). Germany and Turkey: The
worried]. http://m.dw.com/tr/t%C3%BCrkiyedeki-alman- Unavoidable Partnership. Turkey Project Policy Paper
firmalar%C4%B1-tedirgin/a-40612951 No.14, March 2018, The Brookings Institution, Washington
Dumludag, D. (2009). An analysis of the determinants D.C.
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Hurriyet Daily News (27.07.2017). “Turkish prime project-tender/

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Plenary Session III

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Kia vs. the Government of Nuevo León: Lessons from an FDI
Dispute at the State Level
Andreas M. Hartmann, Tecnologico de Monterrey, Mexico
Joohee Kim, Tecnologico de Monterrey, Mexico

This paper deals with the topic of MNCs’ subnational Literature Review
choices of location and relative political risk. A Korean
car manufacturer set up a manufacturing plant in Mexico The location choices of foreign companies have been
and found the state government to be reneging on a large a recurrent topic in the international business literature
part of its predecessor’s promises for investment subsidies (for a recent review, cf. Nielsen, Asmussen, &
and tax breaks. In comparison with other, similar cases, Weatherall, 2017). The great majority of studies focus on
the main factures for this relative failure were a lack of the country level, while within-country choices have
experience and local connection on the MNCs’ side and focused mostly on the level of industrial clusters (Brenner
the strength of local industry on the Mexican state’s side. & Mühlig, 2013; Nielsen, et al., 2017). However, two
Our conclusions focus on foreign investors’ relative recent studies highlight the importance of local
bargaining strength at the subnational level. governments for foreign investors: Nicolini, Scarpa, and
Valbonesi (2017) found that for member countries of the
This paper uses the case of a Korean car factory in European Union, a federal structure has a significant
Mexico to elucidate the power relationships between positive effect on the granting of state aid to investors in
foreign investors and state-level governments. Mexico has the automotive industry. Li and Sun showed that in the
become a major location for foreign-owned car Chinese context, “large foreign firms can receive
manufacturing plants, due to its closeness and duty-free favourable treatments from local institutions due to their
entry of Mexican-assembled cars to the North American contribution to local economy and employment” (2017:
market, with relatively low restrictions on local content. 561).
From the MNCs’ point of view, the choice of country is
obvious but then, the selection of a specific location
within one of Mexico’s thirty-two territorial entities can Power Relationships between Local
amount to a real challenge. Governments and Foreign Investors
The case reported in this paper is unique, as it has led
to a major conflict where similar investments in other Although the academic literature on the relations
Mexican states have run smoothly. We will show how between host-country governments and foreign MNCs
choosing a Mexican state with a strong industrial base put goes back at least to the 1960s (cf. Boddewyn, 2005), the
the foreign investor in a weak position once the newly theory most often referred to (cf. Kobrin, 2009) is
elected local government decided to go back on its Vernon’s (1971) “obsolescing bargain” model, which was
predecessor’s generous promises of financial and meant as a warning to MNC managers that their
infrastructure support. From the evidence shown, we will companies could fall victim to expropriation and other
draw conclusions about power relations between foreign abuses once they had made a substantial investment in the
investors and state governments. corresponding host countries. Since those times, many
Our case study is entirely based on official countries – including Mexico – have promulgated foreign
documents and press reports from both Mexico and South investment laws that protect MNCs from such arbitrary
Korea, as well as some third-country sources. decisions (cf. UNCTAD, 2016). For some countries,
After this introduction, we present a brief literature however, expropriation is still a perceived risk for foreign
review on FDI location choice. The following section investors (cf. Jia & Mayer, 2017).
deals with Mexico’s situation as an attractor of foreign To adapt Vernon’s (1971) theoretical model to
investment. We then present a brief history of the MNC’s conditions below the expropriation threshold, Eden,
internationalization and site selection abroad. The Lenway, and Schuler (2005) have extended Vernon’s
empirical core of the centers on Kia’s entry into Mexico original two-phase concept into a “political bargaining
and the relationship with the Nuevo Leon state model”, which presents an ongoing relationship between
government. We then discuss the implications of the case the foreign investor and the host country government,
and the lessons that can be derived from it. Finally, the allowing for a partial compatibility of the parties’
paper offers a set of conclusions. interests. This model looks at both parties, goals,

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resources, constraints, and outcomes, as well as the  A dependable infrastructure in terms of electricity
MNE’s strategies and the bargaining process as such. and water, which is not guaranteed in all Mexican
Behrman and Grosse (1990, quoted in Grosse, 2005) states.
have developed another framework that applies a  A sufficient amount of both half-skilled workers as
stakeholder approach to MNC-Host government well as educated administrative and technical
relationships: While MNCs have to take into account their employees. For the country level, Noorbakhsh,
competitors, other governments, suppliers, and customers, Paloni, and Youssef (2001) have corroborated the
host governments need to respond to voters and other importance of human capital for FDI influx.
governments, as well as various pressure groups. We will  A sufficient level of security and crime control. In
use a combination of these two frameworks for analyzing this respect, the empirical results are not unanimous:
the case of Kia in Mexico. For example, Kinda (2009) found mixed results for
the effects on crime on FDI in 77 developing nations,
Mexican States and FDI Attraction while Daniele and Marani (2011) could show that
persistent crime deterred FDI in some regions of
The Macroeconomic Context: Automotive FDI Italy. For the specific case of Mexico, Ashby and
Ramos (2013) found the state-level murder rate to be
in Mexico positively correlated with FDI in some sectors and
negatively with others, while there was no significant
While in the 1960s, foreign carmakers had to effect for the manufacturing industry. On the other
negotiate their permits for producing in Mexico (cf. hand, Pajunen (2008) was able to show that
Bennett & Sharpe, 1979), the situation has completely countries’ relative attractiveness for FDI not did
changed since the 1990s: The implementation of the result from specific individual institutional factors but
North American Free Trade Agreement (NAFTA) has from sets of characteristics that may be functionally
transformed the country into a prime location for setting equivalent.
up car assembly plants, which produce mainly for tariff-
 A stable and effective functioning of government. On
free exportation to the US and Canada. Without any
a national level, Globerman and Shapiro (2002)
sizeable domestic manufacturer, Mexico has thus become
found such “governance infrastructure” to be a
number eight among the world’s car manufacturers in
significant predictor of FDI.
2016 (OICA, 2017), although local content was often
Clearly, not all regions of Mexico fulfill these
relatively low. For the Mexican state of San Luis Potosí,
conditions. The Mexican Southeast, for example, is
for example, “OEMs use an estimate of 50% to 55% local
lacking in both infrastructure and skilled workers, while
content, but Tier 1 companies only use 10% to 30% local
several states on both coasts are plagued by violence. As a
content, with 30% being an exception” (Soto, 2016). All
result, out of the thirty-one Mexican states plus one
over Mexico, politicians and government officials are
Federal District, only twelve host foreign car assembly
involved in efforts to increase both the size and the depth
plants.
of automotive production. A fully developed car-assembly
Within-country patterns of FDI in the Mexican car
plant, with its host of suppliers, often provides tens of
industry According to traditional economic theory, one
thousands of jobs and sizeable tax income.
would expect FDI projects to cluster in specific areas for
Qualifying conditions: Infrastructure, workforce, taking advantage of favorable factor conditions and
and security Like most emerging economies, Mexico
agglomeration benefits, such as the proximity of
presents enormous regional differences in terms of
specialized suppliers. Four Mexican states (Coahuila,
internal development, which make specific locations more
Guanajuato, Mexico State, San Luis Potosí) contain
or less attractive for foreign investors. For medium-tech
assembly plants from several competing manufacturers,
manufacturing operations with a strong export orientation
which seem to have given preference to such
such as the car industry, any potential site for setting up
agglomeration advantages. For example, when Japanese
an assembly plant would need to meet a set of minimum
car manufacturer Honda was looking for a second site in
criteria:
Mexico, it chose Guanajuato over Jalisco, where it had
 A robust transportation network for receiving parts established its first plant. A company representative cited
and shipping out finished cars. For example, Holl the unavailability of a sufficiently large plot and the
(2004) found that new motorways influenced the connection to two railroad networks as motives for the
spatial distribution of manufacturing establishments different location and denied receiving special incentives
in Spain. In an emerging economy like Mexico, with from Guanajuato state authorities (Ramírez & Romo,
its vast territory, transport connection plays an even 2011). In such a constellation, the state government will
more important role. be inclined to favor foreign car makers and their suppliers
in general, but would probably avoid giving preferential
treatment to one company over the other, in order to avoid

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conflicts with individual firms and maintaining the doors workers. Additionally, Nuevo León has a long history of
open for future investment by current and potential attracting manufacturing investment from foreign firms
industry participants. from North America, Europe, and Asia, such as Carrier
However, the dominant pattern of spatial distribution (air conditioners), Johnson Controls (auto parts), Lego
is one car manufacturer per state (Aguascalientes, Baja (toys), LG (appliances), etc. Traditionally, Nuevo León’s
California, Chihuahua, Jalisco, Morelos, Nuevo León, governments have been industry-friendly, with several
Puebla, Sonora, cf. Global Business Reports, 2016). The governors hailing from the state’s leading industrial
Volkswagen Group even preferred a relatively families.
underdeveloped site within Puebla state for its new Audi
plant, in order to remain within the same entity as the Kia’s Internationalization
Volkswagen factory established in the 1960s. Two
reasons for this behavior can be presumed: First, foreign Hyundai Motor Group (HMG) with its two major
car manufacturers avoid to co-locate in one state in order brands Hyundai and Kia is South Korea’s largest auto
to prevent any competition for local semi-skilled and manufacturer, reaching a total output of almost 5 million
skilled workers, which could lead to wage increases and vehicles in 2016. Its internationalization was prompted by
worker poaching. Sun, Tong, and Yu (2002) found some push factors such as saturation of the domestic market,
evidence of such crowding out for those Chinese necessity to increase the ratio of overseas production
provinces that have traditionally been most attractive for volume to limit currency risks, and a surge in labor costs
FDI. Second, being an important company at the state escalated by militant unions after the 1997 Asian financial
level should guarantee a special relation with the local crisis. The same crisis forced Kia Motors into large-scale
government, which might be used for obtaining initial restructuring efforts, which led to its acquisition by
incentives and favorable treatment in the ongoing political Hyundai Motors in 1998. The consolidated group (HMG)
bargaining process. For example, the German firm BMW then started expansion into overseas markets.
supposedly received incentives worth MXN 3.5 billion Before the crisis, key Korean automakers enjoyed
(then approx. USD 237 million) for locating in San Luis their exclusive market position under the protection
Potosí state (Hernández López, 2014). granted by the national government. With the hike of
These two different within-country location strategies domestic sales by about 40% around the 1988 Seoul
also have implications for carmakers’ supplier networks: Olympics, the production volume increased from 100
When a company sets up shop within a state where thousand in 1980 to 1 million in 1988 (Cho, Kim, & Kim,
competitors already operate, it will probably be able to 2014). However, in the 1990s, the industry’s rapid
plug into a part of the existing supplier structure, which is expansion caused market saturation and overinvestment.
already operating and just needs to start making custom- Hyundai Motors no longer sustained its monopoly
made parts. In fact, many of the world’s most important position in the domestic market and turned to overseas
tier-1 suppliers service a host of OEMs. On the other market by building KD (knocked down) assembly plants
hand, those carmakers that choose to open up a location in Asia and Europe.
without competitors in the same industry often have to Another factor behind international expansion was
invite some of their key suppliers to install plants exchange rate volatility. With the devaluation of the
specifically for this customer. This constellation increases Korean currency after the Asian crisis, HMC expanded
the carmakers’ bargaining power, but also their the export volume with competitively lower prices and
vulnerability to potential failures from the suppliers’ side. made foreign exchange gains of KRW 240.5 billion in
Additionally, setting up a whole OEM-supplier cluster 1997 and KRW 463.7 billion in 1998 (ChosunBIZ, 2013,
might prolong the overall setup process and requires even Feb. 13). In 2012, HMG achieved a sales record of 7.1
more cooperation from the local authorities, which need million units with 8.8% of global market shares, which
to facilitate even more land and infrastructure. made it the 5th global automaker (Schmitt, 2017).
Industry structure of Nuevo León state With a However, with the increase in won value of nearly 7.6%
population of 5.1 million inhabitants, Nuevo León ranks against the US dollar, the earnings of Hyundai and Kia
eighth among Mexico’s thirty-three federative entities dropped despite higher unit sales. It was 5.5 % year-on-
(INEGI, 2016) but third in per-capita income. Since the year drop in net profit in 2012 when it had an 8% hike in
end of the XIX century, Nuevo León has been a major sales (Panait, 2013). While limiting currency risks by
center of the manufacturing industry. Today, it hosts the expanding the global productions, HMC tried to keep in
headquarters of cement maker Cemex, beverage and retail check price hikes by holding costs down through
giant Femsa, and the industrial conglomerate Grupo Alfa. authoritative measures against militant unions.
Nuevo León is also the basis of the largest Mexican- In response, however, militant unionists organized
owned bank Banorte and a host of second-level firms with frequent walkouts and stalled productivity improvements
family owner ship, which are not listed on the Mexican and implementation of new technology. As a result, in
stock exchange even though they employ thousands of 2016, the productivity level per hour in the South Korean

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plants was half of those in the United States (Korea Times was remoted from New Delhi, the most important market
2017, March 3). Further, the company failed keeping for motor vehicles. The Alabama plant lies some 280 km
surging labor costs down considering the fact that a plant from the Port of Mobile on the Gulf of Mexico to ship
level worker was paid an average annual income of KRW vehicles to Latin America (Lyne, 2002). In Slovakia, a
96 million (USD 85,333). potential workforce of 450,000 lives within a fifty-
kilometer radius from Kia (TheKoreaHerald, 2004, Mar.
Kia’s Globalization and Site Selection Strategy 3). In addition to the above conditions, HMG looked for
locations that were union-free or dominated by docile
The first phase of globalization of Hyundai Motors unionism. In Turkey, Hyundai workers did not join the
took place when it built a Canadian plant in Bromont in nationwide strike in 2015 (MKStock, 2015, May 18),
1985. With over 400,000 cars, nearly three-fourths of its while in the U.S., HMC ruled out those candidate states
Canadian outputs in 1988, Hyundai was ranked fourth that did not have ‘right to work’ law. In India, among four
largest car exporter into the US (Sachwald, 2013: 228). candidate sites, Hyundai Motors was not in favor of
Hyundai had not considered the U.S. for its first overseas Kolkata due to the communist state government. The
plant mostly due to protectionist sentiments against Hyundai workers in Brazil joined a company-friendly
foreign automakers in the U.S. (McDermott, 2014: 159). union apart from the militant unionism based in Sao
Further, the Canadian government offered generous Paulo. Similarly, the union at the Mexican Kia plant was
incentives such as CAD 131 million dollars and a free site affiliated with a politically moderate official umbrella
(McDermott, 2014; 159). However, this move turned out organization.
to be a bitter failure. The Bromont plant started its After the Canadian experience, access to a network of
operation in 1985 with an installed capacity of 100,000 suppliers became an important consideration for HMG.
units, but was closed in 1993 due to its poor quality and For example, The Turkish plant is located 68 km from
decreasing sales (Chung, 2009). The major reason for this Honda Kocaeli. The Indian plant is located 27.2 km from
was due to its location where HMC was isolated from the the Ford plant, and in China, HMC built its plants 144 km
main automobile industry (McDermott, 2014; 159) and from Toyota’s. In Alabama, Kia’s plant is located at the
suffered from insufficient supplies. When closing the juncture of I-95 and I-16, along which several auto
plant, HMC had to pay back a part of the incentives, USD suppliers have lined up. Hyundai and Kia have also
50.1 million to the local government (Hankyong Daily, invited major suppliers to accompany them to new
Sept. 12, 1996). international sites in order to assure a constant supply and
After the failure in North American market, HMC high quality of components (Park & Rhee, 2015).
turned to markets in developing countries. The second Furthermore, HMC chose the sites close enough to sibling
phase of HMC’s internationalization started with building plants to share the production platform and key parts such
KD plants in developing countries such as Botswana in as engines, transmissions, and other components.
1992, Thailand in 1993, Malaysia in 1993, Egypt in 1993, From its experience with the Bromont plant, HMC
Zimbabwe in 1994, Indonesia in 1994, the Philippines in learned that generous incentives could cloud its judgment
1994, Pakistan in 1994, Vietnam in 1995, and Venezuela (McDermott, 2014: 159) and that incentives should be the
in 1995 (Lee & Cho, 2008). last factor to be considered after all other requirements
In the third phase, announced as “Hyundai 21st have been met. Having said that, being a strong and
Century Business Strategy”, HMC turned away from the distinctive player in a region had its advantages of high
KD productions and targeted the wider consumer base in negotiation power over the incentive deals. All of the
Turkey in 1997, India in 1998 and China in 2002. The hosting regions offered Kia incentives such as
Indian plant was considered a stepping-stone to access infrastructure improvements, free sites, tax breaks, and
major global markets. After taking over KIA, HMG other benefits.
started looking into the Chinese market and built plants in
2002. Then, it again targeted the North American market Kia’s Entry into Mexico
in Alabama in 2005 and in Georgia in 2010. For the
European market, plants were launched in Slovakia in On the surface, selecting Nuevo León as a production
2007 and the Czech Republic in 2009. Finally, with the site within the NAFTA area made a lot of sense for Kia:
entry into Brazil in 2012 and Mexico in 2016, HMC had Mexico is the second largest car market in Latin America
finally accessed most of the major auto markets in the after Brazil. Kia’s plant has a planned capacity of 30
world. thousand units, of which it plans to export 60% to North
On the subnational level, HMG looked for location America, 20% to South America, and the remaining 20%
advantages such as access to skilled labor and raw to the domestic market. Most importantly, Kia’s site in
materials, and availability of suppliers. In India, it chose Nuevo León is located only 200 kilometers from the U.S.
Chennai due to the infrastructures such as ports, airports, border, the second largest market in the world. On the
public transportation, and water networks even though it supply side, Nuevo León state has an automotive industry

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that accounts for 20% of national output, 23% of exports, for Settlement of Investment Disputes at the World Bank
and employs over 600 thousand people, ranking third for (Asia Economics News, 2016, Feb. 16). However, such a
auto parts production in the country. The city where Kia is step would have been Kia’s last resort since it would have
located, Pesquería, has immediate access to an further delayed the start of operations.
international airport and railroad line to the US. In April 2016, the state Secretary of Economics
It took Kia three years to make an investment claimed that there were 31 illegal provisions in the
decision in Mexico due to quality issues at other plants. contract and denounced Kia for excessive incentives
Kia was a third-ranked automaker by number of vehicle amounting to nearly 28% of the total investment,
recalls in the U.S., 3.3 million in 2013. Therefore, Kia compared to 6% of incentives that other companies had
stopped its aggressive expansion plans worried that its received previously. Kia argued the deal was reached
suppliers would be unable to keep up the pace. However, through a transparent bidding process and even hinted at
it became difficult to squeeze additional capacity from the the possibility of withdrawing its investment. Then, the
existing plants. The U.S. plants reached up to 125-130% state subtly changed its stance toward Kia. The new
of utilization rate on a two-shifts-a-day basis in 2014 governor said, “we have no differences with Kia, we have
(Automotive News, 2014, Feb. 10). With an additional differences with the previous government.” Further, he
plant in Mexico, Kia could increase overseas production pointed out that the state would fulfill the commitments
rate from 49% to 55%, which would alleviate the capacity that had legal validity according to the possibilities of
problem (Meail Business News, 2016, Sep. 8) and reduce state finances (La Silla Rota, 2016, Jan 19).
vulnerability to fluctuating exchange rates. Since the state On April 4, 2016, Mexican president Enrique Pena
of Nuevo Leon met the basic conditions for a new site, the Nieto said he would keep an eye on the deal when asked
state’s incentive package offer was a relatively minor for mediation by South Korean president Park. The next
factor to be considered. day, the state governor announced he still would not
Meanwhile, the Nuevo León state had a strong comply with the agreement. Members of the lower house
interest in attracting Kia. Kia would be the final consumer of the Mexican federal parliament adopted a statement
of its auto part manufacturers and would strengthen the urging the state to honor the agreement. In May 2016, the
state’s economic position. A local university even Mexican Secretary of the Economy urged both parties to
prepared a 74-page report on the economic and social reach a compromise saying Kia could relinquish up to
impact of the investment (Instituto para el Desarrollo USD $23 million in incentives. On June 8, 2016, both
Regional, 2016). Kia Group itself took care to explain its parties released a joint statement that the deal was reached
positive impact on the local economy, including direct with the reduction of the incentives from 28% to 10.5%.
and indirect employment, an increase of property value, In the same month, an anti-corruption prosecutor accused
and CSR efforts in the rather poor municipality of the previous governor Medina of draining some MXN
Pesquería, including a refurbishing of the local school $195.87 million from state coffers.
(Kia Motors México, 2015).
Agreement with the Previous State
History of the Conflict between Kia Government
and the Government of Nuevo León
The major motive for the Nuevo León government to
In June 2015, a new governor was elected in Nuevo support Kia’s investment in the state was the prospect of
León, and matters turned complicated for Kia. While the creating a total of 70,000 jobs, out of which 14,000 would
plant was already halfway completed, the governor be employed directly by Kia and the rest by suppliers and
demanded renegotiation claiming the reversal of the associated businesses. In the first stage, the car assembly
incentive deals reached by the previous administration. plant would offer direct employment for 4,000 workers.
Amidst the conflict, the contents of the confidential Kia would make an initial investment of USD 2.5 billion.
contract were released to the public. The contract seemed The Nuevo León government committed to infrastructure
disadvantageous for the citizens of the state by creating a measures and tax breaks costing around USD 700 million,
major fiscal burden including the exemption from the equivalent to 28% of the private investment (Agencia el
payroll tax for 20 years. Universal, 2015, Dec 6). As was later revealed, these
In March 2016, when the plant was 98% completed incentives included the state government paying federal
(Yonhap News, 2016, March 29), the state stalled the taxes for the firm, as well as taking care of infrastructure
implementation of the infrastructure components of the investments, such as building a fire station, a million-
agreement, such as a natural gas pipeline, drainage lines, gallon water tank, and a training center (Campos Garza,
water treatment facilities, and a rail spur connecting the 2015). Additionally, the agreement included some special
Kia lot to the main line. In response, Kia alluded to the favors, such as paying for the inauguration party and
possibility of taking the case to the International Center condoning all future traffic fines for Kia employees
(Flores, 2016).

