Doing Business in a Transitional Society

Abstract

This article addresses how foreign subsidiaries formulate their relational political strategy by responding to the unique parameters of the economic and institutional environment in an emerging market in an attempt to improve their performance. To this end, the authors have developed a model that assesses economic environment antecedents characterizing an emerging market (regulatory distance, industry accessibility, environmental uncertainty, and economic development) as well as the performance consequence of the subsidiaries’ relational political strategy. A possible moderating effect of the firm’s reputation in the host country and length of operations on the relationship between political strategy and local performance is also examined in the model. Our analysis of primary and secondary data concerning 358 foreign-invested enterprises in China generally supports this model.

Keywords

political strategy economic environment transition economies multinationals China

Competing successfully in emerging markets has become critical for the survival and growth of multinational corporations (MNCs) attempting to maintain and improve their performance in the highly integrated world market. There are several studies that address the political imperatives and strategies needed for MNCs to ethically, legitimately, and effectively deal with local governments (e.g., Brouthers & Bamossy, 1997; Hillman & Keim, 1995; Hoskisson, Eden, Lau, & Wright, 2000; Park & Luo, 2001; Peng & Luo, 2000; Ramamurti, 2001). These studies confirm that firms’ political strategies influence their performance in the host countries and are used by foreign subsidiaries to partially curtail their liability of foreignness (Eden & Lenway, 2001; Stopford, 1994), achieve their strategic objectives (Dunning, 1998; Grosse & Behrman, 2005), or respond to isomorphic pressures within the host country (Kostova & Zaheer, 1999; Lenway & Murtha, 1994).

Due to its involvement in certain costs and risks, a firm’s political strategy is not created in a vacuum but is instead largely determined by environmental and organizational factors. Several existing studies have already revealed national- and industry-level determinants as well as firm-level conditions that affect the types of political strategies used by American firms in multiple countries (Blumentritt & Nigh, 2002) or by American firms within either a domestic setting (Meznar & Nigh, 1995) or a European setting (e.g., Hillman, 2003; Hillman & Wan, 2005). However, the effect of an emerging market’s economic and institutional environments on a foreign subsidiary’s political strategy has not yet been adequately examined. It is well recognized that these environmental conditions in an emerging economy are both unique (e.g., high regulatory interference and uncertainty) and powerful (e.g., industrial access policy can restrain an MNC’s entrance and operations; Behrman & Grosse, 1990; Boddewyn & Brewer, 1994; Dowling & Shaeffer, 1982; Ramamurti, 2000). Additional research has established that relational political strategy (RPS) overwhelms transactional political strategy in emerging markets because relationships at the social, organizational, and individual levels are essentially the lifeblood of economic development and business conduct (Luo, 2002; Peng & Luo, 2000; Xin & Pearce, 1996).

Unlike transactional political strategy, where firms await the development of a specific public policy issue before building a strategy to address the said issue, RPS involves the degree to which a firm proactively influences government policy by building long-term relationships with government authorities across various issues over a long term (Hillman & Hitt, 1999). Instead of monitoring public interest and becoming involved only in specific issues (i.e., transactional approach), firms using a relational approach attempt to build relationships regarding many issues over time so that when public policy issues arise affecting their operations the contacts and resources needed to influence this policy are already in place. In this study, RPS broadly connotes a general orientation of the firm toward building long-term relationships with host country government agencies and officials to influence government policy and/or acquire government-controlled resources.

With this definition, this study aims to investigate how the economic and institutional environment in an emerging market affects foreign subsidiaries’ RPS, which, in turn, influences subsidiary performance, considering the possible moderating effects of a subsidiary’s reputation in the host country and its duration of operations. In doing so, we place our arguments and discussions within the convergent logic of institutional and resource dependence theories (Kostova & Roth, 2002; Oliver, 1991; Pfeffer & Salancik, 1978). Note that this study focuses on MNC subsidiaries seeking market share or market penetration in a host emerging economy. Those using a host emerging market solely as a production-export platform are not included in our discussions and tests due to differing dependencies on local economic and institutional environments as well as incomparable performance environments (e.g., export-oriented firms in China receive longer income taxation breaks and complete refund of value-added tax (VAT), whereas local market–focused MNCs do not). An emerging economy is one whose national income per capita is relatively low but economic growth is rapid; industrial and national environments are volatile but market potential is vast; governmental interference is strong but economic and market liberalization is on the rise (Hoskisson et al., 2000; Peng, 2000). Economic environment is thus defined broadly, capturing major macro- and microlevel economic features that characterize this type of economy: regulatory interference, industry accessibility, environmental uncertainty, and economic development. As these variables are common in all emerging economies (Luo, 2002), our arguments and related hypotheses apply to this entire group, not limited merely to China (the empirical setting of this study). Note also that government regulation is also an element of institutional environment (Peng, 2000) but is already a part of the economic system, especially when it concerns economic affair–related regulations (Olsen, 1991).

