Through Thick and Thin: Political Risk and the Interdependencies between MNCs and Host Countries

• In Event: Globalization and domestic institutions

Abstract

In this study, we examine the interdependencies between multinational corporations (MNCs) and host countries marked by heightened political risk. Specifically, we study how MNCs manage host country political risk and whether the nature of MNCs’ risk management strategies are associated with future political stability in the host country. Using several unique datasets, we find a positive association between the likelihood of maintaining a local relationship and the level of host country political risk. This finding is consistent with MNCs teaming up with local organizations in order to navigate host country political risk. We document that firms that invest in local relationships enjoy greater future customer growth and benefit more from these relationships during high risk periods. We also find that MNCs stand to gain the most from complementing access to local knowledge through relationships in the host country with maintaining a government relations team and/or expertise in managing environmental and social risks. Finally, we document welfare gains associated with the aggregate level of relationships that stem from MNCs with government relations staff and/or risk management expertise in the form of lower levels of future political risk in the host country. This finding suggests that these local partnerships help align the MNCs’ interest with those of local businesses and governments.

Authors

• Jennifer L. Blouin, University of Pennsylvania

• Clare Wang, University of Iowa

• Laura Wellman, David Eccles School of Business, University of Utah