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 The amount of incentives originally offered by the varied between 0% and 27% of the sum invested (cf.
Nuevo León government was in line with the financial Table 1). While the Guanajuato state with its multiple car
support offered to foreign car assemblers in the 1995- companies offered incentives of up to 2%, single-investor
2000 period, when state and federal governments offered States (San Luis Potosí, Puebla, Nuevo León) chipped in
incentives equivalent to between 35% and 40% of foreign between 17% and 27% of the sum invested. The case of
investment sums (Agencia el Universal, 2015, Dec 6). Aguascalientes with its Nissan-Daimler JV is exceptional,
However, there was also a precedent in Guanajuato state, as the state government changed its policy from generous
where the Japanese car maker Mazda had to accept a to no incentives at all (Arteaga, 2016), when Nissan was
reduction of the originally promised incentives package. already captive due to inter-plant linkages.
In the 2010’s, incentives given to car manufacturers

Table 1: Comparison of Incentives given to Car OEMs in Mexico in the 2010’s

OEM Mexican State Year Investment Direct Incentives (millions Percentage
(millions of MXN) Employment of MXN)
Nissan-Daimler Aguascalientes 2015 1,240 3,700 0 0%
Mazda Guanajuato 2012 770 4,500 13.9 1.8%
Honda Guanajuato 2012 1,270 1,200 25.4 2%
Nissan Aguascalientes 2012 2,000 1,200 150 7.5%
BMW San Luis Potosí 2014 1,000 1,500 170 17%
Audi Puebla 2012 1,800 1,500 486 27%
Kia Nuevo León 2014 2,482 8,900 670 27%
Source: Flores (2016), based on Nuevo León government data

Additionally, in 2007, Nuevo León had promulgated August 27, 2014 was technically illegal and also imposed
the Law on Promotion of Investment and Employment that an enormous burden on the local government’s budget. The
limited state incentives to 5% of the invested sum (Agencia Mexican federal government had already stepped in with a
el Universal, 2015, Dec 6). Thus, the agreement signed on USD 190 million tax incentive.

Impact of the Change of Government

In October 2015, a wave of discontent against document as “highly confidential and commercially
governmental corruption swept into office a new, sensitive”, according to a local TV anchorman (Martínez,
independent governor of Nuevo León, who promised to 2015). While Kia insisted on the validity of the contract, the
clean up the mess left behind by the previous new state government contested it.
administration. The Kia project had already been targeted, On the national level, the Mexican federal government
because the previous government had purchased the plot of urged the parties to come to an agreement (CNNExpansión,
land from one of the previous governor’s friends, at a much 2015), while the Korean ambassador in Mexico stressed the
inflated price (Pulso, 2015), to be donated to Kia. One of future benefits of Kia’s installation in Nuevo León (Olvera,
the main problems left behind by the previous 2015). While Kia did not make any public statements,
administration was the state’s excessive debt, which made it Nuevo León’s Secretary of Economic Development
impossible to finance the storm drain system and the accused the firm of “extraordinary stubbornness” to insist
railroad spur that had been promised to Kia (Agencia el on an “illegal” agreement and a “leonine contract”. He also
Universal, 2016, Jan 25). The new government also had to voiced the suspicion that Kia would enlist the help of then
catch up on a six-month delay in other infrastructure work, president Park Geun-hye during her official visit to Mexico
which threatened to push back the beginning of production (Flores, 2016).
at the plant (Flores, 2015). The new governor could not give too much credit to
Therefore, the new government labeled the contract as Kia since the economic benefits brought by the investment
“overreaching and not implementable”. Kia was more project had been a success of his predecessor. On the other
cautious and demanded legal certainty, although the hand, the state needed to bring in an auto assembler in order
possibility of a lawsuit for breach of confidentiality was to participate in Mexico’s auto manufacturing boom. Kia
mentioned (Pulso, 2015) after the Nuevo León authorities presented itself as an innocent bystander since it did not
had published the original agreement on its Facebook want to put itself in the middle of the political disputes.
account on November 29, 2015 (Manufactura, 2016). This Further, it did not want to make another withdrawal
step clearly contravened Kia’s understanding of the decision after the Canadian experience and to have open
agreement, which contained a passage labelling the conflicts with any government. From the experience of its

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13-year long conflict with the Brazilian government at the 2016). On October 13, 2016, the Nuevo León State
arbitration court of the International Chamber of government, the Municipality of Pesquería, and Kia signed
Commerce, Kia learned that confrontation with any state a new agreement with parallel text in Spanish and English.
would hurt the future market opportunity. Even though Kia The government published the scanned text in full length
was awarded over USD $200 million and was relieved of a (79 pages), including all clauses with both parties’ rights
BRL 2 billion penalty levied by the Brazilian government, and obligations in the previous and modified agreement. As
Kia still has been branded as an anti-Brazilian automaker, the government explained in an additional graph, the new
which made Kia rule out Brazil, the largest auto market in agreement would lead to MXN 7 billion (approx. USD 368
Latin region, from its potential site lists (YonhapNews, million, as of Oct 13, 2016) in savings (Government of
2011, Oct 30). Nuevo León, 2016a). To further strengthen the state
After several months of intensive coverage in both the government’s position, the new agreement established
local and international press (e.g., Althaus, 2016), in June verification visits, penalties for non-compliance by the
2016, the conflict ended in a new agreement that investor, and a binding arbitration procedure according to
substantially reduced both tax breaks and the infrastructure ICC rules (Convenio de Colaboración/Collaboration
projects that had originally been promised (Agencia el Agreement, 2016). The Nuevo León government also
Universal, 2016, Jun 8). The most important details of the published a graphic overview of Kia’s contractual
incentives are listed in Table 2. Overall, State support was obligations in the previous agreement (none for Kia and
reduced from 28% to 10% of the sum invested and for the sixteen for Nuevo León) and the new text (thirteen for Kia
first time, Kia committed to contributing to the and four for Nuevo León) (Government of Nuevo León,
infrastructure developed and guaranteed an undisclosed 2016b).
amount of jobs and local purchases (González & Nava,

Table 2: Comparison of Main Incentives Granted in the 2014 vs. the 2016 Agreements
Category Agreement of Aug 27, 2014 Agreement of Oct 13, 2016
Income tax exemption 100% over 20 years 95% over 5 years
Real property tax exemption 100% over 5 years 10% over 10 years
Exemption of value added tax on 100% None
real estate purchases
Exemption of motor vehicle tax for 1 year None
Kia employees
Exemption of fee for environmental 100% None
impact study
Source: El Universal, 2016

Discussion
In a study of FDI in China, Luo (2001) had found access to the US market. Thus, the size of the local
personal relations between MNC managers and regional government’s incentives were not decisive.
governments to have the most significant effect on several Even if Kia and its parent company HMG have built an
performance measures. Confirming these findings, the impressive international network over the last years,
unfavorable outcome for Kia in this case may be partially compared to other car companies, the Korean are relative
imputed to the lack of the carmaker’s ties to the new state newcomers to the game of influencing host country
government, although the local Secretary of Economic governments. A study comparing Toyota and Hyundai’s
Development was the owner of a car supplier (without lobbying in Europe, for example, found the latter to be far
known ties to Kia). The fact that the foreign investor did not less effective in influencing politics (Barron, Pereda, &
go through with its threat to withdraw or reduce its Stacey, 2017). Johanson and Vahlne (2009) have defined
investment is in line with another finding in the literature: the concept of “liability of outsidership” for MNCs, defined
For foreign investments by US-based MNCs, Wheeler and as the absence of a relevant network in the host country.
Mody found that “high-cost tournament play is unnecessary Generally, it can be assumed that in a Latin America, Asian
for countries with good infrastructure development, firms face a greater liability of outsidership than North
specialized input suppliers and an expanding domestic American or European-based MNCs (cf. Chen, 2017).
market” (1992: 57). Apparently, Kia found the Applying Ghemawat’s (2001) CAGE framework, Korean
infrastructure and suppliers to be sufficiently developed, firms face greater cultural, administrative, and geographic
while NAFTA provided domestic-equivalent conditions for distance to Mexico than their European competitors. A

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similar situation forced the Chinese automaker FAW to 2016), which could have interfered both with its capacity to
cancel the construction of a small-scale assembly operation attract qualified workers and with its sales within Mexico.
in the state of Michoacán (cf. Cuervo-Cazurra & Montoya, Since Kia began selling its vehicles in July 2015, the total
2014), even though FAW had a Mexican partner. That volume of its sales accounted for 95,352 units in just under
failure that might have warned Kia to tread more carefully two years, making Kia the 5th largest vehicle brand in
in its Mexican investment. Mexico (Mexico News Daily, 2017, May 6). We can thus
The concept of legitimate expectations In conflicts conclude that Kia’s cautious approach to the conflict at
between governments and foreign investors, the latter have least helped it maintain a positive image in the eyes of the
often invoked the concept of legitimate expectations, Mexican public.
including – among others – “[g]overnments’ written Relative bargaining power in an ongoing relationship
commitments to investors, e.g., contractual commitments Although the major commitment for the FDI project was
beyond mere contractual expectations” [Sauvant & Ünüvar, established through the construction of the assembly plant,
2016]. Clearly, the present case falls into this category, as the further development of the initial investment leaves
the Nuevo León government had signed a binding multiple options for both parties to implement or withhold
agreement. However, things get complicated insofar as one actions that could benefit or harm the other side’s interests.
could consider the agreement to be partially void, as it The state government could authorize and/or finance further
violated a local law promulgated prior to the contract infrastructure for the focal firm, its suppliers, and associated
signature. On the other hand, the concept of legitimate companies. The foreign company, on the other hand, could
expectations could also be applied in the opposite direction, increase or decrease the rate of production at the plant and,
i.e., the investor’s committing to creating a sizeable number above all, modify the depth of production either in-house or
of jobs and including a concrete percentage of local content by inviting and qualifying supplier firms. Kia’s actual
into its production process, instead of just assembling bargaining strength would depend on the flexibility and
foreign-made parts. In the partially politicized and resilience of its global production network, as well as the
economically sensitive context of the present conflict, degree of capacity utilization in its plants. If the Nuevo
however, such legal considerations should not be León government were seen as exerting too much pressure,
considered necessarily as 100% enforceable; Mexico’s the Korean firm could use the “option value” of its
relatively weak rule of law (rank 88 worldwide, cf. World multinational production network (cf. Kogut & Kulatilaka,
Justice Project, 2016) adds even more uncertainty. 1994) by shifting manufacturing out of Mexico.
The role of national stereotypes in FDI-related What strengthened the local government’s position was
negotiations As measured by Håkanson and Ambos’ (2010) its strategy of going public, knowing that public opinion
study on psychic distance, Korean managers qualified the expected the governor to make good on its promise to
difficulty of doing business in Mexico with a score of 67, revise the agreement with Kia. The new government needed
compared to a minimum score of 21 (China) and a to “win” the negotiation and to make sure that the outcome
maximum score of 77 (Argentina). Thus, Kia probably would be all over the media. Kia, on the other hand, also
expected its insertion into the Mexican context to be rather tried to build up some local support through its CSR
difficult. On the other hand, Koreans perceive contracts to initiatives: Even amid the conflicts, the company donated
be somewhat malleable (Lee, 2005; Movius, Matsuura, MXN 1 million to public schools in the Pesquería
Yan, & Kim, 2006), which allowed Kia to deal with the municipality and initiated a professional career
situation in a flexible way. development program for university students. Kia
Had the Korean firm insisted even stronger on the participated in cultural events, reforestation, and recycling
fulfillment of the original contract, the Mexican public activities with citizens and provided training programs for
might have viewed the firm as abusive, thus reinforcing or its new employees with the support of the state government
creating a negative country-of-origin effect (cf. Yu & Liu, at Nuevo León.

Conclusions
Large foreign investment projects can bring many jobs receives preferential treatment, such as tax breaks, while the
and prosperity to a region or state. It is in the best interest of locals have to carry the full fiscal burden. Thus, the
the local authorities to help the foreign investor, to the bargaining power of a foreign investor is reduced when
extent that a potential loss of the investment cannot be local industry is strong and well connected to local
substituted by other national or foreign investors. authorities. In the current case, local firms never intervened
However, a state-level industry that is already well publicly in the conflict, but their influence was felt through
developed reduces the perceived attractiveness of any the preexisting law limiting incentives for foreign investors.
proposed foreign investment. Additionally, local The uniqueness of the situation in Nuevo León becomes
incumbents might not view too favorably that a foreign firm evident when compared to other states, where similar levels

120
of state incentives were approved without any conflict Kia can turn the adverse political situation into an economic
reported in the press. success or whether the firm will choose to reduce its
Finally, Kia’s situation as a latecomer to Mexico investment in Mexico in search for more favorable
exacerbated its position as an outsider, without relevant conditions elsewhere. When this paper was written (early
political connections in Mexico. Contrary to the chaebol 2018), the Kia operation was fully functional, although
tradition of strong government protection in Korea, even depth of production was rather limited, with powertrains
asking for the Korean President’s support did not turn the and dashboard assemblies being imported as whole
situation to Kia’s favor. component sets. Within the context of NAFTA
This case demonstrates that even on the subnational renegotiation, the probably increase of mandatory local
level, the nonmarket aspects of location choice play a major content demanded by the US administration could possibly
role for foreign investors. A major limitation to this study prompt another round in the ongoing bargaining process
lies in the nature of the issue: Only time will tell whether between Kia and the state of Nuevo León.

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Business Diplomacy: How to Ease Multinational
Corporations’ Business Risk in Developing Countries and
Conflict-prone Zones
Huub Ruël, Hotelschool The Hague/University of Twente, The Netherlands
Lisa Isabell Stümke, University of Twente, The Netherlands

These days, multinational corporations (MNCs) are no Western companies to leave the safety of familiar
longer ‘innocent’ business actors; they play an important economies and expand to other parts of the world such as
role in international relations as well. The revenues and Brazil or China. These occurrences forced governments to
market value of many MNCs are higher than the GDPs of pass their power of managing foreign policy goals and
small countries. For many developing countries and national tasks even more to MNCs (Westermann-Behaylo
conflict-prone regions, MNCs are attractive partners since et al., 2015). In turn, this created a situation in which
they support economic growth. Entering markets and governments had to deal with a lack of vital resources such
starting operations in developing countries or conflict- as experienced and well educated people to get the
prone regions is attractive for MNCs since the margins are country’s business done. This is where diplomatically well-
high and the potential for growth great. However, organized MNCs come into play. They expand their
operating in developing countries and especially conflict- business by entering emerging markets while taking on a
prone regions is also risky. Recent research has already diplomatic role by managing multiple interactions between
contributed to this topic, for example by describing what local stakeholders such as the government, NGOs, and
kind of diplomatic actions had already been undertaken by communities.
so-called principled leaders in order to manage in conflict- New opportunities have also appeared for some of the
prone regions. But the topic needs far more research to countries that are active in the global market economy, but
better understand how MNCs act in conflict-prone regions they have simultaneously created governance gaps for
in order to survive. To fill the gap, this study investigated others within the last century. Unstable market situations
on a more explorative basis the question: “How do giving rise to other types of conflict than the commonly
principled leaders manage their company’s business known conflicts between states. An example of that is an
successfully by conducting business diplomacy in intra-state conflict having a lasting effect on many groups
developing countries and conflict-prone zones?” within society as they mainly undermine human progress
Grounded theory was used in this study as a basis for and economic development (Sidibe & Saner, n.d.). To
the methodology. Interviews were conducted with nine provide some insights into the status quo, different sources
principled leaders from different MNCs operating in have shown that today more than 60 conflicts are taking
various sectors. The results showed that business diplomacy place and more than 15 peacekeeping operations are being
was conducted by every MNC to minimize the business risks undertaken by the United Nations in conflict zones (United
and maximize the business opportunities, but to different Nations, 2016; Council Foreign Relations, 2016;
degrees. Based on the data analysis, a conceptual Business Wikipedia, 2016; see Appendix: Table 1 & 2).
Diplomacy Framework Matrix was developed to lay a Macnamara (2012) and Nelson (2000) stressed that the
theoretical foundation for understanding how MNCs can field of commerce and diplomacy is no longer state-centric,
act when launching a new venture in a conflict-prone nor confined to official governmental interactions, since a
region. variety of MNCs have a standing in world politics by
negotiating and compromising with foreign authorities to
Today, we talk about a globalized society in a world ease these complex circumstances. As shown by a study
that is becoming more and more interconnected and undertaken by the Edelman Trust Barometer (2016), MNCs
economically interdependent. To put it differently, are actually expected to go beyond serving their pure
economic, social or political problems are getting too big market demand and instead take responsibility to respond to
for MNCs or for governments to figure out all by social public demands. Around 80 percent of the
themselves (Westermann-Behaylo et al., 2015). In the respondents believed and trusted in the fact that MNCs are
1990s, privatization and the power shift from the Western more likely to be in a position to improve profits, economic
economy to the more developing economies compelled as well as social conditions in the society where they

125
operate compared to national governments (Edelman Trust emerging and conflict markets is the goal of this study.
Barometer, 2016; see Appendix: Figure 1 & 2; Nye, 2008). Which stakeholders are important enough to stay in contact
Increased foreign direct investment in developing with? What preparations must be taken care of before
countries and conflict-prone zones is just another aspect entering a developing country or a conflict-prone zone?
clarifying why this study is of interest. The non-profit How do business diplomats behave towards foreign
research and educational organization ‘The Fund for Peace’ authorities? What actions can help to gain access to the
gathered data from many countries with regard to their relevant market? All of these questions are answered by this
extent of fragility and came to the conclusion that of research, which in turn provides input for other companies
178 listed countries, around 70.2 percent (125 countries) which plan to launch a venture in such a complex business
were characterized as “warning” and “alert” and could be environment. In summary, this study dove deeper into the
considered so-called conflict zones (Fund for peace, 2015; topic of business diplomacy by investigating how these
see Appendix: Figure 3). Of these 125 conflict zones, 54.4 MNCs developed and encouraged interpersonal links with
percent experienced an increase in FDI in the period from relevant stakeholders in the unexplored context of
2011 to 2015 (The World Bank Group, 2016). In summary, developing countries and conflict-prone areas. It should
MNCs are investing and operating in more than half of the encourage MNCs not to ignore complex situations in their
world’s conflict zones, and because of their diplomatic area of operation, but instead to take responsibility and
skills, they are expected to provide assistance at the same handle them properly since threats and other difficult
time as they are successfully exploring the business situations affect not only the emerging market itself but also
situation in these countries and regions (Nelson, 2000). all other parties involved. As a final step, a “Business
Previous research has presented different concepts that Diplomacy Framework Matrix” was created to put into
match exactly what MNCs diplomatically practise to perspective all dos and don’ts for business diplomats when
survive in emerging and conflict-prone economies. Scholars planning to launch a new venture in a developing country or
call these concepts corporate diplomacy, economic a conflict-prone zone.
diplomacy, business diplomacy, etc. They are elaborated in The following section starts with a literature review
detail in the next section. The recent literature has pointed and a theoretical framework to give an idea about what
out some pioneering businesses that successfully launched exactly is meant by the term business diplomacy and how it
diplomatic actions. Tesco, a retailer originating from the is related to MNCs operating in developing countries and
UK, addressed the issue of labor grievances within the conflict-prone zones. Then the qualitative methodology
agricultural sector in South Africa in 2009 (Kotze, 2014). approach, used to analyze the semi-structured telephone
DHL, a worldwide logistics company operating in more interviews, is discussed. Sections 4-6 present the research
than 220 countries, helped to re-establish the distribution of findings of this study, a discussion about these findings in
mail and parcels in Kosovo. In particular, it supported the relation to previous studies on this topic, and finally
country in establishing the necessary logistics for continued concluding remarks derived from first-hand insights into
service (Bennett, 2001). Another example is given by the how MNCs handle their business strategies with foreign
multinational construction company ABB, which has stakeholders to establish a positive, long-term relationship.
taken the diplomatic role and responsibility to encourage
diversity and improve ethnic relations in the workplace by Literature review and theoretical
bringing Bosnians, Kosovars and Serbs together. It helped
with rebuilding electricity infrastructures, which were framework
damaged during the war that took place between 1992 and
1995 (Bennett, 2001). This section provides an overview of the recent,
relevant literature in an attempt to come up with a clear
understanding of what business diplomacy is about. It aims
Practical relevance to point out how the topics MNCs, business diplomacy, and
developing countries and conflict-prone zones are
Practising business diplomacy by building relationships connected to come up with an appropriate research
with foreign authorities contributes to the growth of question.
developing countries and conflict-prone zones and grants
access to foreign markets in terms of resources, labor, etc. Different facets of diplomacy
Recent studies conducted by Melin (2016), Westermann- Several scholars have conducted research about
Behaylo et al. (2015), Ruël (2013), and Ruël and Zuideman international companies that developed so-called business
(2012) have contributed to the exploration of what kind of competencies, helping them to build bridges between their
diplomatic actions have already been accomplished by company and a foreign and multifaceted political setting. In
MNCs and were taken as the starting point for this study. 2000, for example, business diplomacy was supposed to
Finding out how successful business diplomats of “influence economic and social actors to create and seize
pioneering MNCs behave and act to launch ventures in

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new business opportunities; working with rule-making The use of business diplomacy to gain power and
international bodies whose decisions affect international
legitimacy
business; forestalling potential conflicts with stakeholders
and minimizing political risks; using international media International companies need approval from the local
channels to safeguard corporate image and reputation” government and other foreign authorities in possession of
(Saner et al., 2000, p. 13). About three years later Steger legitimate power. They can make use of power and
(2003) came up with a new concept of what international legitimacy as two independent tools or in combination to
companies were urged to apply due to globalization, and build authority in such a strategically important market
entitled it corporate diplomacy. In his eyes, it was a environment. Power is generally understood as the
systematic and professional endeavor of international capability of someone to determine the other participant’s
companies to obtain a license to operate and to manage the way of thinking, which in turn leads to the desired result of
business setting to guarantee that business is done smoothly a discussion or an event (Nye, 2008). For international
(Steger, 2003, p.6- 7). This is supported by what Heinz companies, power seems to be an effective way to extend
(2014) stated in his study. He clearly emphasized that their control in terms of achieving the status of institutions
advancing the corporate interest by negotiating and creating within society (Ordeix-Rigo & Duarte, 2009). There are
alliances with key authorities such as governments, different modes of power that can be employed by
analysts, the media and NGOs is the most important aspect international companies such as soft power, hard power and
to focus on when it comes to business survival in a fast- smart power (Hedetoft et al., n.d.; Ordeix-Rigo & Duarte,
changing environment. Another facet of diplomacy is 2009). Soft power can be distinguished in three sub-types:
public diplomacy, which can be understood as a two-way coercive power that makes use of physical resources of
street characterized by an exchange of information in terms forces, violence, or restraint; utilitarian power that is based
of listening and talking. Credibility is important for this on exchange of material or of financial resources; and
type of diplomacy since the outcome of the negotiation symbolic power that rests on normative and social symbols
depends on what values international companies share with such as prestige, esteem, love and acceptance. Hard power
the respective foreign authorities and how the latter is best known as military power or economic pressures that
perceive the international companies’ messages and adapt are used to control others to act accordingly. Smart power
to them accordingly. Others have made a more detailed represents the most effective and efficient way, namely the
differentiation of the concept as international companies balanced combination of soft and hard power aligned to the
can make use of business diplomacy on the one hand and respective situation. Legitimacy inevitably plays an
commercial diplomacy on the other. Commercial important role, too. This study works with the definition
diplomacy is then popularly understood as making policy in provided by Ordeix-Rigo and Duarte (2009). It states that a
terms of working within a network of public and private company’s performance should give other authorities the
actors who manage commercial relations using diplomatic impression that it is desirable, appropriate within the given
channels and processes, and business support in terms of society, and accepted in the host country’s constructed
granting access to new markets (Ruël, 2013). It is system of norms, values, and beliefs. To increase both
represented as a two-dimensional concept, meaning that it power and legitimacy, international companies have the
is practised by heads of state and embassies as well as by possibility to make use of what recent research calls
international companies. The kind of diplomacy that is business diplomacy.
exercised by multinationals is also termed business
diplomacy, where the focus lies on its stakeholder Tools of business diplomacy
management (Sidibe & Saner, n.d.). In this case, managers Along with power and legitimacy, research has
negotiate, re-negotiate, compromise and set up long-term, revealed certain tools that business diplomats use while
positive relationships with local authorities to establish a working abroad. An antecedent of all the following tools is
license to operate and increase the business’ power as well “having a positive corporate diplomatic history” as a
as its legitimacy (Ruël, 2013). company (Nelson, 2000). Of course, this takes some time to
Most recent studies have switched to the term develop and depends on previous actions by the respective
corporate diplomacy again and extended already existing company in the home market. Presuming that a MNC had a
research on this topic by adding aspects from research areas strategy for dealing with stakeholders in the past, it seems
such as political corporate social responsibility, conceivable that it might face problems with foreign
international relations, and peace studies (Westermann- authorities, particularly in developing countries and
Behaylo et al., 2015). For the purpose of this study, the conflict-prone zones, since circumstances are already
term business diplomacy was chosen as the most heating up.
appropriate facet, since its focus lies on stakeholder Another commonly known tool is having a “good
management by international companies. reputation” as a company, as a positive picture of a business
partner makes every step easier to negotiate (Ordeix- Rigo