The necessary effort in researching political strategies of MNCs competing in different economic environments and the potential value that political strategy brings to firms (Dunning, 1995; Eden & Lenway, 2001; Hillman, Keim, & Schuler, 2004) should be of interest in both theory and practice. The institutional and political perspectives of MNC strategies have largely been separated thus far, and we view this gap as undesirable because political strategies are either in response to or in deliberate alignment with the economic environment encountered. Although the literature on international business–government relationships has made strides in examining the importance of political strategy, the possible moderating role of some key firm (subsidiary) attributes, such as reputation and length of operations, in affecting the outcome of political strategy has yet to be probed. If such an effect is found to exist, it may assist managers in finding a path to maximize returns from their political strategy. In addition, this study adds to research focusing on developing personal-level relationships with emerging market governments (e.g., guanxi in China) by extending to organizational-level processes in influencing a variety of public policies and engaging in a number of governmental institutions.¹

Theory and Hypotheses

A foreign firm’s political strategy in a host country is critical for many reasons. Chief among these are reducing uncertainty and establishing greater resource/market access. Uncertainty reduction and critical resource/market accession necessitates the need for foreign subsidiaries to develop appropriate political strategy (Hillman & Hitt, 1999)² to cope with host governments that are often the major source of market volatility and regulatory barriers in emerging markets (Khanna & Palepu, 1997). For instance, the governments of China, India, Russia, and Brazil still exert considerable control over economic activity in regulated industries by restricting project location, geographic coverage, entry mode, capital requirements, and so on (Luo, 2002). Firms that are able to gain access to the political process can benefit from reduced uncertainty, lowered transaction costs, and increased survival rate (Gladwin & Walter, 1980; Hillman & Hitt, 1999; Rugman & Verbeke, 1998). We assume that foreign subsidiaries seek economic gains through building and adjusting their RPS to respond to these organizational and environmental constraints (or contingencies in the resource dependence theory). In many ways, RPS is like the development of relationship-oriented social capital, which in turn facilitates continued exchange and mutual gains. With this definition, we view RPS as a predicting variable that affects firm performance as well as a criterion variable being predicted by or responding to various organizational and environmental conditions (see Figure 1).

Figure 1.

Economic and Institutional Environment, Relational Political Strategy, and Subsidiary Performance: A Theoretical Model.

This proposition is underpinned by the convergent insights of institutional and resource dependence perspectives. As Oliver (1991) pointed out, organizational responses vary from conforming to resistant, passive to active, preconscious to controlling, impotent to influential, and habitual to opportunistic, depending on the institutional pressures toward conformity exerted on organizations, influencing the extent to which the firm depends on external resources controlled by the institutional environment.³ Organizations may use such strategic responses as cooperation, influence, defiance, manipulation, pacification, or bargaining to cope with external pressures (Zucker, 1987). The greater the degree of discretionary constraints (i.e., these constraints are elastic, changeable, and negotiable) imposed on the organization by institutional and economic pressures, the greater the likelihood of using influence, defiance, or manipulation as strategic responses (Oliver, 1991). From the resource dependence perspective, organizations vary in terms of the degree of dependency on other organizations (e.g., government) and identifiable environmental components (e.g., regulations) for reducing uncertainty and acquiring critical resources (Pfeffer & Salancik, 1978). If business is highly dependent on resources that are controlled or mediated by the government, managers may then want to develop strategies that reduce the resource cost of governmental intervention (Dowling & Shaeffer, 1982). Therefore, firms can be proactive in pursuing political strategies (Hillman & Hitt, 1999; Keim & Baysinger, 1988; Schuler, 1996; Shaffer, 1995).