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& Duarte, 2009). Since diplomacy is all about storytelling intensity, since they are highly contextual, industry- and
and seeking compromises among all stakeholders regarding company-specific (Banfield et al., 2005; Macnamara,
a certain issue, the fact of “being truly interested” in doing 2012). Therefore, this study is based on the understanding
some good for the foreign society in the short or long run of developing countries and conflict-prone zones as
helps in achieving the company’s business goals. Next, countries or regions that are already at risk or obviously
being “aware of who is who” in developing countries and becoming subject to non-violent and violent conflicts in
conflict-prone zones is a very valuable tool of business terms of civil wars or on a more localized stage (Banfield et
diplomacy (Nelson, 2000). Pulling the right strings by al., 2003). Recently, light has been shed on new types of
involving the relevant stakeholders makes it easier for conflicts, moving away from the idea that conflicts happen
companies to succeed, also financially. Finally, the “usage between states towards more intra-state or internal conflicts
of media channels” in developing countries and conflict- (Sidibe & Sane, n.d.). MNCs offer valuable aspects such as
prone zones is related to other tools and can influence the credibility, neutrality, resources, and legitimacy and have
chance of success with a business in either a positive or a an extensive reach that makes them receptive to taking on a
negative way. role connecting them to issues of peace and security,
traditionally the preserve of state sovereignty as well as
The ambition of business diplomacy national identity these days (Banfield et al., 2003; Tripathi
and Gündüz, 2008). As the former Secretary General Kofi
Given these popular tools of business diplomacy, the Annan once stated, “At a time when more than 1 billion
question of “when is business diplomacy carried out people are denied the very minimum requirements of
successfully?” still remains unanswered. Research done by human dignity, business cannot afford to be seen as the
London (1999) has pointed this out very clearly. Business problem” (Valente and Crane, 2010). This quote once again
diplomacy is successful when two main goals are achieved, makes clear that MNCs must take on a new role that not
namely process goals and outcome goals. Under process only includes the idea of following their own business goals
goals, London (1999) understood that companies are but goes beyond that to consider other stakeholders’
closely cooperating with all relevant stakeholders during positions and needs and to take responsibility for their
the process, and coercion, threats and other negative actions in the foreign context.
interactions have been avoided. Communication among all There are two ways that MNCs can act in foreign
participating parties should remain flexible as well as open contexts. On the micro-level, they are responsible for all
to new ideas. Outcome goals are achieved when impacts derived from their corporate operations and their
negotiations have positive consequences realised either relationships with foreign authorities and society. A
unanimously or in a consensus. The agreements achieved negative example is the exploitation of natural resources in
should bring some stability to the negotiations by lasting for poor regions. Investment in such a valuable resource leads
a certain time. Continuously striving to improve to grievances within a certain region rather than promoting
interpersonal competencies as well as establishing a group development for all stakeholders. This situation is also
identity with a certain common interest is also necessary for related to the “Dutch Disease”. When looking at the
continuing, positive, long-term relationships that will macro-level, international companies focus on including the
withstand future deals and disagreements. In general, foreign contexts’ economic and natural environments as
maintaining respect for all involved stakeholders and a well as political impacts and their own business
diplomatic stance as well as being approachable to fellow performance but in collaboration with relevant stakeholders
negotiating parties pays off for companies. in the region. An illustrative example for the macro-level is
the provision of resources in combination with the support
of MNCs to build a medical center in a developing country
MNCs in developing countries and conflict- or conflict-prone zone rather than just donating money to
prone zones the society. Such actions go beyond traditional philanthropy
and corporate social responsibility and hence place MNCs
Globalization of trade and investment has changed the in quasi-governmental roles in cooperation with other
nature of relations between states and brought new players stakeholders, taking major decisions about public welfare
to the stage regarding the market economy, namely MNCs and social provision (Valente and Crane, 2010).
(Banfield et al., 2003). In developing countries and conflict- Recent research took a closer look at the different
prone zones especially, there are inherent difficult relationships MNCs have with different foreign authorities
characteristics to handle, such as major foreign investment, when doing business abroad (Banfield et al., 2003). The
weak legal frameworks and governance structures, which present study added results about the relationship between
confront foreign investment firms with inevitable MNCs and the local security services in the respective
grievances when planning to launch a new venture there foreign context. This type of relationship is one of the most
(Valente & Crane, 2010). Those characteristics differ in important ones when it comes to generating soft power. To

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 developing
country/conflict- •market situation
prone zone •main stakeholders
characteristics •main challenges

principled leaders •on organizational level

implementing
•tools of BD
business diplomacy
•on employee level
in MNC

Power &
Legitimacy

Process goals &

outcome goals

Figure 4: Conceptual Model

Performance

strengthen the ties between MNCs and the foreign acted as diplomatic actors, but has not addressed what
authorities, MNCs can attend joint trainings of their processes they went through (Melin, 2016). Therefore, the
security service, grant assistance programs, or involuntarily present study focuses on exploring how international
assist repressive governments by providing them and the companies take on their new role to achieve their business
security service with certain supplies. Knowledge about goals without contributin to local tensions. The main
military psychological operations is important to influence research question then reads:
foreign authorities’ behavior. In other words, MNCs have to “How do principled leaders manage their company’s
interpret deception or disinformation-related issues in the business successfully by conducting business diplomacy in
right way to uphold a good relationship with the local developing countries and conflict-prone zones?” as
security services. The local security services may also try to illustrated by Figure 4. It is proposed that MNCs have a
apply wartime tactics in situations that seem ambiguous. As certain stakeholder management strategy, which represents
a result, potential danger may evolve when actions are actions and tools of business diplomacy and hence has an
interpreted in the wrong way. A wide array of grievances impact on the business performance in the foreign context.
may also arise when the company management and the The next sections darws on the theoretical background just
local security services must work together. In many cases, discussed and points out what relevant choices anre made to
MNCs are not allowed to choose their own security services transform the theory into practice.
and are compelled to contract security services from
the government. The governments of many developing Research methodology
countries are rather repressive, and their politics may not be
democratic. This can have a spillover effect on the security Research Method
services provided, resulting in violations of the rights of Choosing the right research design leads the way to
local citizens while protecting the international company. translating the theoretical part into practice. Nowadays,
In summary, this study aims to conflate business diplomacy MNCs have to explore possibilities for meeting their policy
and MNCs in foreign conflict-prone contexts. Business goals as well as business targets in developing countries
diplomacy is a vital instrument used by MNCs to master the and conflict-prone zones because most developing
micro- and macro-level challenges they may face in economies are still situated within weak regulatory,
developing countries and conflict-prone zones. Research institutional and governmental frameworks that hamper
has found evidence of principled leaders of MNCs who MNCs. For that reason, this study used grounded theory,

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which was invented by Glaser and Strauss in 1967 and A wide range of developing countries and conflict-
basically means discovering theory from data (Babbie & prone zones were covered by this research, namely the
Mouton, 2001, Glaser & Strauss, 2009). In other words, it is Niger Delta area, Nigeria, South Africa, Kenya, Honduras,
a “general methodology for developing theory that is Senegal, Moldova, Guatemala, Colombia, Bukavu (Central
grounded in data systematically gathered and analyzed” Africa), Congo, Sierra Leone, Rwanda, Russia, Ukraine,
(Strauss & Corbin, 1994). Through actual research, Belarus, Moldova. This allowed us to interpret and draw
meaning a continuous interplay between analysis and data conclusions over a wide range, which does not imply that
collection, the researcher is able to derive a theory (Strauss the research findings can be generalized. The selected
& Corbin, 1994). To justify this choice of using grounded MNCs operated within the following six sectors:
theory, two aspects need to be clarified. For one thing, this machinery, oil and energy, farming, public policy, banking,
methodology is appropriate regarding the present study and oil and gas. For the sake of all interviewees, it was
because the research into MNCs conducting business decided to keep their name as well as their company
diplomacy in the context of developing countries and anonymous.
conflict-prone zones is still in the early stage of Then a theoretical case selection with regard to the
development. Second, grounded theory supports the goal of interviewees was made. The researcher looked for those
this study, which is to come up with a theory on how employees in the position of principled leaders, who are
principled leaders manage their companies’ business by also called business diplomats, since they were the
behaving diplomatically in an unstable foreign ones who made difficult decisions, resolved conflicts, and
environment. There are also two weaknesses of grounded negotiated deals on behalf on their MNC. The unit of
theory that must be considered. First, the theory that will be analysis remained the
generated might be overly complex since research on this MNC, since principled leaders acted on behalf of the
topic is still new. MNC they were working for. To select potentially
Second, results from a later analysis might be too interesting MNCs, this study started by screening trade
narrow and represent a rather idiosyncratic setting mission documents as well as stock exchange lists from
(Eisenhardt, 1989). The qualitative analysis process was the Netherlands and Germany.
conducted as follows. Data were collected by means of nine Additionally, the world’s largest professional network,
semi-structured telephone interviews, since there is not LinkedIn, provided a great opportunity to contact those
much coherent theory about how exactly principled leaders international company representatives from companies
manage their stakeholder’s interests to pursue successful doing business in developing countries and conflict-prone
business in developing countries and conflict-prone zones. zones.
The interviews allowed the researcher to get in touch with a Once the conduct of semi-structured telephone
sufficient number of principled leaders spread around the interviews was complete, the raw interview data needed to
world in different foreign contexts. Such a qualitative be organized, coded and analysed. The present study turned
approach offered the chance to observe the phenomenon the raw data into meaningful data by assigning every
under study substantially and to create a deeper interview transcript to two people who analyzed them
understanding of it (Babbie, 2001). It also improved the independently of each other. This process effectively
validity in comparison to any kind of survey and led to rich, avoided the possibility of researcher bias. The conceptual
in-depth insights. Semi-structured interviews offered an model from section two was used here. Every concept was
initial direction due to some pre-determined questions but coded by a different color. Everything said by an
then left each interviewee the opportunity to provide interviewee that was related to the category of a company’s
additional relevant and valuable information. In this way, general situation in the foreign context was marked blue.
all the different categories that make up the concept of The category of main stakeholders was highlighted yellow;
business diplomacy discussed in the previous section could main challenges a MNC faced in a foreign context were
be reflected much more accurately. The semi-structured colored red; business diplomacy on the organizational level
interviews in general took around 30 to 60 minutes, and a was shaded purple; tools of business diplomacy were
transcribed version was checked by each respective marked green; and finally business diplomacy on the
interviewee afterwards. employee level was shaded orange. An overview of this in
combination with the main interview questions can be
Research sample found in the appendix (see Table 4). Once the categories
The research sample for this study was drawn from were classified, the theory was built by means of
nine semi-structured telephone interviews conducted connecting and interrelating data.
between October 2016 and April 2017. All selected MNCs All cases were compared on the basis of each color
met the following criteria: (1) being an internationally code (each representing one concept of interest), making it
oriented company, and (2) operating in a developing possible to look for similarities and differences between the
country or a conflict-prone zone. interviews. It was decided to grant all interviewees privacy

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through total anonymization, since more than half of the new venture in an exciting and difficult context.
interviewees did not want to disclose any names. With Recalling sub-question one, “What are the general
prepared and managed interview data, the researcher was situations of successful business diplomats and their
then allowed to start interpreting it, creating explanatory companies in developing countries and conflict-prone
accounts as well as providing meaning for the main zones?”, it can be answered as follows. As stated by one of
research question. the interviewees, companies did not play a crucial role in
The following section gives an overview of the results the past when it came to mitigating and solving conflicts.
from the analysis regarding the nine semi-structured This has now changed. In many developing countries and
telephone interviews conducted with relevant business conflict-prone zones, the companies’ clients did not possess
diplomats from MNCs that were present in developing the knowledge and experience in implementing projects
countries and conflict- prone zones. according to international standards. This along with weak
governance structures in those areas were the main reasons
Research findings and discussion why most of the MNCs focused their investments
and business goals on developing countries and conflict-
Results were taken from nine semi-structured prone zones.
telephone interviews conducted in the period between The degree to which business diplomats and employees
October 2016 and April 2017. All selected MNCs met the conducted business diplomacy depended greatly on the type
following criteria: (1) an internationally oriented company, of industry and the goal of the respective company. To give
and (2) operating in a developing country or a conflict- an example, back in 1995 a brewery in Bukavu, the
prone zone. A wide range of developing countries and Democratic Republic of the Congo, somehow always
conflict-prone zones were covered by this research, namely continued working, even in an environment characterized
the Niger Delta area, Nigeria, South Africa, Kenya, by violence and expulsion. It was not known whether and to
Honduras, Senegal, Moldova, Guatemala, Colombia, what extent the brewery was involved in humanitarian aid
Bukavu (Central Africa), Congo, Sierra Leone, Rwanda, situations, but for some reason the company was able to
Russia, Ukraine, Belarus, Moldova. This allowed us to operate despite the problematic circumstances in that area.
interpret and draw conclusions over a wide range, which The best explanation was that all actors in Bukavu had an
does not imply that the research findings could be interest in being provided with beer. We can conclude that
generalized. The nine MNCs operated within the following fulfilling special interests allows companies to operate even
different six sectors: machinery, oil and energy, farming, in difficult conflict-prone situations as long as they are
public policy, banking, and oil and gas. For the sake of all needed and this is communicated properly among all
interviewees, it was decided to keep their name as well as stakeholders.
their company anonymous. Another interviewed business diplomat emphasized
This section starts with the information interviewees that many aspects of business diplomacy need to be studied,
gave about their company’s general situation in the prepared for and planned before the actual launch of a new
respective foreign context. The next part outlines the most venture. In other words, only after proper preparation and
important stakeholders that MNCs must consider while analysis were employees supposed to take action on foreign
doing business in a developing country or a conflict-prone grounds on behalf of their companies. This was supported
region. The third part discusses the main challenges these by the fact that companies very often failed to deliver their
MNCs encountered in the past. Subsequent parts consider business, their product and their services even if their
business diplomacy from different perspectives. The last products were perfectly marketed and sold in Europe,
part examines advice given by interviewed business simply because they were not familiar with the foreign
diplomats to others who plan to launch a new venture in context and in turn failed to comply with the framework of
developing countries and conflict-prone zones. business diplomacy.
Almost every interviewed leader was acquainted with
MNCs in developing countries and conflict-prone zones the term “business diplomacy”, and most of them practised
it on a daily basis. But if businesses really want to operate
Interviewees described the situation of their company successfully in such environments, the company and all its
while working in developing countries or conflict-prone employees must conduct business diplomacy consciously.
zones. There were many different foreign contexts That is why all of the interviewees live and breathe
mentioned during the interviews. In this way, the first step diplomacy, and not just during working hours.
for other companies was provided as they can get an idea of
what a successful business looks like in such environments. Relevant stakeholders
Most of the interviewees had practised business diplomacy Since companies differ in size, business goals and their
for a long time on behalf of their companies, making them operative sector, there is no one-size-fits-all group of
good role models for other businesses that want to launch a stakeholders that every company should consider when

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launching a new venture in a developing country or establish any business relationships since the Dutch
conflict-prone region. Nevertheless, sub- question two, government did not have its own embassy there. Luckily,
“Who are the main stakeholders that successful business there was one in Costa Rica which could provide
diplomats deal with in developing countries and conflict- information and contacts which led his company to success
prone zones?”, can be answered by the following list of the in Honduras. Another interviewee had had a totally
most important stakeholders mentioned during the different experience and explained that he did most of the
interviews: contact with his stakeholders directly, but embassies were
(1) state security apparatus, one of his focal areas.
(2) local community,
(3) NGOs in the field, Main challenges
Another interesting aspect was figuring out what made
(4) local government,
it so difficult for MNCs to be successful in a turbulent
(5) foreign local media/ international media, foreign environment and how successful ones dealt with
(6) clients, such situations in the end. The three most important
(7) employees of the company itself answers to sub-question three “What are the main
(8) embassies, challenges that successful business diplomats face when
(9) local authorities (e.g. national and central banks), launching a new venture or operating in developing
(10)illegal groups, countries and conflict-prone zones?” were: (1) culture, (2)
(11)competitors of the company itself, being blocked by the government, and (3) illegal groups.
To begin with, most of the interviewees mentioned
(12)brokers between the company and the client,
three sensitive issues that every MNC should avoid: (1) do
and
not discuss politics, (2) do not discuss religion, and (3) do
(13)the United Nations of course. not discuss ethnic issues. Taking Ukraine as an example,
one company supplied its clients with machines for
It is not necessary to stay in contact with all of the destroying money and had to deal with the Central Bank of
above-listed stakeholders. In fact, every company planning Azerbaijan and the Central Bank of Armenia, since both of
to do business in a developing country or conflict-prone them were the company’s customers. The clients were
zone must figure out during a proper preparation (discussed aware that the company was doing business with the other
in the last section in detail) which stakeholders are relevant client, which meant the MNC had to be careful not to
to make the business a success. share information about each project. If any information of
Referring to the theory part, the relationship between its clients had been leaked, barriers and mistrust could have
MNCs and the local military or the local security service is resulted, leaving the MNC without a business relationship
one of the most important ones. During the interviews, it with those clients in the future. That is why business
appeared that the military and local security services can diplomats did not make any of the three sensitive issues part
step in and bring stability, especially in developing of the business itself.
countries and conflict-prone regions with little control.
What this looked like in practice is elaborated in the section Culture
dealing with research findings about tools of business For most of the interviewed principled leaders, making
diplomacy. contact with local stakeholders and authorities as a foreign
Another stakeholder group element that was stressed in company was difficult, because local people were culturally
the different interviews was the contact with embassies. different. It was pointed out that culture consisted of two
Most of the interviewed principled leaders stayed in close aspects, with language accounting for 20 percent of the
contact with them and said that embassies are extremely barrier and customs, habits and body language accounting
helpful for them when it comes to making first contact with for 80 percent. Language barriers could be taken care of by
a foreign country. Embassies possess a great deal of hiring an interpreter to support the business partners with
information and an established network of important communication. However, the other 80 percent of the
stakeholders ranging from government officials to society barrier and most of is communication happened through
representatives. Interviewees emphasized that embassies body language when the business partners met. Giving a
were always willing to help business diplomats with an simple example, one of the western business diplomats
entrepreneurial vision by inviting them to events such as once tried to shake hands with a business partner
trade fairs, but usually the business diplomats had to originating from the Middle East, which was normal in
approach the embassies first. It was rare for embassies to western society but not in the Middle East. This example
send out invitations or make contact with employees of shows clearly how easy it is to ruin a business relationship
MNCs in the first place. One of the interviewees had a before it has even started.
business in Honduras, where it was not that easy for him to These days, most of the MNCs operating in developing

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countries or conflict- prone regions have American or and, apparently, no future perspective.
European expats in their high-level management positions,
which makes the whole approach a bit easier for those Business diplomacy on the organizational level
principled leaders who need to conduct business in the
foreign region. One way to tackle this challenge is to Regarding sub-question four, “To what extent are any
educate the company’s employees with an in-depth culture policies introduced within successful operating companies
course. In particular, employees can be taught different that address [diplomatic] relations with important
perspectives considering the dos and don’ts about foreign stakeholders in developing countries and conflict-prone
habits, language, politics, literature, sports, history and zones?”, most of the interviewed principled leaders did not
food. Unless the employees of such MNCs absorb such provide clear information about how business diplomacy
information and work in the cultural reality of the certain was established in their companies, with written or official
country or region, their life will be difficult. documents. This also had to do with the size and vision of
In contrast, one of the principled leaders did not think the respective company. Most of the principled leaders
of culture as a main challenge for a company launching a stated that they and all other employees understood
new venture in a developing country or conflict-prone company ethics and followed guidance policy books or
region. He supported this by stating that his company did project-stakeholder strategies, covering all practices and
business with every country regardless of differences in guiding the way in which they approached and maintained
religion or other cultural aspects. This perspective might be relations with all regulatory stakeholders. Those strategies
an option with cultures that are not overly sensitive to and guidelines were there to build trust and effective
foreign impressions in the first place. communication, representing two vital parts of business
diplomacy. The reverse was also found, when foreign
Being blocked by government companies got involved in the local authorities’ framework
Local governments still have a lot of authority in by complying with certain standards to obtain a license to
unstable regions, even those with rather lethal and weak operate.
governance structures. Dealing with corrupt governments Some MNCs were bound to external performance
represented one of the three main challenges for a company standards such as the International Finance Corporation
entering this specific country or region to do business. Environmental and Social Performance Standards
Governments decide, for example, whether a company can predefined by the United Nations. In fact, it was not always
be registered to do business legally in that area or not. clear how companies needed to implement them, so it was
Governments also dictate that foreign companies must up to the business diplomats themselves to work out the
comply with certain rules, such as having a local office and best way possible. This is also related to one of the
employing local people. This was indeed something challenges mentioned above, namely being blocked by the
that blocked foreign MNCs from launching new ventures government. If business diplomats failed to comply with
successfully. In the end, every company must be clear about those rules and standards, their license to operate could be
whom it must deal with and whether there are exceptional revoked or the company could be sanctioned by the
cases when business diplomats can find ways to work government or other higher authorities. Therefore, business
around those blocking rules. diplomats are seriously advised to research applicable
regulations and policies that the company may be expected
Illegal groups to comply with.
Illegal groups also pose a challenging start for foreign
MNCs wishing to expand their business in those areas. Tools of business diplomacy
Most companies arrive in the developing country or conflict Regarding the tools of business diplomacy, the
zone with a huge underestimation of the local situation. following section answers the question of “What tools do
Business diplomats noted that other MNCs failed to provide successful business diplomats use to seek [diplomatic]
enough resources such as qualified people, financial relationships with relevant stakeholders in developing
support, skills and materials when encountering illegal countries and conflict-prone zones?”.
groups, because most of the time those illegal groups tried From the interviews, it appeared that adopting and
to gain the local community's trust by turning them against using a certain set of tools facilitated building new, positive
the company’s project. MNCs are advised to prepare their and long-term relationships with local authorities. This was
principled leaders with relevant resources to prevent them essential for every company striving to do business in
from walking straight into the trap. If there is no proper developing countries and conflict-prone regions. A variety
preparation and support for business diplomats, the process of indispensable tools were mentioned by the interviewed
and the outcome goals are very unlikely to be achieved, leaders.
which in turn leads to low levels of power and legitimacy For example, MNCs mainly had educated, intelligent
and ends with great difficulty in recouping any investment and open-minded people employed in the vital positions.