In light of the above, environmental constraints in this study refers broadly to regulatory and economic constraints that may hinder business activities. Because these constraints also vary significantly by industry, this study captures both country (macro) and industry (micro) level economic parameters. We propose that the pursuit of RPS is influenced by such economic parameters as regulative distance, environmental uncertainty, industry accessibility, and economic development. Although there are other environmental factors that may influence RPS, the four economic and institutional parameters in Figure 1 are the most representative in exhibiting the economic environment of an emerging economy and in capturing environmental antecedents of RPS. These economic parameters are particularly relevant to RPS in emerging markets because they significantly affect transaction costs, operational uncertainty, and market access (Hoskisson et al., 2000; Peng, 2000; Ramamurti, 2001). They also determine a subsidiary’s market or industry domain in which it can operate, the local resources it is allowed to access, and government-controlled distribution networks where it may market the products (Luo, 2001, 2002). Political economy theorists suggest that economic attributes, such as government regulations, market-access restrictions, environmental uncertainty, and the level of economic development, are particularly salient attributes in a host country’s economic environment that impact an MNC’s political behavior (Kofele-Kale, 1992). According to Moran (1985), these economic attributes determine a firm’s transaction costs and investment opportunities in a host country, and powerful MNCs can, and should, influence governmental treatment offered to them through appropriate political strategies.

Finally, we want to note that in Hillman and Hitt’s (1999) decision-tree model, economic and organizational variables are proposed as the antecedents of the choice between relational and transactional approaches. Nevertheless, their model discusses only one country-level economic variable, namely, corporatist versus pluralist systems, leaving other economic parameters, such as those examined in this study, unaddressed. As these two approaches often coexist, and are simultaneously used by a firm (Hillman & Hitt, 1999), we maintain that it is meaningful to look at the level of use of each approach, including RPS. Hillman and Hitt (1999) also included several firm-level variables, such as diversification, financial capability, intangible resources, and dependence on government, as the antecedents of political strategy. What the present study attempts to contribute is, as explained below, the proposition that two firm-level attributes not included in Hillman and Hitt’s model (1999)—firm reputation and length of operations—moderate the link between RPS and firm performance. Since Hillman and Hitt’s model (1999) focuses on the antecedents and concurrent processes of political strategy, our study adds to their model by additionally assessing the consequential part of political strategy (including both the direct and moderating paths linking RPS and performance).

Hypotheses—Economic Environment and RPS

Regulatory distance

When expanding internationally, MNCs have to diagnose home and host country regulations on the comparative scale (Kostova, 1996). Hence, regulatory distance denotes the differences between home and host countries in regulatory quality and stringency resulting from the complexity and burden of the regulatory environment (Oliver, 1997). Kostova (1996, 1999) suggests that the greater the regulatory distance, the more difficult it is for MNC subsidiaries to establish legitimacy in the host country and transfer strategic resources to local operations. In the presence of large regulatory distance, MNC subsidiaries will perceive greater deterrence and higher transaction costs escalated by administrative regulations enacted by host government authorities. From an institutional perspective, this deterrence elevates environmental impediments and increases information search costs (DiMaggio & Powell, 1983; Scott, 1987). From the resource dependence viewpoint, this deterrence increases the uncertainty of external resources, pushing the firm to either seek alternative resources or to manipulate the regulations. This theory elaborated the negotiated environment of organizations (Pfeffer & Salancik, 1978), assuming that organizational relations with the regulatory environments are open to negotiations and to the exchange of concessions. Oliver (1991) further suggested that lobbying efforts should be bolstered in the face of increased regulatory pressure, if such regulations can be influenced by businesses or if businesses can gain from gray areas not covered by regulations.

Thus, based on the institutional theoretic logic, we posit that the greater the regulatory distance between home and host countries, the more institutional pressures MNC subsidiaries are under to pursue RPS to offset their institutional disadvantages. As institutional distances can influence how institutional pressures are perceived and handled in home and host countries (Kostova & Roth, 2002), foreign subsidiaries whose home countries’ regulatory systems are more fully developed and properly functioning than those of the host market would have a greater need to obtain host government support and legitimacy through relational interactions with local government. This strategic response (increased RPS) is necessary for foreign subsidiaries because local market share in a regulated locale is difficult to increase for any foreign firm without host government support (Wells, 1998). As host governments exert greater influence on the economy, resulting in less economic freedom in that country, foreign subsidiaries become more susceptible to governmental actions and therefore have a greater impetus to formulate political strategies to manage their interactions with the host government (Moran, 1985). It is worth noting that a firm’s ability to cultivate and utilize RPS is less transferable across nations than many other resources and capabilities. RPS is largely embedded in the unique host country environment and socially bounded by indigenous norms and practices. In fact, many MNCs have recently hired local managers to handle public relations, especially with officials and bureaucrats, in emerging markets (Luo, 2002).