133
They spoke the language of business as well as the local benefited from buying these machines as they also took
foreign language and were familiar with the local habits. care of the environment by sticking to their clean banknote
The ultimate goal was to employ principled leaders who policy. In turn, this resulted in having clean banknotes
understood the foreign context and who could navigate circulating in the host country, which was a good image for
from the communities through the state to the market. This the country itself. All interviewees highlighted that their
of course demanded in-house training before the business companies went abroad with a long-term goal and therefore
diplomats entered a new and unstable market. ensured that local communities also got a piece of the
A good reputation was mainly seen as an advantage, business pie generated from the resources that belonged to
since it facilitated access and proved the company's the community. Related to the data from the Edelman Trust
reliability to clients as well as other stakeholders. The key Barometer mentioned earlier, an interviewee stated that
to a good reputation is the perfect quality of the company’s showing true interest in the people’s and country’s success
product or service which had been established successfully is the beginning of the success chain as it builds trust,
in other markets, like their home market. which in turn leads to the communities expecting MNCs to
In contrast, one of the business diplomats reported act as surrogate governments when local governments fail.
that a good reputation also had a downside because it With trust, business diplomats can generate power as well
preceded his company and him as the one in charge when as legitimacy, which in turn helps them to achieve process
he entered the developing country or conflict-prone region. and outcome goals and finally results in success.
To put it differently, companies with a good reputation had In addition, all principled leaders stayed in close
to be especially careful when they worked on their network contact with local mediators, helping them to get necessary
in the destination country, since people who knew the insights into society’s needs and possibilities, with the
company were already trying to use it to make money side effect of building trust among all project partners. Most
themselves. It rather helped to be unknown to the locals so principled leaders were flexible and used corporate social
the staff could prove how good the company’s business responsibility policies to engage and strengthen such
really was. Thus, the type and goal of each company relationships. In fact, locals were employed where possible,
influenced to what extent their good reputation was helpful which in some cases resulted in a tripartite agreement
in building up a new business in a complex and foreign between the company, the state security apparatus, and the
context. The wish to develop and gain knowledge of the local community. Local stakeholders had the company’s
foreign business environment played a crucial role here, business and employees monitored and secured against any
too. other threats such as illegal groups. So, it was a win-win
Using and dealing with international media were situation for the MNCs and the country and its people.
mentioned as another important tool of business diplomacy. Finally, every business diplomat established a
To include media channels in the company’s business supportive stakeholder network that every business
processes had a positive effect on spreading information diplomat must forge to gain a foothold in the foreign
about its vision and achievements, for example. What country or region. Such a network of important string-
business diplomats always considered with this tool was pullers helps to gain access to other important stakeholders
that media channels are difficult to control and do not and granted business diplomats the vital information of
always display the real facts. Hence, using public media knowing who was who, where the debate was going, and
was an option, but it usually depended on the type of whom to contact first to get the business done successfully.
business as well as on the foreign government and its Part of that were so-called facilitation centers that smoothed
regulations. Some companies even decided to deal with business processes to a great extent. Such centers were vital
local hosts more personally, and spread news and assets helping business diplomats by informing them about
announcements around themselves instead of using public the situation at stake, health issues, applying for the right
media channels. In this way, MNCs could share information visa and so forth. Working together with such a facilitation
more effectively in terms of building positive and long-term center saves time and money that companies would have
transparent relationships than public local and international invested in figuring out all these aspects.
media channels would have done. Eventually, business
diplomats became familiar with handling media channels Business diplomacy on the employee level
and were supported by an organized team of employees
experienced in journalism to deal with those aspects Business diplomacy on the employee level again
appropriately. depended on the history and size of the respective company
One of the best tools regarding business diplomacy was and the sector it was working in. Sub-question six, “To
showing true interest in co-developing the local people’s what extent are any employees specially assigned to deal
life while launching a new venture in their specific area. To with [diplomatic] relationships with important stakeholders
give an example, the company supplying money-destroying when launching a new venture or operating in developing
machines told its clients that their country and communities countries and conflict-prone zones?”, was answered with

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two main trends that appeared during the interviews: company’s support network, a definition of the company’s
(1) MNCs employed a moderately large team where business goal, followed by the
tasks were divided by stakeholder groups; and positive impacts the company brings with it for the host
(2) MNCs employed just one person who was country and its people. All these steps are essential for a
responsible for an entire geographical area including all thorough preparation that addresses all possible obstacles
kinds of stakeholders. regarding the company’s business success.
Business diplomats should also have a good
Regarding the first trend, an interviewee explained that
understanding of what is to be expected from the launching
by assigning certain people to certain stakeholders, it was
easy to maintain good and positive relationships with them. of the new venture in the respective foreign setting. This
means knowing whom they have to deal with and what the
This means one employee was dealing only with NGOs,
aspects, regulations and standards are that they have to
another was handling public affairs, yet another one was the
obey, and includes taking care of the legal aspects, visas
management issue advisor, and one employee was
and health issues for employees. Having established the
dedicated to dealing with the press. Altogether, a
company’s support network, business diplomats should
collaboration within a team like this made every project a
draw on state-owned or private security services located in
joint effort.
the host country or region to guarantee the employees'
In contrast, there were also companies that followed
safety at all times.
the line of employing one person (called a regional
Interviewees recommended applying a value-chain
manager, an environmental manager, a business developer)
approach, meaning that business diplomats who are in
or even the CEO working together with a local liaison
charge of the company’s operation should be aware of who
officer instead of a whole team. One of the principled
their business partners, suppliers and customers are. This
leaders stressed that this allowed a better transfer of the
provides transparency to all stakeholders and ensures that
company’s aims and objectives for the project to the local
the whole process proceeds according to the regulations and
community.
complies with the International Anti-Corruption and Anti-
Bribery Act. It means business diplomats can do business
Business Diplomacy Framework Matrix without the fear of running into any hidden accusations or
lawsuits.
The business diplomacy framework matrix (see Table In summary, the main research question of “How do
5, p. 25) was developed to answer the last sub-question, principled leaders manage their company’s business
“What can be learned from the experience of business successfully by conducting business diplomacy in
diplomats who already conduct business diplomacy developing countries and conflict-prone zones?” can be
successfully in developing countries and conflict-prone answered by a combining all of the aspects above. In other
zones?” In particular, this section reveals advice words, successful principled leaders were prepared and
interviewees gave regarding the topic that was not directly researched the company’s new venture setting to minimize
covered by the main interview questions. Each advice is a risks and maximize opportunities. The Business Diplomacy
type of analysis and an associated action. Framework Matrix is a first step and at the same time a
One of the first things that future business diplomats checklist towards properly launching a new venture in
should do is check the following aspects by conducting two developing countries and conflict-prone regions. In
related types of analysis. Business diplomats should particular, the complexity and the unfamiliarity of the
perform a environmental scan, to investigate the host foreign setting make it very important to prepare and learn
country’s politics, economy, society, technology, legal about all the dos and don’ts to be successful.
framework and environment. Part of that includes making The next section provides a conclusion accompanied
sure that all employees undergo training about the host by recommendations for future research on business
country’s language, habits, history, sports, religion, food. diplomacy in the context of developing and conflict-prone
Furthermore, and especially related to the environment, regions.
business diplomats must ensure that all employees working
in the developing country or conflict-prone zone are
familiar with the conflict setting. This includes abduction
Conclusion and future research
training and diplomatic behavior lessons, for example.
As a next step, it was recommended to conduct a Conclusion
SWOT analysis, to investigate the strengths, weaknesses,
opportunities and threats of the developing country or The nine business diplomats, who all worked for
conflict region. The SWOT analysis encompasses an MNCs, investigated and practised business diplomacy to
evaluation of the company’s business risk, a list of all different extents. The data from the interviews with
relevant stakeholders and how they can contribute to the business diplomats from different MNCs revealed that

135
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Table 5: The Business Diplomacy Framework
Matrix

Type of analysis Action

PESTLE analysis  Socio-cultural factors covered ✓ Make sure all employees undergo training about the target country/zone (including
 Preparation language, habits, history, sports, religion, food)
PESTLE analysis  Political, Economic, Socio-
cultural, Technological, Legal, and Environmental ✓ Make sure all employees are familiar with the conflict setting
factors covered  Preparation
PESTLE analysis  Socio-cultural factors covered ✓ Make sure all employees behave in a diplomatic way regarding stakeholders
 Preparation
✓ Make an evaluation of the company’s business risks when launching a new venture in the
SWOT analysis -> Threats -> Preparation
target country/zone
SWOT analysis  Opportunities and Threats  ✓ Perform a stakeholder analysis
Network
✓ Define the company’s goal by launching this new venture (short-term or long-term
SWOT analysis  Strengths perspective?)
SWOT analysis  Opportunities ✓ Define positive impacts the company’s work might have for the target country/zone

SWOT analysis  Opportunities  Network ✓ Contact the company’s own government/embassies for information and support

SWOT analysis  Opportunities  Network ✓ Contact people/companies/authorities related to your industry in the target country/zone

SWOT analysis  Threats  Preparation ✓ Make a list of competitors who are also active in the target country/zone
SWOT analysis  Opportunities  Network ✓ Contact people/companies/authorities associated with legal matters in the target country/zone
SWOT analysis  Opportunities  Network ✓ Contact people/companies/authorities regarding immigration in the target country/zone
PESTLE analysis  Legal factors covered  ✓ Make sure all employees have the right visa
Preparation
PESTLE analysis  Legal factors covered  ✓ Make sure all employees are provided with the right health matters (e.g. vaccinations)
Preparation
SWOT analysis  Opportunities -> Network ✓ Contact security services (state-owned or private)

Business design ✓ Apply a value-chain approach to grant transparency to all stakeholders

PESTLE analysis  Political and Legal factors ✓ Comply with the International Anti-Corruption and Anti-Bribery Act
covered  Preparation
Appendix
Figure 1: Business vs. Government, percent in trust

Figure 2: Business must lead to solve problems

139
 Figure 3: Fragile States Index 2015
Source: Fund for peace (2015). Retrieved 21.05.2016 from:
http://fsi.fundforpeace.org/map/2015heatmap_sml.png

Table 1: Current Peacekeeping Operations of the United Nations

Mission Established in
The Middle East und Maghreb
UN Truce Supervision Organization May 1948
UN Interim Force in Lebanon March 1978
UN Mission for the Referendum in Western Sahara April 1991
UN Disengagement Observer Force June 1974
Asia and Oceania
UN Military Observer Group in India and Pakistan January 1949
Europe
UN Peacekeeping Force in Cyprus March 1964
UN Interim Administration Mission in Kosovo June 1999
Sub-Saharan Africa
UN Mission in Liberia September 2003
UN Operations in Côte d'Ivoire April 2004
African Union-United Nations Hybrid Operation in Darfur July 2007

140
 UN Organization Stabilization Mission in the Democratic Republic of the July 2010
Congo
UN Interim Security Force for Abyei June 2011
UN Mission in the Republic of South Sudan July 2011
UN Multidimensional Integrated Stabilization Mission in Mali March 2013
UN Multidimensional Integrated Stabilization Mission in the Central African April 2014
Republic
The Americas
UN Stabilization Mission in Haiti June 2004
Source: United Nations (2016). UN Peacekeeping Operations Fact Sheet. Retrieved June 1st, 2016.
From: http://www.un.org/en/peacekeeping/archive/2016/bnote0316.pdf

Table 2: Conflicts around the globe

Global Conflicts
Critical impact
Taliban in Afghanistan Since 1978
Civil War in Syria Since 2011
Territorial disputes in the South China Sea
Tensions in the East China Sea
North Korea Crisi
War against IS in Iraq Since 2003
Civil War in Libya Since 2011
Significant impact
Islamist militancy in Pakistan
Sectarian conflict in Lebanon
Islamist militancy in Egypt Since 2011 ?
Conflict in Ukraine Since 2014
Kurdish – Turkish Conflict Since 1984
Criminal violence in Mexico Since 2006
Israeli-Palestinian conflict Since 1964
Boko Haram in Nigeria Since 2009
Conflict between India and Pakistan Since 1974 (Kashmir conflict)
War in Yemen Since 2011
War in North-West Pakistan Since 2004
Limited impact
Nagoron-Karabakh conflict Since 1988
Destabilization of Mali Since 2012
Violence in the Central African Republic

141
Violence in the Democratic Republic of Congo Since 1996
Sectarian violence in Myanmar Since 1948
Civil War in South Sudan Since 2013
Islamist Militancy in Russia Since 2009
Al-Shabab in Somalia
Uighur conflict in China
Political crisis in Burundi Since 2015
Balochistan conflict Since 1948 (Pakistan-Iran)
South Thailand insurgency Since 1960
Insurgency in Northeast India Since 1963
Colombian conflict Since 1964
Naxalite-Maoist insurgency (India) Since 1967
CPP-NPA-NDF rebellion (Philippines) Since 1969
Moro conflict (Philippines) Since 1969
Sectarianism in Pakistan Since 1989
Xinjiang conflict (China) Since 1989
Oromo conflict (Ethiopia) Since 1992
Ogaden insurgency (Ethiopia) Since 1995
Communal conflicts in Nigeria Since 1998
Insurgency in the Maghreb (Algeria –Tunisia) Since 2002
War in Darfur (Sudan) Since 2003
Kivu conflict (DRC – Burundi) Since 2004
Sudanese nomadic conflicts (Sudan-South Sudan- Since 2009
Ethiopia)
Turkey-ISIL conflict Since 2015
Arab separatism in Khuzestan (Iran) Since 1922
Kurdish separatism in Iran Since 1946
West Papua conflict (Indonesia) Since 1963
Cabinda War (Angola) Since 1975
Internal conflict in Peru Since 1980
LRA insurgency (DRC-CAR-South Sudan) Since 1987
Internal conflict in Bangladesh Since 1989
Second Afar insurgency (Eritrea-Ehtiopia) Since 1995
Ituri conflict (DRC) Since 1999
Syrian civil war spillover in Lebanon Since 2011
RENAMO insurgency (Mozambique) Since 2013
ISLI insurgency in Tunisia Since 2015
Source: Council Foreign Relations (2016). Global Conflict Tracker. Retrieved May 30th,
2016. From: http://www.cfr.org/global/global-conflict-tracker/p32137#!/
And
Wikipedia (2016). List of ongoing armed conflicts. Retrieved May 30th, 2016. From:
https://en.wikipedia.org/wiki/List_of_ongoing_armed_conflicts

142
Country Foreign Direct Investment
2011 2012 2013 2014
South Sudan - - (-)78,000,000 (-)700,000,000 decreasing

Somalia 102,000,000 107,330,000 107,110,000 105,500,000 increasing or stable

Central African
Republic 36,908,456 70,035,157 1,852,793 3,475,008 decreasing

Sudan 2,313,694,286 2,311,460,740 1,687,884,179 1,251,280,889 decreasing

Congo (D. R.) -90,875,696 -420,534,934 -400,663,272 -343,601,083 increasing or stable

Chad 281,900,000 342,800,000 538,400,000 760,500,000 increasing or stable

Yemen -517,842,928 -14,239,188 -133,570,896 -738,028,979 decreasing

Syria - - - -

Afghanistan 57,620,844 61,525,860 39,663,686 48,756,005 increasing or stable

Guinea 956,040,000 130.000 3,250,000 566,000,000 increasing or stable

Haiti 119,000,000 156,000,000 160,377,879 99,000,000 decreasing

Iraq 2,082,000,000 3,400,000,000 5,131,200,000 4,781,800,000 increasing

Pakistan 1,326,000,000 859,000,000 1,333,000,000 1,778,000,000 increasing

Nigeria 8,841,113,287 7,069,934,205 5,562,873,606 4,655,849,170 decreasing

Cote d'Ivoire 301,577,299 330,274,412 407,476,278 462,038,433 increasing

Zimbabwe 387,000,000 399,500,000 400,000,000 544,800,000 increasing

Guinea Bissau 25,024,047 6,624,917 19,639,704 21,459,644 increasing or stable

Burundi 3,354,999 604.920 6,884,807 - increasing

Niger 8,841,113,287 7,069,934,205 5,562,873,606 4,655,849,170 decreasing

Ethiopia 626,509,560 278,562,822 953,000,000 1,200,000,000 increasing

Kenya 139,862,091 163,410,210 371,846,696 944,327,305 increasing

Liberia 1,312,748,380 646,600,000 700,267,800 362,967,566 decreasing

143
Uganda 894,293,858 1,205,388,488 1,096,000,000 1,146,560,083 increasing or stable

Eritrea 39,000,000 41,358,137 43,858,858 46,510,786 increasing

Libya - 1,425,000,000 702,000,000 50,000,000 decreasing

Mauritania 588,749,564 1,386,098,851 1,126,004,760 501,852,411 decreasing

Myanmar 2,519,813,313 1,333,856,137 2,254,603,965 1,398,232,002 decreasing

Cameroon 652,411,756 527,394,101 547,249,169 501,200,000 decreasing

North Korea - - - -

Mali 556,147,162 397,865,237 307,853,389 198,927,339 decreasing

Sierra Leone 950,477,689 742,063,945 376,923,661 690,349,249 increasing or stable

Bangladesh 1,264,725,163 1,584,403,460 1,905,802,911 2,496,935,633 increasing

Congo
(Republic)
2,179,856,146 2,151,894,023 2,913,934,094 5,502,260,247 increasing
Sri Lanka 955,920,000 941,116,591 932,551,318 944,246,587 increasing or stable

Timor-Leste 49,058,169 40,382,444 55,857,106 33,905,492 decreasing

Nepal 94,022,157 91,996,607 74,244,987 5,830,069 decreasing

Rwanda 106,210,000 159,814,905 257,642,420 291,726,096 increasing

Egypt -482,700,000 2,797,700,000 4,192,200,000 4,783,200,000 increasing

Burkina Faso 143,657,309 329,300,899 490,264,068 341,898,203 increasing or stable

Djibouti 79,000,231 109,998,256 286,004,468 152,998,239 increasing or stable

Angola -3,023,770,966 -6,897,954,559 -7,120,017,424 1,921,699,719 increasing

Lebanon 3,490,150,694 3,169,656,065 2,879,838,137 2,953,635,487 decreasing

Cambodia 795,460,489 1,440,978,035 1,345,044,252 1,730,355,930 increasing

144
Iran 4,276,718,690 4,661,734,400 3,049,945,000 2,105,494,000 decreasing

Mozambique 3,663,937,118 5,635,092,659 6,697,422,432 4,998,799,334 increasing or stable

Malawi 1,128,341,392 -52,302,532 634,708,256 715,693,148 increasing or stable

decreasing or stable
Togo 727,757,281 121,518,516 195,754,580 292,085,515
Philippines 2,007,150,725 3,215,415,155 3,737,371,740 6,202,380,556 increasing

Swaziland 93,211,829 89,720,141 29,442,304 26,584,894 decreasing

Solomon
Islands
120,052,793 23,881,499 53,434,351 21,022,030 decreasing
Gambia 36,178,721 33,524,809 37,635,270 28,404,021 decreasing

Uzbekistan 1,635,145,064 563,040,470 686,036,031 751,433,911 decreasing

Zambia 1,108,500,000 1,731,500,000 2,099,800,000 1,507,800,000 increasing

Equatorial
Guinea
1,975,000,000 2,015,000,000 1,914,000,000 1,933,000,000 decreasing
Laos 300,743,507 294,375,016 426,667,686 720,840,000 increasing

Madagascar 738,462,649 810,503,139 566,545,550 350,695,431 decreasing

Tajikistan 67,496,200 198,280,200 -54,166,500 260,785,960 increasing

Papua New
Guinea
-309,831,004 -63,782,356 18,222,240 -30,389,395 increasing
Comoros 23,088,176 10,375,786 9,456,724 14,028,710 decreasing

Senegal 338,218,819 276,175,403 311,278,297 342,650,072 increasing

Colombia 14,647,755,354 15,039,372,277 16,208,664,127 16,151,013,402 increasing

Kyrgyz
Republic 693,528,000 292,663,900 757,642,400 210,512,100 decreasing
Tanzania 1,229,361,018 1,799,646,137 2,087,261,310 2,044,550,443 increasing

145
Guatemala 1,139,659,133 1,263,638,429 1,353,141,908 1,204,670,350 increasing or stable

Russia 55,083,632,500 50,587,554,700 69,218,898,709 22,890,510,447 decreasing

Lesotho 61,173,319 56,648,555 50,429,031 46,521,786 decreasing

Algeria 2,571,237,025 1,500,402,453 1,691,886,708 1,504,685,496 decreasing

India 36,498,654,598 23,995,685,014 28,153,031,270 33,871,408,468 increasing or stable

Israel/West
Bank
8,727,600,000 8,467,600,000 12,448,100,000 6,738,000,000 decreasing
Georgia 861,327,476 425,891,698 705,357,085 1,647,343,208 increasing

Thailand 2,468,144,240 12,894,549,139 15,822,132,057 3,718,726,247 increasing

decreasing or stable
Nicaragua 936,300,000 767,658,534 815,500,000 883,500,000
Benin 161,091,309 281,564,661 360,240,965 377,358,669 increasing

Bhutan 31,141,615 24,380,674 49,784,378 8,379,987 decreasing

Venezuela 3,889,000,000 2,199,000,000 6,927,000,000 - increasing

Honduras 1,042,571,021 1,067,550,208 1,069,029,263 1,294,065,691 increasing

Bolivia 858,941,070 1,059,965,391 1,749,612,614 72,595,677 decreasing

Turkmenistan 3,391,100,000 3,129,600,000 3,076,000,000 3,163,500,000 decreasing

Bosnia 471,610,992 391,976,946 336,758,906 496,764,251 increasing

Azerbaijan 4,485,120,000 5,293,250,000 2,619,437,000 4,430,466,000 increasing or stable

Jordan 1,473,521,127 1,497,323,944 1,748,569,035 1,760,422,535 increasing

Fiji 416,719,478 267,146,323 158,212,691 278,909,582 decreasing

China 280,072,219,150 241,213,868,161 290,928,431,467 289,097,181,064 increasing

146
Ukraine 7,207,000,000 8,175,000,000 4,509,000,000 847,000,000 decreasing

Ecuador 643,709,359 567,035,301 732,016,206 773,101,946 increasing

Tunisia 432,666,012 1,554,269,129 1,058,622,582 1,004,668,149 increasing

Belarus 4,002,400,000 1,463,600,000 2,246,100,000 1,862,000,000 decreasing

Indonesia 20,564,938,227 21,200,778,608 23,281,742,362 26,349,225,591 increasing

Morocco 2,521,362,081 2,841,954,371 3,360,909,924 3,582,296,219 increasing

Turkey 16,176,000,000 13,282,000,000 12,457,000,000 12,765,000,000 decreasing

decreasing or stable
Maldives 423,530,664 227,976,867 360,816,336 363,269,189
Serbia 4,929,898,533 1,276,100,599 2,059,702,251 1,999,520,402 decreasing

Sao Tome & decreasing or stable

Principe
32,152,349 22,471,527 5,782,345 27,098,307
Micronesia -400,946 453.160 1,892,007 800.000 increasing

Cape Verde 102,224,984 137,096,308 93,377,246 132,441,073 increasing

Moldova 347,930,000 282,580,000 290,460,000 349,930,000 increasing or stable

Vietnam 7,430,000,000 8,368,000,000 8,900,000,000 9,200,000,000 increasing

Peru 7,664,946,687 11,917,886,685 9,297,768,037 7,884,539,124 increasing or stable