However, the cultural familiarity logic suggests that environmental or cultural familiarity leads to competitive advantages for those investors whose regulatory distance to the host country is less (Davidson, 1980; Johanson & Vahlne, 1977). Luo (1999) demonstrated that Asian MNCs face lower costs as they learn about the environment in China than Western MNCs due to fewer cultural or institutional barriers. Through the well-established guanxi network, Asian MNCs are likely to maintain a higher propensity for using RPS than their Western rivals. What facilitates this propensity is their knowledge of Chinese history, society, culture, rules, and business practices as well as their long-established ethnic ties accumulated through multiple generations (Yeung, 1997). As regulatory distance between home and host country increases, the more difficult it becomes to correctly understand the indigenous environment, properly interpret incoming information, and effectively adhere to local norms and peculiar practices. It is therefore possible that MNCs facing less regulatory distance are more capable of leveraging their institutional advantages arising from environmental and cultural familiarity in the course of formulating and implementing RPS. Consequently, these MNCs may present a heightened RPS proclivity to exploit their competitive advantages in environmental familiarity and in cost and time effectiveness in building relational ties with government agencies. It follows that, from the environmental familiarity lens, the use of RPS may be negatively related to the regulatory distance. We thereby propose the following set of competing hypotheses:

Hypothesis 1a: Per the institutional theoretic logic, the use of RPS by MNC subsidiaries in an emerging market will be positively associated with the regulatory distance between host and home countries.

Hypothesis 1b: Per the cultural familiarity logic, the use of RPS by MNC subsidiaries in an emerging market will be negatively associated with the regulatory distance between host and home countries.

Industry accessibility

Industry accessibility determines whether foreign subsidiaries can enter an ideal or target sector and how they will be treated by related industrial departments after entering. From an institutional viewpoint, the lower the accessibility, the greater the barriers imposed by the host country government that the MNC subsidiaries will face. Previous studies of the determinants of political strategy in the United States showed that firms in heavily regulated industries tended to have more politicians on their boards than those in less regulated industries (Hillman, 2003). Therefore, MNC subsidiaries are likely to foster close government relations to gain priority in accessing these promising yet restricted industries. Active RPS can help these subsidiaries obtain government support in resource procurement, product distribution, and mediation conflicts with local businesses. Furthermore, as governmental policies on foreign direct investment (FDI) are shifting from rigidity to elasticity,⁴ MNC subsidiaries have more leeway in bargaining with governments for extended access to the target industry. In response to these restrictions, RPS becomes a part of the manipulation that purposefully and actively attempts to change the rules institutionalized by the government (Oliver, 1991).

Industry structure in most emerging economies has became more heterogeneous (i.e., greater variations across industries) due to governments’ industrial policies that deregulated only some sectors, imposed industry-varying VAT rates, and placed different entry and operational barriers on different industries. As a result, both opportunities (e.g., profits, sales, and first-mover privileges) and threats (e.g., regulatory constraints and investment infrastructures) vary widely across industries within an emerging economy.⁵ This variation is further compounded by the transformative nature of economic reforms and the experimental nature of new industrial and investment policies (Luo, 2002). For instance, the Ministry of Commerce of China has specifically categorized sectors designated for FDI as encouraged, restricted, or prohibited. In this study, our sample firms are those that have already set up and operated in various sectors that are either encouraged or restricted. Some MNCs entered restricted industries because these industries are often characterized as having greater market potential in the future. This potential will be materialized when the restrictions are lifted so that the demand, previously stifled by the governmental protection of local state-owned businesses, will transform into market opportunities for MNCs. Thus, after a foreign investor has entered a restricted industry, it needs to continually implement RPS to safeguard its position, obtain greater market access, and push the government to lift more restrictions. Of course, firms in encouraged industries also need to perform RPS to help them grow, but those in restricted sectors have to be more proactive and spend a greater amount of time, diligence and energy in pursuing RPS. We thus predict the following:

Hypothesis 2: RPS will be less intensively used by MNC subsidiaries in an emerging economy’s encouraged industries than in restricted industries in which they compete, ceteris paribus.