Ghana 3,247,588,000 3,294,520,000 3,227,000,000 3,363,389,444 increasing

Mexico 23,328,272,040 19,491,663,030 44,885,843,190 24,154,173,750 increasing

Saudi Arabia 16,308,280,000 12,182,373,333 8,864,693,333 8,011,786,667 decreasing

El Salvador 122,500,004 447,709,564 242,345,997 474,801,761 increasing

Paraguay 447,766,667 745,400,000 74,000,000 523,250,000 increasing

147
Gabon 696,000,000 832,473,111 967,532,993 972,866,924 increasing

Dominican
Republic
2,197,500,000 3,415,900,000 1,599,900,000 2,385,300,000 increasing
Namibia 712,307,885 595,211,781 -558,328,983 493,302,263 decreasing

Guyana 246,800,000 277,910,000 200,558,390 237,750,049 decreasing

Armenia 653,219,756 496,636,701 379,854,997 404,344,951 decreasing

Suriname 145,288,761 124,348,749 137,463,325 -209,526,323 decreasing

Kazakhstan 13,760,291,529 13,648,134,374 9,946,760,285 7,597,703,264 decreasing

Samoa 8,984,743 13,887,919 24,179,519 22,838,888 increasing

Cuba - - - -

South Africa 4,139,289,123 4,626,029,122 8,232,518,816 5,740,650,679 increasing

Cyprus 2,078,721,742 1,233,052,957 3,765,400,619 861,137,244 decreasing

Malaysia 15,119,371,191 8,895,774,251 11,296,278,696 10,608,698,827 decreasing

Belize 95,348,525 194,201,409 92,247,731 141,097,030 increasing

Jamaica 172,757,165 413,333,448 591,928,347 595,111,532 increasing

Macedonia 507,920,733 337,911,248 402,458,310 60,879,915 decreasing

Bahrain 780,851,064 891,223,404 988,829,787 957,712,766 increasing

Grenada 42,648,184 31,489,863 74,688,413 40,439,427 decreasing

Brunei 691,170,275 859,061,565 775,641,999 567,889,727 decreasing

Botswana 1,092,802,291 147,058,313 188,606,246 393,180,125 decreasing

Brazil 71,538,657,409 76,110,663,189 80,842,996,727 96,895,162,916 increasing

Seychelles 143,240,665 613,208,776 57,288,923 108,307,072 decreasing

Albania 1,049,425,306 920,080,650 1,253,783,309 1,149,384,241 increasing

Source: The World Bank Group (2016). Retrieved May, 23rd 2016. From:
http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD

148
Antecedents of Conformity in Multinationality: A
Systematic Review of the Literature
Makafui Kwame Kumodzie-Dussey, University of Ca Foscari Venice, Italy

The phenomenon of conformity in multinationality has 2002; Henisz & Delios, 2001; Lu, 2002). This is
gained significant attention in the management literature in particularly evident from a preliminary scan of top tier
recent years. It is worthwhile noting that, numerous gaps management and business journals which shows a total of
exist in comprehending firms’ conforming behaviour in 35 studies that have attempted to look at the conforming
multinationality and its consequential performance behaviour of firms when they engage in multinationality.
outcomes. A fragmented array of theoretical perspectives This scan points to the fact that quite a considerable amount
has been adduced by various scholars in their attempt to of studies examined this phenomenon albeit under various
investigate firms’ engagement in this strategic action theoretical and empirical considerations, a sine qua non
particularly in multinationality activities. This paper when attempting to undertake a literature review.
attempts to consolidate the state of academic research on A careful view of the theoretical landscape of
this phenomenon by reviewing the literature on conformity conformity in multinatinality shows that numerous
in multinationality and attempts to offer some framework to theoretical perspectives which cuts across various
comprehend what the theory has said about the antecedents disciplines such as economics, orgaisational ecology,
of this strategic behaviour among firms. sociology (Lieberman & Asaba, 2006) have been employed
Multinationality is a key phenomenon that has attracted in an attempt to comprehend this phenomenon. Some
quite considerable attention in the international business scholars have drawn on instituitional theory (e.g., Davis,
literature in recent years. It has attracted this attention Desai, & Francis, 2000; Henisz & Delios, 2001), resource
because it critically interacts with the structure, strategy, based view (e.g., Chang, 1995), learning theory (e.g.,
functioning, and performance of firms (Kirca, Hult, Fernhaber & Li, 2010), legitmacy theory, and competitve
Deligonul, Perryy, & Cavusgil, 2012). Firms engaging in dynamics (e.g., Gimeno, Hoskisson, Beal, & Wan, 2005)
multinationality, i.e. exploring value adding activities among others to look at the phenomenon. This varying
outside their home country can encounter different types of theoretical expositions on firms conforming behaviour in
cost when undertaking this endeavour. Examples of sources general and its performance implications still remains
of such costs are lability of foreignness (Zaheer & losely understood. This substantial gap in our
Mosakowski, 1997), liability of newness (Lu & Beamish, comprehension of what drives firms’ conforming behaviour
2004), coordination and the complexity of managing such when engaging in multinationality thus provides the need
multinational enterprises (Kostova & Zaheer, 1999) among for a deeper and fine grain analysis of the factors
others. In order to minimize the cost associated with underpinning such decisions. The review therefore seeks to
multinationality the literature suggests that firms conform address the question, what are the main drivers of firms’
in multinationality (Giachetti & Spadafora, 2017) to the conforming behaviour in multinationality? To that effect,
decisions of industry rivals to reduce the risk and undertaking this review would afford us the opportunity not
uncertainty associated with this strategic decision (Guillén, to only answer the above question, but to as well direct
2002; Haveman, 1993; Henisz & Delios, 2001). Our some attention to this strategic behaviour of firms, since the
reference to conformity in multinationality is the situation discussion on firms’ conforming behaviour is largely driven
where the multinationality of a focal firm resembles those by varying contextual factors, alternate theoretical
of other industry rivals (Giachetti & Spadafora, 2017), i.e. perspectives and in some cases, inconclusive empirical
when firms deliberately choose to imitate the strategic results.
actions of rivals, specifically, those concerning In the end, this paper contributes in diverse ways to the
multinationality decisions. It is worthwhile noting that, this literature on multinationality and firm imitaton. First, we
strategic behaviour has gained some attention among draw on the theoretical pluralism and diverse empirical
International Business scholars, with different studies settings in the extant literature to understand the drivers of
showing in various ways both theoretically and empirically firms conforming behaviour in their quest to undertake
how firms imitate the multinationality decisions of rivals value adding activities outside their home country. Second,
(Chan, Makino, & Isobe, 2006; Delios, Gaur, & Makino, the paper complements previous reviews on imitation
2008; Giachetti & Spadafora, 2017; Greve, 1998; Guillén, (Lieberman & Asaba, 2006; Ordanini, Rubera, &

149
DeFillippi, 2008), since it lays specific emphasis on firms’ should be reported. The review report can focus on the
imitation of multinationality strategies and its performance extent to which some consensus is reached across various
implication rather than imitation in general as previous themes or identify emerging themes in the extant literature
reviews have done. Lastly, the paper highlights several (Tranfield et al., 2003). Since this review seeks to reconcile
avenues to advance the field of study. After setting the tone the diverse theoretical views of the main drivers of firms’
for this insightful review, the paper is structured as follows. conforming behaviour when they engage in multinationality
Section One describes the methodological approach i.e. rather than presenting just the findings of empirical studies,
how the journals were selected, the determination of the the review would carefully assess literature contributions
sample of 35 articles to be included in the review. Next, with important theoretical components. To that effect this
Section Two presents the general outcome of the review. It review would follow the methodological principles outlined
illustrates the dominant theories as well the contextual by Tranfield et al. (2003).
settings used by scholars to explain conformity in
multinationality. In our final section, we discuss the Definition of Boundaries and the Inclusion
implication for theory and provide a research agenda for Criteria
future studies on conformity in multinationality.
A great deal of the management literature in general
Method has given considerable attention to the concept of imitation
though it is conceptualised from different theoretical
A literature review helps map relevant literature to perspectives. But it is important to point out that only a
specify a research question with the aim of developing the sizeable number of these literature streams directly deal
knowledge base of the field. A systematic literature review with imitation with a vast majority indirectly addressing the
deviates from the traditional narrative exposition which phenomenon of imitation (Ordanini et al., 2008). In our bid
often lacks scientific rigor to a more detailed, scientific and to better position this study and conduct a review that is
transparent assessment of the existing state of studies meaningful we ought to define the conceptual boundaries
(Tranfield, Denyer, & Smart, 2003). In addition, it also i.e. the theoretical and empirical frontiers within which this
seeks to avoid biases usually associated with the narrative review is conducted, as suggested by Tranfield et al. (2003)
form of literature review. In order to conduct a successful as the premier activity to be considered when one decides to
systematic review, we follow the approach outlined by undertake a review. With this consideration in mind we
Tranfield et al. (2003). The authors suggest that once the would define the conceptual perimeter of our focal concept:
rationale for the literature review has been adequately conformity in multinationality. In this study, we define
satisfied, a three-stage framework can be adopted in conformity in multinationality as a firm- level construct
undertaking the review. The stages are: where a firm’s multinationality resembles the
 Stage 1, Planning the review multinationality posturing of other industry rivals at one
 Stage 2, Conducting the review point in time (Giachetti & Spadafora, 2017). We take
 Stage 3, Reporting cognisance of the fact that, the phenomenon of conformity
During the planning stage, scoping studies can be done in multinationality can be influenced by other variables at
to know the relevance and size of the literature and to set the firm level such as the size and age of the organisation,
boundary conditions for the subject area and topic. as well as other exogenous environmental factors (Giachetti
Particularly, the scoping can include an overview of the & Spadafora, 2017). But our focus would be on the set of
theoretical, practical and methodological history of the broad decisions that are deliberate in firms’ conforming
extant literature on the subject matter. Based on these, multinationality actions which has broad impact at the
scoping a review protocol is then designed to set the organisational level (Rivkin, 2000). Thus, our
direction of the study (Tranfield et al., 2003). The second conceptualisation of conformity in multinationality means it
stage entails an unbiased search of the literature for relevant is an intended strategic decision, where a firm receives
studies based on the protocol designed. The reviewer some impetus of multinationality actions from rival firms
initially conducts a review of the potential studies in the and then decides to conform to multinationality decisions of
literature search. Those studies deemed relevant would be these rivals. With this approach, we are able to delineate
retrieved for more detailed evaluation of the text from this strategic behaviour from the more general isomorphic
which more important ones would be selected for the phenomenon which emphasises a similarity in
review. The number of studies included and excluded are organisational forms due to the emergence of some shock
documented with some justifications provided for the or the convergence to similar behaviour due to some
excluded studies (Tranfield et al., 2003). Lastly, the third common external source (Lieberman & Asaba, 2006).
stage which is the reporting stage synthesises the outcome Having sufficiently defined the scope within which this
of the review based on the protocol that was designed at the review is undertaken, we proceed to establish some
genesis of the review. A ‘thematic analysis’ of the review guidelines to complete the review protocol of the analysis.

150
The literature review would attempt to shed some light on Neo institutional theory (NIT) is a well-established
what the extant literature says about the drivers of theory which emanated from institutionalism (Selznick,
conformity in multinationality i.e. what are the underlying 1949). Later, Meyer and Rowan (1977) as well as
factors enhancing the propensity for firms to conform in DiMaggio and Powell (1983) provided some very strong
multinationality. After providing the scope for the review theoretical and empirical foundation for this theory. The
we advance to the selection criteria that was employed in basic argument of neo institutional theory is that
selecting the papers for the review. To retrieve the papers organisational behaviour occurs as a response to some
that formed the nucleus of this review, first, web of science social pressure emanating from the environment created by
which provides access to comprehensive literature search other organisations (Suddaby, Seidl, & Lê, 2013). The
was used in retrieving articles. The key words imitation and theory thus gained popularity because of its use of social
mimicry were used to capture conformity whiles considerations in its attempt to provide some explanation
internationalisation, entry mode, FDI, international for firm behaviour rather than rational economic
expansion captured multinationality, given that the concept justifications (Suddaby et al., 2013). The use of non-
of multinationality is a multi-dimensional construct. economic explanations for firm behaviour which deviates
Second, we then retrieved other papers that have been cited from classic economic theory, but rather the socially
as dealing with the same phenomenon to be included in our constructed beliefs that the organisation may have formed
literature review once it meets the boundary conditions that from its environment seems to suggest that organisations
where stipulated above. Those that did not meet the criteria might undertake certain practices not for performance
set up were excluded from the review, in the end a total of implications only but also for legitimacy effect as well.
35 articles was settled on. Thus, certain organisational practices may be adopted or
diffused through a population regardless of whether it has
Broad Outcomes of The Literature performance implications or not (Tolbert & Zucker, 1983).
DiMaggio and Powell (1983) contributed to the
Review advancement of the NIT theory by introducing the concept
of isomorphism, through which they argue that
After carefully going through the selection process to select organisations converge in structure and process when the
the relevant papers that would help us attain our objectives, organisational fields within which they exist become more
we proceed to present the results of our initial assessment of structured i.e. institutionalised. They further suggested that,
the various articles for our review analysis. Various three main institutional forces shape the organisational field
contributions made by different scholars on the imitation of which leads to isomorphism. First, the one that emanates
multinationality strategies were classified into the dominant from political influences (coercive isomorphism); second,
theoretical perspectives that were highlighted in these responses to uncertainty (mimetic isomorphism), and lastly
studies, our review showed that more than one theoretical the ones associated with professionalization (normative
perspective seemed to provide the basis for the conforming isomorphism). With mimetic isomorphism, uncertainty is
behaviour of firms as they engage in multinationality. We the predicator of such isomorphic behaviour. When
would like to point out that these theoretical perspectives organisational goals are blurred, leading to some form of
were not mutually exclusive in how we categorise them. In symbolic uncertainty, it turns out to be a powerful force for
such cases where more than one theoretical view was imitation. To that effect, organisations then tend to model
espoused, we decided the classification based on the themselves onto others (imitate) as a response to this
dominant theoretical approach adopted in providing uncertainty (DiMaggio & Powell, 1983). Ordanini et al.
explanation for this phenomenon. Although we do admit (2008), was quick to point out that with mimetic
some of the papers do show some significant link between isomorphism it can be argued to be a form of imitation,
the varying theoretical views used in explaining the since there is a deliberate action by organisations to
phenomenon, we opine that our method of classification overcome the uncertainty that has riddled the organisation.
affords us the opportunity and possibility to properly But same cannot be said for the other forces of
categorise the papers. This would significantly aid in our isomorphism since firms can behave similarly and look
reporting outcome since we can thematically map out the alike or be isomorphic because they belong to the same
findings of our study and adequately identify areas where environment and need to adapt themselves to survive, even
further scientific inquiry would be of essence. without a deliberate action to copy the strategic behaviour
of others, as exemplified in the study of Davis et al. (2000).
Conformity in Multinationality Main The general thesis of mimetic isomorphism has been
employed by scholars in the international business arena to
Theoretical Perspectives study firms’ conforming behaviour i.e. the extent to which a
firm’s multinationality resembles those of other industry
Neo institutional perspective rivals. Lu (2002) in her study of Japanese firms’ entry mode

151
choices found support for memetic isomorphism by also examined the phenomenon by leveraging on both
showing that later entrants tend to follow the entry mode institutional and ecology literature to explain Chinese
choices of earlier entrants, with uncertainty about the foreign investment location choices and found that
market playing a key role in this conforming behaviour. behavioural inertia was more influential in understanding
Similarly, Henisz and Delios (2001) also adopted the neo firms FDI decisions than behavioural mimicry. Introducing
institutional argument to explain FDI decisions and plant an interesting twist to the discussion on firms conforming
locations choices by Japanese firms, and consequently behaviour in multinationality, C. Li and Parboteeah (2015)
found support for firms’ conforming behaviour, employing explored how cultural dimensions play a key role in firms’
the memetic isomorphism framework. Guillén (2003) also mimetic tendencies. The results of their study found that
found that business group association did play a role to the individualism-collectivism and power distance significantly
extent that firms conform to the multinationality posturing affect firms conforming behaviour. Delios et al. (2008)
of group members. Haunschild and Miner (1997) employed examined firms conforming behaviour by employing both
the institutional argument to offer explanation for firm’s institutional argument and competitive rivalry-based
imitative action in multinationality. Similarly, the arguments to understand which better explains this
institutional perspective was used to explore the driving phenomenon, and they found that the competitive context in
force for internationalisation by F. Li and Ding (2013), who the home country influences the firms’ propensity to
also found that mimetic isomorphic pressure plays a role in conform to the multinational posturing of rivals. And
firms’ internationalisation intensity. In De Beule, Somers, ultimately concluded that both theories are complementary.
and Zhang (2018) study of Chinese location decision of
greenfield investment into Europe, the authors found that Antecedents of Conformity in Multinationality
Chinese firms follow other Chinese firms in the same sector
thereby giving credence to the neo institutional perspective. In examining the antecedents of conformity in
In all these studies uncertainties about the outcome of such multinationality, authors have enumerated various factors at
multinationality actions seems to be the motivation for such the industry level, the focal firm’s rivals-level and lastly the
conforming behaviour in multinationality. focal firm-level as the key drivers of imitative actions. At
the industry-level, referring to the structural characteristic
Organisational learning perspective of the industry, some authors for example found that home
country industry concentration influences a firm’s
The organisational learning theory suggests that firms propensity to conform to multinationality decisions of rivals
may learn from the experience of others (Levitt and March). (e.g., Anand & Kogut, 1997; Delios et al., 2008; Flowers,
This theory has also contributed to studies of inter- 1976; Gimeno et al., 2005). Whiles at the focal firm’s
organisation imitation by suggesting that firms may be able rivals-level which refers to the strategic actions of rival
to leverage on the experience of other organisations to firms, authors found that the amount of past entries or exist
make decisions. Using the key arguments from the of a foreign market by rival firms influences a focal firm’s
organisational learning theory Oehme and Bort (2015) propensity to conform to rivals’ multinationality decisions
found that firms imitate the internationalisation mode of (e.g., Chan et al., 2006; Fernhaber & Li, 2010; J. Li & Yao,
peers that are located within their network with the 2010). Lastly, some empirical investigations of the focal
propensity to imitate contingent on two main factors, firm-level antecedent of conformity in multinationality
namely, the firm’s past experience and its position in the reveals that a firm’s association with business groups, as
network it is embedded in, with this imitative action serving well as firms’ prior multinationality engagements
as a shortcut to the hitherto known, planned, or experience- influences the focal firm’s propensity to conform in
driven approach to multinationality. Similarly, J. Li, Qian, multinationality (Chan et al., 2006).
and Yao (2015) also used the organisational learning
argument to show that, the location decision of experienced Conclusions: Implications and
firms increases the confidence of other firms to imitate such
location decision. Indications for Future Research
Mixed theoretical perspectives To conclude the analysis, we would want to discuss the
main contribution, implications and indication for future
Some scholars advanced more than one theoretical research that can emanate from this review. The review
perspective in trying to understand firms conforming synthesised the main theories used to explain firms
behaviour in multinationality. For example, Henisz and conforming behaviour in multinationality. In the end, we
Delios (2001) employed institutional perspective and sought to show what the theories have said about
political institution to understand firms conforming conforming in multinationality. At the generic level, the
behaviour in multinationality, Yuan and Pangarkar (2010) literature suggests two main reasons for firms conforming

152
to the multinationality posturing of others. The reasons are: entry and performance. Entrepreneurship Theory and
uncertainty reduction and ways of being effective in their Practice, 34(1), 1-30.
multinationality engagements. In suggesting some avenues Flowers, E. B. (1976). Oligopolistic reactions in
for further research, we suggest that new studies be carried European and Canadian direct investment in the United
out at individual level to understand how firms’ decision to States. Journal of International Business Studies, 7(2),
conform to the multinationality posturing of rivals is 43-55.
influenced by individual actors in the firm. More precisely, Giachetti, C., & Spadafora, E. (2017). Conformity or
a cognitive perspective can throw more light on the role Nonconformity in Multinationality? Performance
played by individual actors in this strategic decision- Implications for the Italian Ceramic Tile Manufacturers.
making process. Secondly, scholars might also be interested Management International Review, 57(5), 683-715.
in understanding empirically what the outcomes of such Gimeno, J., Hoskisson, R. E., Beal, B. D., & Wan, W.
conforming behaviour is by employing the concept of P. (2005). Explaining the clustering of international
mutual forbearance to understand the success outcome of expansion moves: A critical test in the US
this multinationality actions. Thirdly, the performance telecommunications industry. Academy of Management
implications of such conforming behaviour would be of Journal, 48(2), 297-319.
significant interest as well to scholars in this field. Lastly, Greve, H. R. (1998). Managerial cognition and the
since the governance of the firm is very critical in firms’ mimetic adoption of market positions: What you see is
strategic decision-making process, examining the role of what you do. Strategic Management Journal, 967-988.
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insightful to investigate since the governance of the firm and foreign expansion: South Korean firms and business
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Guillén, M. F. (2003). Experience, imitation, and the
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Digital Tax as Political Risk
Ertugrul Akcaoglu, Hacettepe University, Turkey

This paper examines the rise of the digital tax concept with respect to international taxation, and more specifically,
as a political risk for MNEs. An historical and with respect to taxation of the digital economy. Following
chronological approach is used to demonstrate how and a chronological path will provide us why international tax
when the international tax system was established, and how policies in general, and the EU’s digital tax proposal in
it provided a relatively stable environment for MNEs to particular might become a major political risk for MNEs
flourish. The ascent of digital economy however, although that operate in the digital economy.
in the past decade provided unimaginable opportunities to
MNEs, now became the source of the destabilization of the
existing international tax system. Not only the OECD is How Did the Digital Tax Become a
considering significant changes in their model tax treaties; Political Risk?
but also, European Union is suggesting a digital tax and a
new concept of virtual permanent establishment to
recapture untaxed profits of MNEs that operate in the Existing international tax system
digital economy. States have split views and some are
considering unilateral actions. This means that there is a
significant political risk for MNEs with respect to Tax laws change, and they change a lot. Usually minor,
international taxation on the horizon. but sometimes major changes often occur in tax laws of
almost all states. Enterprises, local or not, are used to this
fact. The international system of taxation, however, still
Having some kind of risk is a sine quo non for all types reflects the principles that were developed in the early
of businesses. When it comes to the risks in international 1920s. So, basically, there is nothing new for MNEs with
business, several categorizations can be made. For example, respect to international tax policies of governments. Or, is
according to Miller (1992, pp. 311-331), MNEs are exposed there?
to five types of international risks: natural, legal, societal, International juridical double taxation is defined as
political and governmental. Daniell (2000), however, imposition of compatible taxes in two or more states on the
categorizes such risks as financial, cultural, legal and same taxpayer in respect of the same subject matter and for
political. identical periods (OECD, 2017, p. 9). It is a known fact that
One can define political risk as potential harm (or, industrialization and increasing international trade in the
sometimes, potential benefit) to a business operation arising late 19th century and early 20th century resulted in double
from political behavior. When making a policy decision, a taxation (Kobetsky, 2011, p. 110). It was the International
government is motivated by both economic and non- Chamber of Commerce (ICC), which was founded in 1919
economic objectives. The political environment in a state or at the end of the World War I, that first called for a solution
a region may compel political actors to substantially alter for the double taxation problem, which is considered as the
existing policies with respect to economic factors such as main obstacle to the financial reconstruction and
taxes, currency valuation, trade tariffs or barriers, international trade. In 1920, at its Brussels Conference, the
investment incentives, wage levels, labor laws, ICC requested the League of Nations, the political forum of
environmental regulations, development priorities etc. the period to settle disputes among states, to take measures
⁠
Same can be said with respect to non-economic factors as to prevent double taxation (the Technical Experts, 1925,
well. For example, political disruptions such as elections, pp.7-8). As a response, in 1921, the League of Nations
riots, coups, civil or international wars or terrorism may appointed a committee of four economists (Professor
result in a change in the ruling government. Obviously, Bruins, Commercial University, Rotterdam; Professor
uncertainty about government actions drastically affect Senator Einaudi, Turin University; Professor Seligman,
MNEs’ (and all other businesses) investment plans and Columbia University, New York; Sir Josiah Stamp, KBE,
ability to operate. London University) to study double taxation. In its report,
In this paper, I aim to point out only one aspect of all which was submitted in 1923 (Economic and Financial
political risk categories: governments’ changing position Commission, 1923), the committee stated that individuals

155
should be taxed on their cross-border income in the state to “associated enterprises” as well.) Article 7 sets a simple
which they have economic allegiance (Vogel, 1998), and rule: only residence state may impose a tax on business
according to the committee, economic allegiance had four profits of an enterprise. Source state, however, may also
bases: the place of production of wealth (origin or source), impose a tax, only if, the enterprise carries on business in
the place possession (location) of wealth, the place of that state through a permanent establishment. In that case,
enforcement of rights to wealth, and the place of the source state’s authority to impose a tax on business
⁠
consumption (residence or domicile) (Economic and profits is limited to the profits that are attributable to the
Financial Commission, 1923, pp. 22-23). The report permanent establishment. The permanent establishment
concluded that the places of origin (source) of wealth and itself is defined in Article 5, which is, basically, a fixed
the places of consumption of wealth (residence) are the place of business or a dependent agent within the source
main bases of economic allegiance, and in case of double state.
taxation of cross-border income, residence jurisdiction The solution of the OECD, which is adopted by most
should be the preferred method, source jurisdiction should states with respect to taxation of international business
provide exemptions or tax credits for income derived by income, in essence, was devised by the four economists, the
non-resident taxpayers (Economic and Financial ICC, and the technical experts of the League of Nations in
Commission, 1923, p. 25). the early 1920s. The existing network of international tax
Many consider the 1923 report of the four economists as treaties, approximately 3000 bilateral tax treaties, one way
the basis for the current tax treaties (Kobetsky, 2011, p. or another, is based on the OECD Model Tax Treaty. States
115). Other committees of the League of Nations, further either follow it as a basic document of reference in treaty
developed the work on double taxation by following their negotiations or develop their own models (such as the US
work. However, I should note that the ICC, in close contact Model Tax Treaty) as a derivative of the OECD Model.
with the League of Nations, continued on its study of Even the United Nations Model Tax Convention between
double taxation. For example, in 1923, at the London Developed and Developing Countries reproduces a
Conference the ICC adopted a resolution that the best significant of the OECD’s Model Tax Convention and its
method to avoid double taxation was to accept residence Commentaries. In short, the existing system of international
jurisdiction as the basis of tax on income; source taxation business taxation is almost one hundred years old and
should be restricted to taxing only income that was derived relatively stable.
within its territory, and residence state should provide relief
for source state taxation (the Technical Experts, 1925, p. 8).
Until the end of the World War II, League of Nations The Ascent of the Digital Economy
further developed its work. In 1928 it released its first draft
model tax treaty, which was followed by Mexico (1943) Existing international tax system was designed for
and London (1946) models. brick-and-mortar businesses, and for a considerably long
The World War II, of course, was the greatest risk of all period of time, it worked reasonably well. However, with
for MNEs in all senses, and also was the end of the League the growth of the Internet in the late twentieth century, the
of Nations. After the war, the increasing interdependence methods of doing business have started to change. The
between Western states clearly showed that a harmonized Internet seems not only to make the traditional economy
set of measures to resolve international double taxation was function more efficiently, but also to offer an even more
necessary. This time it was the OECD, which was first was perfect form of free-market exchange (Zekos, 2003, p. 164).
established as the OEEC in 1948 to run the US-financed Since the mid-90s there has been a significant increase in e-
Marshall Plan for reconstruction of a continent ravaged by commerce. Retail e-commerce, for example, is expected to
war and then later transformed into the OECD in 1961, that reach $4.479 trillion in 2021 according to a research
undertook the work left by the League of the Nations. In company, eMarketer (eMarketer, n.d.) ⁠Online sales have
1963 the OECD released its first Draft Convention opened up an opportunity for all types of companies; not
concerning the avoidance of double taxation, which was only the for ones that sell tangible goods but also for
later named as Model Tax Convention on Income and on companies that provide intangible goods and services, to
Capital. Since then many changes have been made on the reach a worldwide market. Revolution of technology has
Model Convention and on its Commentary (OECD, 2017, triggered changes in business organizations, and companies
pp. 10-11); yet, the basic principles stay the same when it of the digital economy, such as Apple, Amazon, Alphabet
comes to taxation of cross-border income: (Google) or Facebook are formed. “The new/digital
There are two significant articles of the Model with economy is defined as one based on knowledge and
respect to taxation of business income; Article 7 titled information, relying on sub-sectors such as entirely digital
“business profits” and article 5 titled “permanent goods and services and mixed goods that is, physical goods
establishment”. (I should also note Article 9 titled that are sold through the Internet” (Zekos, 2003, p.197).

156
The existing system of international taxation is not capable of revenues between residence and source countries.” The
of resolving issues regarding business profits derived from Committee, therefore, supported the view that “the concept
the sale of digital and mixed goods and services. I should of PE should be abandoned and a serious attempt needs to
note that it took a considerable amount of time for states be made within the OECD or the United Nations to find an
and international organizations to really comprehend the alternative to the concept of PE” (Ministry of Finance of
digital economy and to respond accordingly. For example, India, 2001, pp. 71-72) The Committee suggested to adopt a
in 1996 the US Treasury acknowledged that some of the slightly modified version of Professor Richard L
issues posed by the communications revolution were so Doernberg’s “base erosion approach”, and therefore, a low
complex that they could not be dealt with by existing rate withholding tax on all (not only on electronic
principles; and therefore, international cooperation was commerce) gross profits of MNEs in the source state as an
likely to be necessary (US Treasury, 1996). In 1997, the alternative to the permanent establishment threshold of the
White House issued a framework for global electronic tax treaties (Ministry of Finance of India, 2001, pp. 77-78).
commerce, and with respect to taxation stared that “No new As a response to the High-Powered Committee’s report
taxes should be imposed on Internet commerce. … the eComTaxpert Group, basically, a group of experts, most
(G)overnments should cooperate to develop a uniform, of which are from developed states, and also from MNEs
simple approach to the taxation of electronic commerce, such as IBM, GE and Microsoft, released its report titled
based on existing principles of taxation.” (White House, “Taxation of Electronic Commerce in India” in 2002 (The
1997) In the following years, many states such as Canada eComTaxpert Group, 2002). This report criticized Professor
(Canadian National Revenue Ministry, 1998a, 1998b), Doernberg’s base erosion approach as a radical departure
France (Reinhold, 2004, p. 703), Australia (Australian from the international consensus and argued that it was in
Taxation Office, 1997, 1999), Netherlands (Netherlands' conflict with the internationally accepted standards on when
Ministry of Finance, 1998), Japan (Ministry of International a jurisdiction has the right to impose an income tax on a
Trade and Industry of Japan, 1997), the United Kingdom non-resident enterprise. The report cautioned that any
(Inland Revenue and HM Customs and Excise, 1999) unilateral move on India's part to adopt such an approach
released similar reports pointing out issues and calling for might lead to disputes between India and its various treaty
international cooperation. The EU’s position was similar partners, and also might expose India to intricate issues in
(European Commission, 1997a, 1997b). In the end, all relation to the WTO (The eComTaxpert Group, 2002, pp.
states and the EU were looking forward to the OECD’s iv-v).
policy decisions on this matter. The “Electronic Commerce:
The government of India announced in 2001 that it was
Taxation Framework Conditions” issued by the OECD at
not going to adopt the suggested policy changes by the
the Ottawa Conference in 1998 conveyed the belief of the
High-Powered Committee; instead, it was going to wait for
Committee on Fiscal Affairs of the OECD that “the
the developments in the international community.
principles which underline the OECD Model Tax
Therefore, for MNEs it was the business as usual; there was
Convention are capable of being applied to electronic
no new political risk with respect to international taxation
commerce” (OECD, 1998). Starting from 1998 to
neither in India nor in any other state to the newly rising
(approximately) until 2005 the OECD worked hard to prove
digital economy during most of the 2000s. Ever expanding
that existing principles, definitions and provisions of
globalization and the digital economy, merged with the
international tax treaties (the Model Convention to be
aging international tax system have created the perfect
honest) could be applicable with respect to e-commerce
environment for MNEs to maximize their inherent
operations as well (OECD, n.d.). Consequently, the OECD
advantages in tax planning, and the MNEs have taken full
came up with recommendations on the challenges e-
advantage of those conditions (Brauner, 2014, p. 57).
commerce poses to the PE concept, which are now set out
in paragraph 42 of the Commentary on article 5 of the
OECD Model Tax Convention. The BEPS
There was one state, however, although for a very brief
period of time only, that had a different policy approach, or
should we say, an attempt to change its international tax Years ago, many authors, mostly from developing states
policy with respect to taxation of the digital economy. That pointed out the fact that the existing international tax rules
state was India. In 1999 India established the High-Powered were not designed for the new digital economy. As Chang
Committee on Electronic Commerce and Taxation. In 2001 Hee Lee, stated in 2004, “(D)igital technology completely
the Committee released its first report in which it heavily destroys the economic and legal basis for the existing rules
criticized the existing international tax regime with respect of international taxation, implying the necessity of a
to electronic commerce. The Committee’s view was that complete overhaul…” (Lee, 2004, p. 21). However, during
“applying the existing principles and rules to e-commerce the 2000s most states (perhaps all states) preferred to wait
situation does not ensure certainty and reasonable allocation and see the developments in the emerging digital economy.

157
No new policies were adopted with respect to taxation of the European Commission released an Anti-Tax Avoidance
cross-border income of MNEs derived from electronic Package⁠ as a European response to the finalization of the
commerce or other forms of the digital economy. The tax BEPS project (European Commission, 2016). Later,
competition between states further lowered the political risk however, against the suggestions in BEPS Action Plan 1, in
of taxation for MNEs. Then, with the financial crisis of March 2018, the EU Commission presented a series of
2008 and its aftereffects on the global economy, measures aimed at ensuring a fair and effective taxation of
governments that seek new or renewed sources of revenue digital businesses operating within the EU (European
realized (or acknowledged) that MNEs have been using Commission, 2018). The package includes an interim tax,
corporate tax planning strategies that artificially “shift” which is a 3% Digital Services Tax on advertising revenues
profits from higher-tax locations to lower-tax locations, of large internet companies, such as Facebook and Google,
thus “eroding” the tax-base of the higher-tax locations. For and on revenues from digital intermediary activities of
example, in 2013, Facebook who host 1.9 billion, or 83%, online platforms such as Amazon.com Inc., Ebay Inc., and
of their 2.3 billion global accounts in Ireland, only paid an Airbnb Inc. etc. The package also includes a long-term
Irish effective tax rate of <1%, using a double Irish scheme solution based on the new concept of a digital or virtual
(Financial Times, 2013). permanent establishment (“significant digital presence”).
At the same period, major news on illicit tax schemes However, on April 28, 2018, at the Informal Economy and
⁠ Finance (Ecofin) Ministers meeting, held in Sofia, Bulgaria,
like Offshore Leaks (ICIJ, 2013), Luxembourg Leaks (ICIJ,
2014), Swiss Leaks (ICIJ, 2015), Panama Papers (ICIJ, Malta and Luxembourg and some other states of the EU
⁠
2016) and Paradise Papers (ICIJ, 2017) started to hit front criticized these plans. The finance minister of Malta,
pages of news outlets on a yearly basis. Edward Scicluna said that “Malta is in favor of long-term
permanent solutions which are agreed to by international
All of these developments were actually hinting us consensus under the aegis of the OECD.” In response,
about governments’ changing position with respect to ministers of Spain, Italy and France took the position that
international taxation. It took almost a decade for the they would introduce their own levy on digital companies
OECD to accept the reality and to take action. The OECD (Malta Today, n.d.; Politico, n.d.).
initiated the Base Erosion and Profit Shifting (BEPS)
⁠
project following the 2012 G20 Summit and at 2015 G20
Antalya summit in Turkey, the G20 heads of states endorsed Discussion and Conclusion
a package fifteen actions designed by the OECD to be
implemented domestically and through tax treaty
provisions. (OECD, n.d.) Although all actions are The digital economy is the result of a transformative
significant for MNEs, I should note that Action 1, process brought by information and communication
“Addressing the Tax Challenges of the Digital Economy” technologies. It is increasingly becoming the economy
and Action 7, “Preventing the Artificial Avoidance of itself, and it would be difficult, if not impossible, to ring-
Permanent Establishment Status” are directly relevant. fence the digital economy from the rest of the economy for
tax purposes. Political leaders, media outlets, and civil
The BEPS is about globalization and MNEs, and it is society around the world have expressed growing concern
natural that it focuses on the advantages that the digital about tax planning by MNEs. For MNEs, this might not be
economy provides to MNEs, which on the other hand are anything new. However, there is a growing trend at political
major challenges for the tax authorities of states. Until heights to review, revise or in some cases to repeal the rules
BEPS states competed between themselves and MNEs of existing international tax system. The existing system,
benefitted from the tax competition. The BEPS is the which was established almost a century ago managed to
starting point for tax coordination between states against survive until the 2000s. The OECD was (and to some extent
MNEs. Obviously, there is more to come. still is) reluctant to react to the developments in information
The success of the BEPS project is questionable. The and communication technologies and their exploitation by
US and the EU Commission, for example, have been the MNEs. Yet, in the last 5-6 years, things started to
advancing their own anti-BEPS legislation and tax regimes change. Both the OECD and the EU have initiatives to
recently. tackle tax planning schemes of the MNEs; several states of
the EU proposing a special tax for the digital economy. This
means a rejuvenated political risk that did not exist for
Digital Services Tax, the Final Attempt MNEs during the past 50 years. When considered together
from the European Union with the trade wars on the horizon, one may claim that the
next ten years might be considerably riskier for MNEs.
Finally, and briefly, I should point out the EU’s attempt to
tackle tax issues caused by MNEs. First, in January 2016

158
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160
Political Risk Influence on Multinational Corporations
Operating in African Markets: Perspectives from Nigeria
James B Mshelia, University of Northampton, UK
John R Anchor, University of Huddersfield, UK

This paper critically examines political risk influence on According to United Nations Conference on Trade and
MNCs in African markets. It uses a sequential mixed Development (UNCTAD)’s World Investment Report
method strategy to analyse statistically and thematically 2017, the continent has maintained a robust FDI stock even
data collected from MNCs, including a political risk rating though a decline of about 3.5% to $59 billion was
dataset for Nigeria 2011-2016, using a multi-method witnessed in 2016 (UNCTAD, 2017). A number of
approach. The findings reveal that political risk impact on increases and decreases in FDI have been reported for the
MNCs is influenced significantly by factors such as degree continent for the past 7 years. This flux in FDI could be
of internationalisation, perception of political risk, attributed to fluctuating political, social, economic and
assessment outcome, leverage, low financial risk, perceived cultural challenges within many countries on the continent
rewards of FDI and a country’s political risk regional (Baek & Qian, 2011; Jensen, 2008). For this reason,
variation. These findings provide insights into why some political risk could be viewed to manifest itself differently
MNCs invest in markets which are associated with high in African markets compared to others. Therefore, there is
levels of political risk. a need to understand variations in countries’ specific
political risk factors and why MNCs invest in some African
Why would some Multinational Corporations (MNCs) countries (Baldacci, Gupta, & Mati, 2011;Bekaert et al.,
invest in African markets despite the presence of high 2014; Quer et al., 2012).
political risk? Political risk has been identified as one of the Most African countries have specific political risk
key determinants of FDI for MNCs (World Bank, 2014; factors that differentiate one from another, based on
Stevens & Newenham‐ Kahindi, 2017). Political risk is inherent factors in their political environments. Some of
constantly evolving, with different consequences for MNCs these inherent factors are related to religious, ethnic and
(Darendeli, & Hill, 2015; Huang et al., 2015). This has cultural cleavages (Asiedu, 2006;Baek & Qian, 2011;
included, for instance, from nationalisation to Jensen, 2008). These cleavages may also lead to regional
expropriation, and after that to others issues such as license variations in political risk within a country. Therefore, it is
cancellation, tax restrictions, investment agreement possible for there to be low political risk regions in high
changes, terrorism and protectionism amongst others political risk countries. This article investigates country-
(Bakaert et al., 2014; Sottilotta, 2015; World Bank 2014). specific political risk factors to determine the extent how
These different manifestations of political risk have they influence FDI by MNCs into an African market.
influenced the type of strategies MNCs adopt for different However, MNCs have attributes that differentiate one
markets depending on their type of international business firm from another that could significantly influence the rate
activities (Ferrari & Rolfini, 2008; Kerner & Lawrence, of FDI into markets. Likewise, these attributes of MNCs
2014; Kesternich & Schnitzer, 2010). make them perceive political risk differently (Al Khattab et
Increasing FDI inflow into African markets by MNCs al., 2011; Jiménez, Luis-Rico & Benito-Osorio 2014).
from developing economies has brought more concerns There are different dimensions to political risk perceptions.
about political risk in the continent (World bank, 2014). For example, there are differences in perceived risk and
This increase in FDI inflow has led to an increase in studies actual risk between new entrants and the accrued operating
of political risk in African markets compared to other experience of incumbents. Similarly, differences in firm
developed economies (Mshelia & Anchor, 2018; Osabutey behaviour could arise from dissimilar attitudes to risk (risk
& Okoro, 2015; Han et al., 2018; Stevens & Newenham‐ takers versus risk-averse), which may also vary by sector,
Kahindi, 2017). Recent studies have reported that almost all home country and age (Al Khattab et al., 2011; Jiménez et
forms of FDI are more susceptible to political risk al., 2014).
consequences than other market entry modes (Bekaert et al., UNCTAD (2017) reported that Nigeria is among the
2014; Kerner & Lawrence, 2014; Sottilotta, 2015; World top 5 FDI inflow host economies in 2016. The country is a
Bank, 2014). major supplier of oil and gas to the global market which,

161
coupled with its large market size, has made it an attractive influences a company’s decision to invest in a location
destination for FDI (NBS, 2014). Despite the flux in her (Mshelia & Anchor, 2018; Jiménez et al. 2011, 2014; Quer
political situation due to the multi-ethnic, multi-cultural and et al., 2012).
multi-religious nature of the country, it has one of the Neo-institutional theory has an inclusive theoretical
significant stocks of FDI on the continent (Ikpeze et al., concept with an emphasis on isomorphism, rational myths
2004; NBS, 2012; UNCTAD, 2016). and legitimacy that focus on resilient facets of social
This article aims to examine political risk influence on structure. The legitimacy facet of neo-institutional theory
MNCs in African markets in order to determine why some could be considered relevant in this context since MNCs
invest in the market despite the presence of high political always try to attain relative legitimacy as they react to
risk. We use a sequential mixed method strategy to analyse different institutional regulations in a host country
statistically and thematically data collected from MNCs in (Darendeli & Hill, 2015; Meyer, 2008; Quer et al., 2012).
Nigeria, using a multi-method approach. We also analyse Consequently, this implies that some changes in regulations
the dataset of the International Country Risk Guide (ICRG) made by institutions could lead to the emergence of
Political Risk Assessment (PRA) annual rating by the political risk in a host country, especially if a political
Political Risk Service Group in the US for Nigeria during environment is unstable or if its institutions are weak. Both
the period 2011 to 2016. We investigate country-specific informal and formal regulations could determine if an MNC
political risk factors and MNC specific attributes for could operate in a proposed market (Quer et al., 2012).
determinant that influences their FDI decision in Nigeria. Consequently, the rules set by institutions are factors that
The study offers valuable insights into why some MNCs could distinguish profitable from a non-profitable
invest in markets which are associated with high levels of investment. There follows a literature review about political
political risk within the Nigerian context. The article risk and the internationalisation of MNCs in Nigeria. This
contributes to the literature of political risk concerning the provides some insights into the country’s specific political
factors that influence MNCs’ FDI in high political risk risk factors and the characteristics of MNCs which cause
markets. them to perceive political risk differently.
The remaining parts of this article are organised into
five sections. The first section presents a literature review Political Risk
of political risk theory, the Nigerian context to MNCs’ FDI
decisions. The second section describes the methodology, Producing a consensus definition of ‘political risk’ has
including the data collection and the data analysis. The third been challenging in the past few decades. Political risk has
section discusses the study’s findings. The fourth section been linked with concepts such as ‘political instability’,
presents the research contributions, and the final section is a ‘political uncertainty’ and ‘country risk’, which raises
conclusion. further complexity regarding its conceptualisation (Brink,
2004; Fitzpatrick, 1983; Howell, 2002a; Overholt, 1982;
Literature Review Sottilotta, 2013). However, a number of authors have
attempted to conceptualise and define political risk with
Political Risk and Firms’ Internationalisation diversity which encompasses political events and
government interventions. According to Kobrin (1979), the
consequences of an event depends on the circumstances
Political risk appeared as a discrete field of study in under which it occurs and the type of the investment, as
international business devoid of an accepted theory that well as the environment. It is for these reasons that
summarises the fundamental principles clarifying how Fitzpatrick (1983) proposed that if political risk is viewed
responses of MNCs towards host nations’ policies as a process variable instead of an event variable. This
regulating them within markets (Robock, 1971; Grosse & suggests that the level of political risk can change over
Behrman, 1992). Even though some theories have been time.
ascribed to international business none has focused on how However, this study considers other factors, both in the
political risks, due to government policies showing cross- process and event variables, in defining political risk.
national business behaviour, affect MNCs. Therefore, political risk could be defined as any unpleasant
The causes of political risk are political, and through possibilities in the political environment as a result of
the interplay of actors with different interest, power and government actions or any condition/event that affects an
constraints in a given environment refer to like politics, investor achieving its business objectives in a host country.
institutions are created. Therefore, institutions become the This definition implies that political risk does not always
rules of the game regulating how MNCs operate in an emanate from government political decisions because some
environment in this context. It is in the same context that variables or factors that cause political risk are not
previous studies about political risk have attempted to associated with political events or government decisions,
interrelate it with institutional theory in explicating what and instead are inherent in the political environment.