Environmental uncertainty

As this study focuses on cross-sectional MNC subsidiaries within an emerging market, we examine uncertainty at the industry level. This uncertainty refers to unpredicted changes or variability in the industrial environment facing the firm (Buchko, 1994; Dess & Beard, 1984). This uncertainty is a significant feature of an emerging market, which greatly influences MNC strategies. Much of this uncertainty stems from a lack of public services and from the fact that government sectors have superfluous discretionary power (Khanna & Palepu, 1997). The inherent difficulty in blueprinting economic liberalization and market transition also propels this uncertainty. In contrast to advanced market economies largely governed by monetary and fiscal policies, emerging economies are primarily managed by various industrial regulations levied by the central government, causing tremendous uncertainty at the industry level and leading to high variations in uncertainty across different industries (Li & Li, 2000; Luo, 2007). Industrial uncertainty increases the costs of dependence on external resources, thereby increasing transaction costs and reducing investment confidence. It influences both existing business operations and future business plans (Kofele-Kale, 1992; Moran, 1985). Because industrial uncertainty constitutes a key element of the feasibility study when an MNC enters a foreign market (Kobrin, 1982), it also affects investment outlook as perceived by MNC managers and impacts cash inflow as reflected in net income remittance (Dunning, 1995).

The institutional theorists argue that organizational decision makers have a strong preference for certainty, stability, and predictability in organizational life (Oliver, 1991). When the environmental context is highly uncertain, an organization will make a greater effort to reestablish the reality of control over future organizational outcomes (Meyer & Rowan, 1977; Zucker, 1987), and RPS is one such effort that organizations can use to affect environmental influences (Luo, 2001; Oliver, 1991) and to buffer the effect of uncertainty (Blumentritt, 2003). To curtail the threats of environmental uncertainty, provoked mainly by changes in industrial regulations, MNC subsidiaries are expected to use RPS more actively so that their executives can receive information quickly from the government agencies responsible for such regulations. Thus, RPS enables these subsidiaries to be better equipped with the needed information, governmental support, and organizational preparations for competing in an uncertain environment. It also provides foreign subsidiaries with more predictable (or less unpredictable) capability and thus assists them in strategically planning and designing their long-range transactions (Caves, 1996). Under these circumstances, MNC subsidiaries will commit more to improving RPS (Dunning, 1998). Without dedicated RPS in place, they are likely to face unpredictable or unverifiable changes in the economic environments and, consequently, increasing investment sunk costs, exit costs, and switching costs (Kobrin, 1982). We thus anticipate the following:

Hypothesis 3: The use of RPS by MNC subsidiaries in an emerging market will be positively associated with the level of uncertainty in the industry in which they compete, ceteris paribus.

Economic development

The level of economic development constitutes a key component of social institution (Olsen, 1991). According to the resource dependence theory, a firm’s strategic response is partially determined by the abundance of external resources on which the firm must rely (Pfeffer & Salancik, 1978). For MNC subsidiaries competing in an emerging market, this abundance is affected by the market’s economic development. The level of this development significantly varies across regions in a large, economically diversified economy such as China (Chen & Fleisher, 1996; Yao & Zhang, 2001). We expect that when the level of economic development in a region (province or state) within an emerging market is low, MNCs are likely to make greater efforts to develop and implement RPS. The level of economic development affects RPS in at least three ways.

First, infrastructure conditions and quality of production factors (skilled labor, capital, supplies, and information) are positive functions of the stage of economic development in the same region (Porter, 1990). When infrastructure and production inputs are inferior, foreign companies will rely more on the local government to secure priority in accessing the limited infrastructural resources or production factor endowments. This is necessary for MNCs in an emerging market because localization (localized management, components, production, and marketing) is essential to market share building, and relocating various production factors from headquarters to a host site is costly (Bartlett & Ghoshal, 1989). RPS becomes more critical for MNC subsidiaries when they depend more on these resources to be provided, at least in part, by the host government (e.g., governmentally launched training programs in India and China).

Second, in a less developed economic area, the local government machinery is less efficient and the regulatory systems are not fully developed to accompany economic development. Insufficient governmental systems can result in environmental complexity that represents a marked environmental attribute (e.g., Murrell, 1996). Furthermore, the incompatibility of the institutional framework with that of Western countries increases the complexity (Boisot & Child, 1988) and creates ambiguity. Thus, MNCs operating in economically less developed areas are more inclined to use RPS as a means to navigate the myths of bureaucracy and clarify information.