162
 Political risk is different from political uncertainty and Classification of Political Risk
political instability. Political instability refers to unexpected
changes in the political environment while political Political risk can be classified according to its
uncertainty refers to doubt regarding the likelihood of
government changes in a political environment. Both are
source since not all risks are as a result of changes arising
used interchangeably in place of political risk. However, from host government decisions. Political risk can be
political risk refers to unpleasant possibilities in the categorised into four sources; namely host-government,
political environment as a result of government actions or host-society, neighbouring countries and non-neighbouring
any condition/event. It is a more objective way of countries (Al Khattab et al., 2011). This article
measuring the amount of doubt from political instability includes non-neighbouring countries as a source
and political uncertainty, rather than the former, which considering the effect of the ‘Arab Spring’ that brought a
captures the subjective nature of instability and uncertainty new example to how political risk could emerge. Table 1
(Brink, 2004). provides a summary of political risks and their origins.

Table 1. Classification of Political Risk According to Sources

Serial Host government Host society Neighbouring Non-neighbouring
countries countries
1 Taxation restrictions Demonstrations/riots/strike Wars Revolutions
s
2 Currency Revolutions, Sanction Regional blocs
inconvertibility/devaluation
3 Contract repudiation Terrorism Political instability
4 Import or export restrictions Coups d’état
5 Ownership/ personnel restrictions Civil wars
6 Delayed profit repatriation Hijacking
7 License cancellation Piracy
8 Price control
9 Expropriation/ nationalisation
10 Investment agreements changes
11 Changes in rules and regulations
Source: Developed from Al Khattab et al. (2011)

According to Brink (2004: 21) ‘political risk is a in a country to be compensated for a good financial and
concern in an investment scenario, which should include economic risk. The resultant inability of some MNCs to
current information covering areas such as history, politics, fully understand diverse political environments has resulted
culture, religion, economics and international relations, as in across-the-board policies, dichotomising some
well as knowledge of the firm’s likely role in the host developing countries as either safe or unsafe (Fitzpatrick
country’. He further states that the ‘presence of political 1983, 251). Hence, there is a need for firms to understand
risk in a host country does not always have to result in a the different political environments in their processes of
negative impact. There are possibilities of changing it into internationalisation into developing countries.
an advantage as long as an investor is aware of it’ (Brink,
2004, p. 21). The generative agents of political risk are Firms’ Internationalisation
divergent and vary among countries, and likewise their Internationalisation is defined as “the process by which
effects on MNCs (Burmester, 2000; Kobrin, 1982). a firm enters a foreign market” (Rugman & Collinson 2012)
Even in the same country, political risk types, costs, through different modes of entry. A number of factors
probability and the degree of its intensity can vary from one influence firms’ internationalisation process to new foreign
part of the country to another; likewise, their consequences markets, apart from firms’ market-specific knowledge as
vary in their impact. Political risk can be attributed to well as their generalised knowledge of operating
differences in political environments, especially in internationally (Johanson & Vahlne, 1990; Clark, Pugh et
developing countries with weak regulation institutions, and al., 1997). The Uppsala Model suggests that the process of
where ideological, ethnic and religious cleavages are internationalisation is consequent upon firms’ experiential
inherent in their environment (Fitzpatrick, 1983). PRS knowledge of a particular market (Clark, Pugh et al., 1997).
Group (2015) argues that it is possible for poor political risk However, Millington & Bayliss (1990) argued that the

163
market- specific knowledge available to firms is not just the political risk vary and could be viewed from different
source of information for internationalisation. This is dimensions apart their perceived reward of investment in
because firms could develop extra networks of institutional relation to the cost of political risk in a country.
arrangements as they keep operating in foreign markets, There are different dimensions about risk perceptions,
which could give some leverage as they internationalised. for example; there are differences in risk perception and
There are different types of international investment actual risk between new entrants and the accrued operating
that MNCs use for internationalising into different markets. experience of incumbents. Likewise, differences in firm
They could choose among the different entry modes into behaviour arise from different attitudes to risk (risk takers
foreign markets such as by owning subsidiary, joint venture versus risk-averse), which may also vary by sector, home
or merger and acquisition, based on their institutional country and age amongst others (Liesch et al., 2011; Kraus
arrangement and resources available for competitive et al., 2015). It is possible to have an endogeneity between
advantage (Andersen, 1993; Andersen, 1997). Firms’ firm entry and perceptions of risk. The greater the
decisions on the best entry mode strategy depend on a wide profitability of incumbents, the more likely it is that new
range of factors, considering the costs and benefits of each firms will enter (hence greater FDI inflows), the lower the
mode of entry, and most importantly their perceptions of perception of risk but likely returns can be expected to fall
risk and how it could be mitigated (Tayeb, 2000; Hill and owing to increasing competitive intensity.
Jain, 2013). In the context of political risk, Dunning (1998)
suggested that the choice between FDI and exporting will Political Risk and MNCs in Nigeria
depend on factors such as internationalisation advantage,
location advantage and ownership advantage (Agarwal & The literature on political risk in Nigeria has been
Feils 2007). In his eclectic theory, he stated that a firm growing due to the country’s position as one of the five
should have all these advantages in order to be successful in largest African FDI inflow destination. The country has
FDI. However, for strategic reasons, firms with increasing experienced series of transformations that have formed and
resource-based advantages could move into certain markets reformed its political landscape since it was created in
due to their strategies, structures and control mechanisms 1914. After independence in 1960, the country has
thereby increasing their market knowledge as well as undergone several economic and political reforms by both
commitment (Agarwal & Feils 2007). Therefore, a firm the democratic and military governments that have had
enter different foreign markets, its international business consequences on for MNCs (John, 1997; Umoren, 2001).
activities increases, thereby increasing the degree of The staging of a military coup and a civil war that happened
internationalisation. from 1967 to 1970 set the stage for the emergence of
A number of variables are used as criteria to measure a political risk in the country after 1966. After, that the
firm’s degree of internationalisation, such as number of government introduced a succession of policies that led to
years, revenue generated and coverage in international the nationalisation of a number of MNCs in 1972 that lasted
business (Rice & Mahmoud 1990; Pahud de Mortanges & for about 10 years. Subsequently, a number of military
Allers 1996; Al-Khattab et al., 2011). It is assumed and interventions in the government, as well as different
expected that as these determinants of internationalisation political and religious crises were witnessed (Babawale,
increase, the degree of internationalisation will also 2001; Bienen, 2003; Onapajo, 2012; Orugbani, 2005).
increase. It is applicable for firms whose type of Presently, the increasing wave of terrorism, high level of
international business activities are either by FDI or corruption, high rate of unemployment, inadequate
exporting. Consequently, this implies a positive relationship infrastructure, poor legal system and the unstable situation
between the determinants of the degree of in the oil-rich Niger Delta region have been reported in the
internationalisation. However, due to differences in their country (Aon, 2014; Wafure & Nurudeen, 2010). The
nature of international business that MNCs are engaged in, country’s economy is also growing with an increasing
it will be problematic to determine the degree of inflow of FDI (UNCTAD, 2016). However, the dataset by
internationalisation of some firms based on their ICRG PRA annual rating conducted for Nigeria within the
characteristics. period from 2011 to 2015 reported a very high political risk
It is most likely to have firms with a high level of score.
internationalisation operating in riskier markets based on
their knowledge of these markets to be able to manage The country is divided along cultural, ethnic, language
political risk (Pahud de Mortanges & Allers, 1996; Iankova and religious lines within her different geographical regions
& Katz, 2003; Al-Khattab et al., 2008). However, firms (Bienen, 2013; Onapajo, 2012). There are regional ethnic
have various institutional arrangements with different militia groups that exist across the country. In the south,
leverage that enables them to operate even in the presence there is the Movement for the Emancipation of the Niger
of some types of political risk and weighing up that the Delta (MEND), in the East, the Movement for the
consequences will have less impact. Their perceptions of Actualisation of the Sovereign State of Biafra (MASSOB).

164
While in the West, Odua People’s Congress (OPC) and the foreign participation (Ake, 1985b; John, 1997; Olaloku,
north, ‘Boko Haram’ (Babawale, 2001). ‘Boko Haram’ is a 1979). This nationalisation policy affected the ownership
terrorist group, whose actions have led to the deaths of and the control of MNCs in various ways; however, some
many, and has resulted in the declaration of a state of oil firms with political influence were favoured partially by
emergency in three northern states (Bienen, 2013; Danjibo, the government (Frynas & Mellahi, 2003). Hence, it
2009). According to Nigerian National Bureau of Statistic resulted in a drop in the number of foreign investors coming
(2012b, p. 11), ‘despite the growth of the Nigerian into the country.
economy, ironically, the percentage of Nigerians living in Subsequently, this led to the introduction of a
poverty is on the increase’. The report demonstrated that the privatisation policy, with the establishment of the Bureau
percentage of the poverty rate of the population increased for Public Enterprise (BPE) in 1994 by the federal
considerably during the period 1980 to 2010, with the government. It was done to relinquish and limit the
northern part having the highest percentage. In research government and its agencies’ involvement in the
conducted by the World Bank on the Investment Climate management of the enterprises (whether wholly or partly
Assessment Report 2012, it was reported that in 26 states, owned) by deregulation through the CAP 369, Laws of the
investors in Nigeria lost 10 percent of their revenue due to Federal Republic of Nigeria (Ake, 1985a, 1985b). It was to
poor infrastructure, crime, corruption and insecurity (Iarossi create a self-sustaining culture with goods and services
& Clarke, 2011). It also reported that 80 percent of firms which reflected real values, as well as to encourage more
offer bribes to government officials for one reason or foreign investors into the country. It led to the promulgation
another. Therefore, it is in this setting that the determinants of the Companies and Allied Matters Act in 1990 by the
of political risk will be interrelated to identify their impact Federal government. Later, the Corporate Affairs
on MNCs. Commission was established to be in-charge with
registering, regulating and supervising the formation and
MNCs in Nigeria incorporation or the winding-up of companies doing any
form of business in Nigeria (Ake, 1985b; John, 1997).
Although there is a dearth of literature on MNCs in However, despite these policy interruptions, the number of
Nigeria, MNCs have been investing in Nigeria even before MNCs coming into the country has increased because the
the country gained independence in 1960. The Nigerian Nigerian government has been reforming its policies to
investment climate was under foreign control because offer incentives to encourage more foreign investors into
foreign investors dominated the ownership and the country.
management of firms in the country. A number of MNCs
such as Shell, John Holt, Patterson Zocohonis (PZ) and the Methodology and Data Analysis
Swiss Union Trading Company (UTC), Societe
Commercial de I’Quest African (CFAO) and Barclays Bank A list of 247 companies obtained from the Nigerian
have invested in Nigeria. However, in the past, it was only Stock Exchange in Lagos and the Corporate Affairs
the government who was involved in the Commission in Abuja databases were used to identify
internationalisation of business in Nigeria. The government MNCs operating in the country. A verification on a firm-
conducted international trade by exporting crude oil and by-firm basis during a pilot study helped to identify 150
agricultural products such as groundnuts, cocoa, and cotton MNCs which 59 of these firms were later found to have
to other countries (Ake, 1985a, 1985b). suffered nationalisation by previous governments in the
It was not until 1972 that this trend changed when the 1970s. The balance of 74 firms completed the online survey
Nigerian government promulgated an enterprise promotion with 81.3% participation rate. This study uses a sequential
act with two schedules. This act was called the mixed method strategy to collect from data these MNCs
Indigenisation Policy Act and was aimed at promoting local through an online survey, followed by a stratified sampling
participation in the economy (Ake, 1985b; John, 1997). The semi-structured interview technique from 12 MNCs which
promulgation of the act led to the nationalisation of some were analysed statistically and thematically respectively. It
foreign firms in the banking and oil sectors, with the also analysed the dataset of the International Country Risk
Federal Government acquiring 40 to 60 percent shares. Guide (ICRG) Political Risk Assessment (PRA) annual
Subsequently, the Act was reviewed to improve its rating by a Political Risk Service Group in the US for
implementation strategy due to low investor knowledge, Nigeria within the period 2011 to 2015. The participant
fragmented share liquidity structure and politicisation. The sample size coupled with the results that emerged from the
government further amended the act in 1989 in order to quantitative data collected and for data triangulation
encourage more foreign capital inflow into the country but informed this approach (Bryman & Bell, 2015; Davies &
exempted the banking, insurance, petroleum and mining Hughes, 2014). Statistical analysis was used to delineate the
sectors. Other businesses not contained in the list of characteristics and to compare the scores of the underlying
scheduled business were now open for 100% of Nigerian or variables for use to predict their outcomes (Field, 2013).

165
 for internal consistency using Cronbach’s alpha coefficient
Validity and Reliability Test statistically to ensure that the research instrument provided
an adequate and accurate measurement for the study.
The scales used in the questionnaire were checked

Table 2. Reliability Statistics

Cronbach's Alpha Cronbach's Alpha Based on Standardised Items Number of Items Number of cases

0.86 0.953 117 74

According to the reliability test conducted, Table 2 (Golafshani, 2003). In the context of this study, the
displays the Cronbach’s alpha coefficient value of 0.86. sampling techniques used can provide the required specific
According to Pallant (2010) “values above 0.7 are exploratory data to complement the quantitative data
considered acceptable. However, values above 0.8 are collected. The data analysis used was to ensure the
preferable”. It suggests the value obtained; there is very robustness and dependability of this study’s finding. To
good internal consistency reliability for the scales used in ensure conformability, proper documentation and
the questionnaire. rechecking of the data collected was ensured (Creswell,
For the interviews, the credibility, transferability, 2013).
dependability and conformability were used as reasonable The questions asked during the semi-structured
criteria for determining the qualitative data collected interviews were based on the questions that needed to be
(Creswell, 2013; Golafshani, 2003). Each one of the criteria probed from the results of the quantitative data and the
was used at each stage to ensure that accepted procedures criteria used to select each sample. A total of twelve firms
were followed and detailed records were maintained for from six industries were interviewed. The interview went in
each of the firms interviewed to ensure the credibility of the the order of the questions; however, the researcher used the
data collected. In order to ensure transferability of the opportunity to explore other leading questions that arouse.
results obtained to another setting, adequate details of the All the interviews were held at the participant firms’
interview procedures used were provided for each specific headquarters offices in Lagos, Nigeria. Each interview
case. For dependability to be ensured, an assumption in lasted about 45minutes on average. The details of the firms
qualitative research was considered that if there is a change that participated in the interview are shown in Table 3.
in context, it is expected that the data would also change

Table 3. Details of the Firms Interviewed

Labe Type of Interviewees Job Responsibility Frequency
l industry
A1 Banking A Director Head of the Risk Management team 01

A2 Risk Manager Responsible for developing risk policy 02

B1 Manufacturin Senior Manager Heading the Risk Management team 01
g
B2 Financial In-charge of financial dealing 02
Manager
C1 Communicati Operation CEO, oversees all departments 01
on manager
C2 In-charge of marketing 02
Sales manager
D1 Insurance CEO Head of the Risk Management team 01

D2 Financial In-charge of financial dealing 02

Manager
E1 Petroleum & General Manager Oversees all departments 01

166
 Gas
E2 Security/risk Develop risk policy 02
manager
F1 Construction Senior Manager Head of the Risk Management team 01

F2 Safety/risk Responsible for developing risk/safety 02

manager policy
Source: Author

Data Presentation and Analysis of Results Table 4 reveals that 58.1 % were large -size firms. In
assigning the participants according to size, based on a
firm’s number of employees, Table 4 shows that 71.6 %
Characteristics of Nigerian MNCs were large -size firms with more than 300 employees. In
Table 4 shows the six category classifications used for assigning the participant firms by type of multinational
the participants to characterised Nigerian MNCs. In business, Table 4 reveals that FDI internationalised 64.9 %
allocating the participants according to their type of of the firms. In allocating the participant firms according to
industry, Table 4 discloses that manufacturing represented entry mode of internationalisation, 56.8% of the firms’ did
36.5% of them and petroleum & gas 32.4 % of them. In so by owning subsidiary.
categorising the participants according to size, based on a
firm’s assets (1 Billion Naira equivalent of $ 136 million),

Table 4. Description of Characteristics of Nigerian MNCs

Characteristics of Nigerian MNCs Frequency Percentage
Manufacturing 27 36.5
Petroleum & Gas 24 32.4
Type of Industry Banking 12 16.2
Insurance 5 6.8
Construction 3 4.1
Communication 3 4.1
FDI 48 64.9,
Export/Import 24 32.4
Type of Business FPI 1 1.4
Others 1 1.4
Owning Subsidiary 42 56.8
Branch/Office 12 16.2
Entry Mode Franchise/Licensing 5 6.8
Joint Venture 5 6.8
Manufacturing Contract 3 4.1
Strategic Alliance 3 4.1
Other 4 5.4
Below N1 billion 3 4.1
N1 billion -- N10 billion 14 18.9
Asset N10 billion -- N20 billion 14 18.9
Above N20 billion 43 58.1
Below 50 4 5.4
50 -150 7 9.5
Number of Employees 150 - 300 10 13.5
Above 300 53 71.6
Source: Author

The Determinants of Internationalisation criteria to determine firms’ degree of internationalisation

In the descriptive statistical analysis of the into high-internationalised, medium-internationalised and
determinants of internationalisation, the variables used as low- internationalised are the number of Years; Revenue

167
generated; the number of Countries coverage area. In medium-internationalised firms according to revenue
categorising the participants according to firms’ number of generated from international business activities. 45.0 % of
years in international business to determine their degree of the firms were low-internationalised firms according to the
internationalisation, Table 5 indicates that 51.4 % were number of operating country participants in the survey.
low-internationalised firms. 52.7 % of the firms were more

Table 5. Determinants of Internationalisation

The Determinants of Internationalisation Frequency Percentage
2–9 38 51.4
Number of Years 10-29 12 16.7
30-90 24 32.9
Below N160 Million 8 10.8
N160Million – N320Million 27 36.5
Revenue Generated N320Million -- N2billion 16 21.6
Above N2 billion 23 31.1
High 25 33.7
Number of Operating Countries Medium 16 21.3
Low 33 45.0
Source: own calculations

Political Risk and the Degree of Likert scale was used to investigate their concerns, where 1
Internationalisation stood for ‘ Not concerned’ 2 ‘Slightly’ 3 ‘Moderately’ 4
‘Very’ and 5 ‘Extremely concerned’. After that, a linear
A descriptive statistical analysis was conducted to regression analysis was performed with political risk as the
compare the scores of the variables to determine the relative independent variable and revenue generated as the
concern of participants for each type of risk in international dependent variable, to test the hypothesis that an increase in
business, The participant firms were presented with three political risk will result in a negative impact on
types of risks, and 14 types of political risk in international firms’revenue.
business derived from the literature reviewed. A five-point

Table 6: Types of Risk in International Business

Types of Risk Mean Std. Error of Mean Median Mode Std. Dev Variance Min Max
Political risk 4.00 .092 4.00 4 .794 .630 2 5 Sour
Financial risk 4.04 .091 4.00 4 .748 .615 2 5 ce:
Cultural risk 2.84 .109 3.00 3 .937 .877 1 5 Aut
hor
Table 6 shows the results of the mean, mode, SD scores of the consequences associated with each type of political
(4 ‘Very concerned’). Most of the participants indicated risk in Nigeria. A five-point Likert scale was used to
that they are very concerned with political and financial indicate the level of consequences associated with each type
types of risk in international business with mean scores of of political risk, where 1 stood for ‘No consequence’, 2
4.00 respectively, while cultural risk had a mean score of ‘Low’, 3 ‘Moderate’, 4 ‘High’ and 5 ‘Severe’.
2.80. It indicates that most of the participants are very Table 7 displays the descriptive statistics of the relative
concerned about political risk. consequences of political risk in Nigeria. Mean scores
range from 2.58 to 1.38, mode scores of mostly 1 and SD
The Consequences of Political Risk scores ranging from 1.20 to 0.88. The mean, mode and SD
scores (1’No consequence’) indicate that most of the
In investigating the consequences associated with participants believe that there are no consequences of
political risk, a descriptive statistical analysis was political risk in Nigeria. It submits that most of the types of
conducted to compare the scores. The participants were political risk have few consequences for participant firms
presented with 14 types of political risk to indicate the level doing business in Nigeria.

168
Table 7: Consequences of Political Risk
Types of Political Risk Mean Std. Error Median Mode Std. Variance Min Max
of Mean Deviation
Terrorism 2.58 .141 3.00 3 1.201 1.442 1 5
Demonstration, riots, strikes 2.23 .141 2.00 1 1.208 1.459 1 5
Currency devaluation 2.15 .150 2.00 1 1.289 1.663 1 5
Revolutions, coups, civil wars 1.88 .149 1.00 1 1.282 1.643 1 5
Price controls 1.67 .115 1.00 1 .987 .974 1 4
License cancellation 1.64 .138 1.00 1 1.189 1.413 1 5
Import/export restriction 1.58 .129 1.00 1 1.110 1.233 1 5
Contract repudiation 1.53 .122 1.00 1 1.050 1.102 1 5
Investment agreement changes 1.54 .122 1.00 1 1.049 1.101 1 5
Confiscation 1.49 .119 1.00 1 1.015 1.031 1 5
Taxation restrictions 1.47 .098 1.00 1 .835 .697 1 4
Expropriation or Nationalisation 1.45 .106 1.00 1 .909 .826 1 5
Currency inconvertibility 1.42 .098 1.00 1 .835 .697 1 4
Delayed profit repatriation 1.39 .106 1.00 1 .889 .791 1 5

Africa FDI Inflows by Regions reveals that there has been a rise and decline in FDI inflow
to the continent for the past six years. Nigeria has
Table 8 shows FDI inflows to Africa regions, a decline witnessed a variable inflow of FDI with an increase
of about 3.5% to $59 billion of FDI was observed in 2016, observed from $3bn in 2015 to $4.4bn in 2016.
but the continent still maintains a robust FDI stock. It

Table 8: FDI inflows to Africa Regions, 2011−2016 (Millions of dollars)

Region/Year 2011 2012 2013 2014 2015 2016
Nigeria 8 915 7 127 5 608 4 694 3 064 4 449
Africa 66 018 77 501 74 551 71 254 61 495 59 373
West Africa 18 926 16 822 14 479 12 176 10 189 11 433
Southern Africa 26 283 29 376 33 118 30 983 26 039 21 248
East Africa 5 894 6 596 7 268 6 894 6 284 7 102
Central Africa 7 367 8 949 7 733 9 112 6 003 5 119
North Africa 7 548 15 759 11 952 12 086 12 981 14 472
Other Africa 54 470 61 742 62 599 59 165 48 514 44 901
Source: UNCTAD (2017)

ICRG - Political Risk Assessment Dataset for risk (5.9%) for Nigeria was recorded from 2014 to 2015.
Nigeria (2011-2016) The net percentage change over this period is -0.9%,
Table 9 shows a dataset by ICRG PRA annual rating implying by this margin no significant reduction was
report conducted for Nigeria within the period from 2011 to experienced in the level of political risk within the period
2016 which ranged from 42.5% to 46.0%. This risk rating by ICRG. The total point percentage is used to indicate the
indicates that a very high political risk ranking was reported level of risk: very high (49.9% - 0.0%), high (59.9% -
by the ICRG for Nigeria within the period (PRS Group, 50%), moderate (69.9%- 60%), low (79.9% - 70%) or very
2015). The highest annual percentage change of political low (100% - 80%) (PRS Group, 2016).

169
Table 9: ICRG - Political Risk Assessment Dataset for Nigeria (2011-2016)
Seri Political Risk Index 2011 2012 2013 2014 2015 2016 Net
al Variables Weig Chang
ht e
1 Government Stability - 12 8.0 7.5 8.0 6.0 7.5 6.0
2 Socioeconomic - 12 2.0 2.0 2.0 2.0 2.0 2.0
Conditions
3 Investment Profile -12 6.5 6.5 6.5 6.0 6.0 6.0
4 Internal Conflict -12 6.6 6.6 6.5 6.0 6.0 6.0
5 External Conflict -12 9.5 9.5 9.5 9.0 9.0 9.0
6 Corruption -6 1.5 1.7 1.5 1.5 1.5 1.5
7 Military in Politics -6 2.0 2.0 2.0 2.0 2.0 2.0
8 Religions in Politics -6 1.5 1.5 1.5 1.5 1.5 1.5
9 Law and Order -6 2.0 2.0 2.0 2.0 2.0 2.0
10 Ethnic Tensions -6 2.0 2.0 2.0 2.0 2.0 2.0
11 Democratic -6 3.5 3.5 3.5 3.5 4.5 4.5
Accountability
12 Bureaucracy Quality -4 1.0 1.0 1.0 1.0 1.0 1.0
Total points - 100 45.6% 45.0% 46.0% 42.5% 45.0% 44.0%
Annual percentage 0.0% -1.3% 2.2% -7.6% 5.9% -1.0% -0.9%
change
Source: PRS Group (2016)

Interview Findings quantitative data collected that informed the interview

A thematic method of analysis was used for analysing questions and the interview quotes are shown in Table 10.
the interview data collected. Details of the link between the

Table 10: Link between Quantitative Data and Interview Questions/ Interview Quotes
Industry Quantitative Data Interview Questions Interview Quotes
A1- Banking Weak correlation 1-What are your firm’s concern about political risk
between types of concerns about the issue of corruption’ problem of
A2- Banking political risk and political risk issues in terrorism.'
firms’ assets Nigeria? the offering of bribes.'
B1-Manufacturing the problem of religious intolerance,

B2-Manufacturing No consequences of 2-What are the types of a type of political risk can exist in one part
political risk on political risk issues of a country and not in another,
C1- Communication firms’ assets mostly concerning their political risk issues as changing over time,
firms in the country? located in the Western part of the country
C2- Communication
From the value of 3-Are the insignificant for their firms depend on the
D1-Insurance R2, consequences of type of political risk,
Types of political political risk significant vary from one part of the country to
D2-Insurance risk cannot explain for your firms? another
52% variations only
E1- Petroleum & Gas engaging in CSR,
4-What factors years of experience operating
E2- Petroleum & Gas The Sig value risk influence the impact of internationally,
indicates that none political risk on your understanding of the Nigerian market,

170
 of the types of firms? leverage,
F1- Petroleum & Gas political risk maintaining a good relationship with
statistically government,
F2- Petroleum & Gas significant 5-What about your the imperfect market,
firm’s perceptions of
political risk in the perceived reward of investing,
country? the large size of the market,
high return on investment,
Source: Author

Discussion most of the factors causing political risk in Nigeria are

associated with the evolution of the country as well as with
political events and government decisions. However, the
The characteristics of MNCs participants displayed a general nature of political risk are mostly determined due to
high percentage of FDI via owning subsidiary. The institutional specific factors. Therefore, this finding
presence of more firms with investments of over two billion indicates that this is a major concern of political risk.
dollars and more than 300 employees confirms that most of The findings on the consequences of political risk
them are large-sized MNCs. The results of the determinant (mean ranging from 2.6 to 1.4) indicate that there are
of internationalisation by number of years showed a greater moderate and low consequences for MNCs in Nigeria.
number of low-internationalised firms, implying an inflow However, the dataset by ICRG PRA annual rating
of more FDI firms in recent times. These findings are conducted for Nigeria within the period from 2011 to 2016
consistent with the UNCTAD (2016) report that FDI reported a very high political risk score. This disparity can
inflows into Africa have increased significantly. The be explained from the point of view that some MNCs can
disparity in each determinant of internationalisation still operate in a country despite the presence of political
confirms that firms’ degree of internationalisation varies in risk if its consequences are insignificant on their return on
terms of years, coverage and revenue generated. investments. The finding of interviews indicated that there
This study finds that though MNCs are very concerned are little consequences of political risk. It also mentioned
about political risk which confirms the World Bank (2014) that the consequences depend on the type of political risk,
report that it is has been a major concern for MNCs which means it varies from one type to another. This means
operating in developing countries. It also supports the views that the consequences of political risk vary from one part of
of Baek & Qian (2011) and Baldaaci et al. (2011) that the country to another, and likewise so do the impacts. A
political risk is one of the key determinants of firms’ type of political risk can exist in one part of a country and
investment in developing countries. Kerner & Lawrence not in another; therefore, it will have an impact on MNCs
(2014) and Kesternich & Schniterzer (2010) also mentioned operating in that part of the country. This finding can be
that political risk has resulted in a range of consequences discussed considering the location of these MNCs in
that have influenced the type of strategies which they adopt; Nigeria. The list of the identified MNCs shows that 75% of
changing their ownership structure, entry mode and these firms are in the western part of Nigeria.
international investment. Political risk and financial risk can The emergence these findings that each type of
also be considered to offer enhanced opportunities as well political risk has different consequences, even in the same
as unexpected potential consequences (Knight, 2012; political environment, and the consequences vary from one
Sadgrove, 2015). Therefore, it implies that how firms will part of the country to the other. Jiménez et al. (2014) and
view political risk depends on their perception of the type Kesternich & Schnitzer (2010) pointed out that an MNC’s
of political risk. degree of internationalisation can influence consequences
The interviewees saw political risk issues as changing of political risk on a firm. This means the consequences of
over time since the socio-economic and political situation political risk will have less of an impact on an MNC with a
keeps altering with changes in federal and state higher degree of internationalisation due to its lower
governments in Nigeria. It was also mentioned during the perception of political risk. Likewise, the perceived reward
interviews that political risk issues are one of the reasons of FDI could also influence the consequences of political
why most of the MNCs operations are in the Western part risk if it caters for the cost of political risk. A firm’s
of the country. This Nigerian case study has shown that leverage of operating in a particular political environment
political risk does not always emanate from governmental can influence the consequences of political risk. This means
and political decisions alone. Political risk could originate that the differences in these factors influence the
due to other factors such as ideological, religious, and consequences of political risk for MNCs in Nigeria. Thus,
ethnic cleavages inherent in a political environment some of the reasons why there are small consequences as a
(Bienen, 2013; Onapajo, 2012). It is for this reason that result of political risk and why some MNCs have been able

171
to manage and mitigate political risk. political risk. Since MNCs degree of internationalisation
In the interviews, some participants mentioned the differs; this suggests that their perception of political risk
different factors that influenced the impact of the will also vary on their perceived reward for
consequences of political risk in Nigeria. Some mentioned internationalisation in a market.
factors such as years of operating intentionally, Firms can internationalise to African markets despite
understanding of the political environment, leverage, a the presence of political risk looking at the differences in
good relationship with government institutions and ability risk perception and actual risk between new entrants and
to take advantage of the imperfect market of the country. the accrued operating experience of incumbents. Also,
Others said that their perceived reward of investing differences in firm behaviour arise from different attitudes
influences their perception of the consequences of political to risk (risk takers versus risk-averse), which may also vary
risk. Cui & Jiang (2010) & Fang et al. (2013) argue that, for by sector, home country and age amongst others (Liesch et
strategic reasons, firms with increasing resource-based al., 2011; Kraus et al., 2015). The greater the profitability
advantages move in the direction of a market, based of incumbents, the more likely it is that new firms will enter
strategies, structures and control mechanisms thereby (hence greater FDI inflows), the lower the perception of
increasing their market knowledge as well as commitment. risk but likely returns can be expected to fall owing to
They also claim that firms’ market knowledge & increasing competitive intensity. Therefore, there is
commitment continue to increase their ability to manage & endogeneity between firm entry and perceptions of risk.
mitigate the consequences of political risk. Nigeria has witnessed a variable inflow of FDI over the
Some of the issues emerging from these findings years which makes analysing the FDI inflow trend & the
suggest that not all the consequences of political risk have changes of political risk in the country challenging. From
the same impact across a country, & further increase the the FDI inflow trend, it will be problematic to determine if
probability of political risk, thereby increasing the cost of there is a significant correlation with political risk. To what
doing business. The evidence from this study suggests that extent would very political risk & over what sort of period
differences in firms’ degree of internationalisation could be would it significantly impact to make any changes in FDI
influenced by the consequences of political risk in diverse inflows to Nigerian PRA. Consequently, it could be
ways. The consequences of political risk have different concluded that there are other determinants of FDI for
impacts, depending on a firm’s degree of MNCs in African markets.
internationalisation (Jiménez et al., 2014). It means the
consequences of political risk will have less of an impact on
a firm with a higher degree of internationalisation than a Contributions
firm with a lower degree of internationalisation.
MNCs move to African markets for different reasons, Al Khattab et al. (2011) & Jiménez et al. (2014)
such as resource-based advantages, organisational structure, suggest that degree of internationalisation influences firms’
market knowledge & commitment (Cui & Jiang, 2010; perception of political risk. This article has contributed
Fang et al., 2013). These factors increase their ability to theoretically that the impact of political risk on MNCs are
manage & mitigate the consequences of political risk. The significantly influenced by factors such as degree of
evidence from this study has shown that a firm operating in internationalisation, assessment outcome, leverage,
a particular political environment over time influences the perceived rewards of FDI, low financial risk & a country’s
consequences of political risk as it begins to have some political risk regional variation. It identifies reasons why
leverage & a good relationship with government firms MNCs invest directly in some markets despite the
institutions. Equally, its perceived reward of investing and presence of high political risk, why they mitigate political
the imperfect nature of a market can be an advantage, as in risk in some markets and why some internationalise into
the case of Nigeria. It means that the differences in these specific markets.
factors influence the consequences of political risk for This study has shown that the consequences of political
MNCs in Nigeria. Thus, this identifies some of the reasons risk vary from one part of a country to another, as do the
why the consequences of political risk differ between firms consequences of their impacts. It has additionally suggested
& are the reason why some MNCs have been able to the reasons why the clusters of MNCs would be located in
manage & mitigate political risk. some parts of a country, & how the consequences of
The dataset of the ICRG PRA annual rating conducted political risk would differ between firms, depending on
for Nigeria within the period 2011 to 2016 was analysed. their location in a country. Most MNCs, for one reason or
The results of the ranking ranged from 42.5% to 46.0% & another, will avoid parts of the country that have high
revealed that a very high political risk ranking was reported political risks. It means the consequences of political risk
by the ICRG for Nigeria within the period. This also vary from one part of a country to another. This could be
provides one of the factors why some firms invest in attributed to regional variations in political risk within a
African markets like Nigeria, despite the presence of country. Therefore, MNCs would locate their investments

172
in a region with the lowest political risk even when a high approach. It has been reported that Nigeria is among the top
political risk existing in a country. Although this finding is 5 FDI inflow host economies in 2016. The country is a
contextual, it would influence the decision making by major supplier of oil and gas to the global market which,
MNCs with regards to where they could locate their firms coupled with its large market size, has made it an attractive
during internationalisation, especially in African markets. destination for FDI. Despite the flux in her political
Firms could internationalise to certain markets despite situation due to the multi-ethnic, multi-cultural and multi-
the presence of political risk due to the differences in risk religious nature of the country, it has one of the significant
perception and actual risk between new entrants and the stocks of FDI on the continent.
accrued operating experience of incumbents. Equally, This study has shown that the consequences of political
differences in firms’ behaviour arise from different attitudes risk vary from one part of a country to another, as do the
to risk (risk takers versus risk-averse), which may also vary consequences of their impacts. It has additionally suggested
by sector, home country and age amongst others (Liesch et the reasons why the clusters of MNCs would be located in
al., 2011; Kraus et al., 2015). The greater the profitability some parts of a country, & how the consequences of
of incumbents, the more likely it is that new firms will enter political risk would differ between firms, depending on
(hence greater FDI inflows), the lower the perception of their location in a country. Most MNCs, for one reason or
risk but likely returns can be expected to fall owing to another, will avoid parts of the country that have high
increasing competitive intensity. Therefore, there is political risks. It means the consequences of political risk
endogeneity between firm entry and perceptions of risk. vary from one part of a country to another. This could be
The presence of high political risk does not deter firms attributed to regional variations in political risk within a
if the financial & economic risks are low (PRS Group, country. Therefore, MNCs would locate their investments
2015). It implies that there are other factors which could in a region with the lowest political risk even when a high
influence firms to internationalise into a particular market political risk existing in a country. Although this finding is
apart from political risk. It has suggested why some firms contextual, it would influence the decision making by
invest in particular African markets, despite the presence of MNCs with regards to where they could locate their firms
high political risk. Therefore, MNCs would need to during internationalisation, especially in African markets.
consider other forms of risk apart from political risk when Firms could internationalise to certain markets despite
making their decision during market entry. the presence of political risk due to the differences in risk
perception and actual risk between new entrants and the
Conclusion accrued operating experience of incumbents. Equally,
differences in firms’ behaviour arise from different attitudes
This study has provided reasons why would some
to risk (risk takers versus risk-averse), which may also vary
Multinational Corporations (MNCs) invest in African
by sector, home country and age amongst others. The
markets despite the presence of high political risk. Political
greater the profitability of incumbents, the more likely it is
risk has been identified as one of the key determinants of
that new firms will enter (hence greater FDI inflows), the
FDI, and its different manifestations have influenced the
lower the perception of risk but likely returns can be
type of strategies MNCs adopts for different markets. It has
expected to fall owing to increasing competitive intensity.
been viewed to manifest itself differently in African
Therefore, there is endogeneity between firm entry and
markets compared to others thereby it has created the need
perceptions of risk.
to understand variations in countries’ specific political risk
The presence of high political risk does not deter firms
factors and why MNCs invest in some African countries.
if the financial & economic risks are low (PRS Group,
Most African countries have specific political risk factors
2015). It implies that there are other factors which could
that differentiate one from another, based on inherent
influence firms to internationalise into a particular market
factors in their political environments. Some of these
apart from political risk. It has suggested why some firms
inherent factors are related to religious, ethnic and cultural
invest in particular African markets, despite the presence of
cleavages. These cleavages may also lead to regional
high political risk. Therefore, MNCs would need to
variations in political risk within a country. However,
consider other forms of risk apart from political risk when
MNCs have attributes that have differentiated one firm
making their decision during market entry. The study has
from another and have informed to have significantly
provided insights into why some MNCs invest in markets
influenced their rate of FDI into various markets. These
which are associated with high levels of political risk.
attributes have also made them to perceived political risk
differently.
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176
When the Family Becomes the Biggest Obstacle for a
Family Business: ‘Who is the Best Fit for the Position’
Nesrin Ada, Ege University, Turkey
Emin Akcaoglu, University Applied Sciences Würzburg-Schweinfurt, Germany

Small and medium sized firms (SMEs) are the major emergence of private property. There are two basic
building blocks in all countries’ economies. Particularly for characteristics of a family business in terms of historical
employment generation they have a vital role. Many SMEs and modern perspective (Boungou Bazika, 2004):
are also family firms. Therefore, they are established, Traditionally, family businesses can be indicated as the
owned and operated by families. In this line, their roots of the modern society. In fact, the company form itself
performance is also strongly related to the performance of is a family-oriented organization. The first family
family members as business people, managers or workers. organizations have evolved into the modern day businesses
In many cases, after the first generation’s involvement in throughout the history. Therefore, this is even reflected in
such a business is ended, the viability of the company may the existence of modern large scale multinational
face critical difficulties if the following generation does not corporations. These companies even now preserve some of
have managerial qualities as well as their predecessors. significant family character traits as we can easily see with
Then ‘a family business becomes the biggest obstacle for a Peugeot, Toyota, or Phillips.
family busines’. On the other hand, from a modern point of view,
family businesses are just pure economic organizations.
Family businesses are businesses that are founded and However, they have a different mechanism to manage
operated by people who come from the same family and certain organizational risks. These are related to trust-based
relatives for the sake of the economic interests of that relationships. In a family environment, as we may normally
particular family. Normally founder is an entrepreneur who expect higher levels of trust such risks can be managed in
is capable of successfully starting and then running the an easier way.
business. In this process, s/he may also get the help of other Let us attempt now to define a family business by
family members under her/his leadership. Hence, roles of referring to all these issues. A family business is a company
the other family members are normally determined by the whose objectives are formed and controlled by the founding
leading entrepreneur. However, this approach may family. Family companies – at least in Turkey – have a
sometimes lead to misuse of the organizational functions as number of features which make them different from other
the managerial performance could be secondary for types of companies (Ada, Şengül and Çapraz, 2004):
appointment in comparison with the strength of the family  The company's founder is generally the father of the
tie between the founder and the person or people involved. family (the first generation); Management boards also
During the founder’s actual managerial period, such made up of other family members.
problems may be overcome due to her/his interventions.  The company looks after the family’s interests.
However, after the founder’s leave, such managerial  Many management decisions must be approved by the
inefficiencies can absolutely be fatal for the sustainability father.
of the firm. Furthermore, sometimes such a case can be  Task responsibilities and authority limits are not
worsened if there are succession problems after founder determined with clarity.
among the family members. These types of disagreements  Company positions are distributed among family
can easily take the company ship directly to the rocks. members or relatives in accordance with relational
With this regard, in this paper, we first focus on basic proximity.
organizational functions of any business. Here,  Getting a job at the company depends on kinship.
organizational functions are explained by referring to the
 Lack of professional thinking and tendency to act
characteristics.
emotionally.
 Distrust for managers who are not members of the
Family business and its characteristics founding family, or their relatives.
 Strong resistance to authority transfer.
Family businesses first came to the scene with the  Lack of training among family members.

177
 In spite of growth of the company and changes in the business and common objectives, as well as the importance
business environment, the founding management is of creating business values as an organizational culture. In
generally maintained without the required changes or family businesses, organizational culture and goals are
adaptations. determined by the family members. As a result, the
 Accusing the personnel composed of non-family problems of the organizing function may be an important
people for business failures and bad decisions. obstacle in family businesses (Misetié, 2001).
 Reluctance to use professional help while business
problems are faced. Organizational problems in family
 Confusing the family financial accounts and personal
accounts, and acting to exploit the company’s financial
businesses
capabilities in an unprofessional way.
When we look at role distribution in a family business,
Though the already mentioned aspects are all negative,
the family ownership dimension has an important role. And
there are some positive aspects of such family-owned
this may create significant problems over the organization
companies such as the followings:
with regard to specialization, command-control, power-
 The managers can normally easily communicate, and
responsibility, supervision, and formalization issues.
hence escape from the inefficiencies of the use of
Organizing problems stem from the fact that the
bureaucratic communication.
organizing function has not been designed well. As a result,
 They are flexibility and quick in decision making. the misrepresentation of organizational structure causes
 They have faster business processes and hence confusion and complexity within the organization (Koç,
progress. Topaloğlu, 2010). This complexity leads to various
 They have the ability to intervene quickly in case of a problems and these are reflected negatively in the business
crisis. management.
There could be a number of organizational problems in
Management and Organization a family business that are rooted in occupational and
organizational structure. The conflicts and effects that exist
between family members constitute the main theme in some
Management is defined as achieving the objectives of
them. These could be as follows:
the firm through an effective and productive way by
planning, organizing, supervising, conducting and  Conflict  sibling conflict  conflicts between the
controlling the resources available with the help of people founder and/or siblings or between the second and third
(Mirze, 2010). In other words, management is the process generations.
of doing things with people who work for the firm in an  The power ambition of the family members.
efficient and productive way. In this respect, the concept of  Leadership problems such as multiple leadership or
management is ‘to work through others’ by ‘aiming the expectancies for multiple leadership
efficient use of production factors’ (Yuksel, 2003). The  The influence of the personality problems of the family
management functions are defined by Fayol (1916) a members or the founder and also negative aspects of
century ago as planning, organizing, directing, coordinating the family culture on organizational function.
and controlling. Over time, these functions have undergone  Confusion of authority among family members.
changes and improvements in line with business needs. In  Overlaps regarding the responsibility and authority
the business administration literature, orientation and areas of the management.
coordination functions seem to be combined. Planning  The disadvantages of having multiple roles and duties
involves preparing sub-plans to identifying goals, setting up for the family member and task complexity.
strategies, and coordinating activities. Organizing involves  The decisions taken by the top management may not be
identifying what, how, and by whom it will be done, how fully implemented in the units in which are run by
the tasks will be grouped, who will report to whom, and other the family members due to power balances
who will take the decisions. Orientation is part of the among them.
manager's job of directing and coordinating people's  Responsibility and authority areas may be outside of
activities. The supervisory function is monitoring, the family-member managers’ professional
comparing and correcting performance. specializations.
In addition to these functions that constitute the basis  Lack of institutional capacity
of the management theory as Fayol has set, Drucker pointed  Focusing on family values instead of strategic
out the importance of business goals, organization, requirements
motivation, communication and human resources
development. Drucker also emphasizes that management Another organizational problem area that can be widely
functions must be used in line with the expectations of seen in family businesses is related to the personal

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relationships between the family members and professional In addition to the following problems are also common:
employees. Some of such problems can be as follows:  Problems related to improvements of the organizational
 Problems regarding the command-line relationships of structure suitable for the family-organization culture.
professional managers due to their close proximity to  Formalization incompleteness (such as non-
the family members. implementation of board decisions).
 Insecurity feeling of the professional managers before  Hierarchy ambiguity and hidden hierarchy presence
the family members. (hidden decision maker).
 Sometimes supervisory areas of the professional  Problems such as trying to move to the growth phase of
managers are overlapped. the operation with the simple organization structure
 Distrust among the employees created by the wage that the founder has formed during the period of
injustice between the family members and the entrepreneurship.
professionals.
 Lack of organizational commitment in occupations,
resulting in high labor turnover. Conclusion
 High labor turnover leading to organizational
commitment by professional managers. Family business is distinguished from other types of
 The existence of organizational silence. business by its unique characteristics (Collins et al., 2012).
 Resistance to institutionalization processes, Lumpkin et al. (2008) found that these characteristics
 Adaptation problems to the organization-family specific to family operations are related to ‘tradition’ (roles
culture. are obvious  common past), ‘stability’ (rules are
 Some senior professionals privileged position leading predictable  behavior), ‘loyalty’ (duty and responsibility,
to informal communication with the second or third sense of indebtedness, sense of belonging ), ‘trust’
generation family members, and hence corporate (protection, security, safety, reciprocity, honesty,
communication and efficiency problems. trustworthiness) and ‘loyalty’ (emotional ties  family
members support each other) (Lumpkin et al., 2008).
Another organizational problem area in family The father’ desire to provide employment to the family
businesses is directly related organizational structure / members is very important in the process of organizing a
framework / schema. The organizational structure is a family business. All these are good and understandable. But
mechanism by which all employees work together to when such family members who are not really fit for the
achieve common business processes in a structured social position that the job requires, significant inefficiencies can
system for the purposes (Mirze, 2016. Within this arise. In addition the decision quality in the business
mechanism, it is expected to act towards organizational making process may have serious obstacles. Therefore, if
policies and business purposes. However, deficiencies and not organized as the competitive conditions impose, a
disruptions in organizational structure are reflected family itself could be biggest obstacle for the family
negatively in organizational function. As Erdoğan and business.
Develioglu (2008) pointed out, organizational problems
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