Finally, institutional theorists suggest that organizations are more likely to use lobbying or influence tactics when institutional expectations are incipient, localized, or unknown (Oliver, 1991; Rowan, 1982). In a society that is economically underdeveloped, such expectations tend to be more unstable, localized, and under promoted (Covaleski & Dirsmith, 1988). Co-opting, influencing, and controlling tactics constitute appropriate responses to external pressures in circumstances where pressures and expectations are not taken as given constraints to be obeyed or defied. Instead, organizations can actively alter, recreate, or control the pressures themselves or the constituents that impose them (DiMaggio, 1983; Oliver, 1991; Scott, 1987). RPS involves the active intent to use institutional processes and relations opportunistically to co-opt and neutralize external constituents to shape and redefine institutional norms and external criteria of evaluation and to dominate the source, allocation, or expression of legitimacy (Oliver, 1991; Provan, Beyer, & Kruytbosch, 1980; Zucker, 1987). We therefore propose the following:

Hypothesis 4: The use of RPS by MNC subsidiaries in an emerging market will be negatively associated with the level of economic development in the region in which they compete, ceteris paribus.

Hypotheses—RPS and Performance

Research has already established that RPS improves a firm’s performance in various settings (Hillman, 2003; Luo, 2001; Peng & Luo, 2000). Pursuing RPS helps MNC subsidiaries achieve desirable performance by buffering the negative impact of foreignness, acquiring critical information and resources controlled by the government, and obtaining local government support in both financial (e.g., reduction of corporate income tax or refund of paid VAT) and nonfinancial (e.g., access to natural resources and primary loans, protection of intellectual property rights) aspects. It also helps these subsidiaries reduce operating uncertainty and transaction costs by gaining institutional legitimacy, reducing institutional ambiguity, and identifying more business opportunities (Peng & Luo, 2000). In addition, pursuing RPS can enhance MNC subsidiaries’ ability to predict regulatory changes through exchange of views and opinions. This pursuit also helps foreign subsidiaries balance the expectations of multiple regulatory requirements and demands arising from unpredictable changes. In conclusion, RPS is viewed as a critical means to acquire resources, especially those controlled by the host country government, and act as an important catalyst to secure institutional support and curtail liabilities of foreignness (Kostova & Zaheer, 1999; Zaheer, 1995).

What this study seeks to add is the proposition that the positive link between RPS and performance is likely to be moderated by two important firm attributes—subsidiary reputation and length of operations. Institutional theorists hold that once an organization has already established its reputation, the same amount of additional effort in influencing economic environment will contribute more to its corporate returns. This is because a firm’s organizational legitimacy increases as a result of improved reputation (DiMaggio, 1983; Provan et al., 1980).

Although still important, RPS alone is not enough to guarantee business performance in an emerging market. Without a good reputation in the eyes of local customers, regulators, suppliers, distributors, and partners, RPS cannot go very far in adding value to a firm’s performance. The mere reliance on governmental relations without a favorable reputation in the market will generate a long-lasting poor image that jeopardizes firm growth (Luo, 2001). Prior research suggests that a firm’s reputation is an intangible asset (Gardeberg & Fombrun, 2006) that helps buffer them against negative actions and competition (Fombrun, Gardberg, & Barnett, 2000). In general, foreign companies are inherently disadvantaged when it comes to building reputation compared to local firms. For MNC subsidiaries in an emerging market, reputation (often resulting from product brands, quality and services, and organizational citizenship) is a key component of their trustworthiness, and this trustworthiness increases as their public image of social responsibility, adherence to social norms, product and service quality, and institutional harmony improve. A good reputation limits the likelihood of opportunistic behavior in a business environment that lacks developed laws. Thus, subsidiary reputation already accumulated in a host country becomes a strategic asset. With this asset already in place, we expect that the same amount of effort in pursuing RPS will add more value to subsidiary performance. An established reputation complements RPS. Although RPS provides the firm with an institutional foundation for organizational legitimacy, a positive reputation provides it with an economic foundation for organizational legitimacy. A subsidiary’s established reputation is perceived by the society as its long-term commitment and adaptation to indigenous interests. This not only legitimizes the subsidiary but also stimulates trust building with the government and society (Kostova & Zaheer, 1999). With this status, the same level of RPS will be returned with greater support by subsidiary reputation, which is in turn reflected in firm performance. Therefore, we expect the following:

Hypothesis 5: The positive link between RPS and subsidiary performance will be stronger for MNC subsidiaries in an emerging market if subsidiary reputation in the host country is higher.

The length of operation in a host country has been recognized as a proxy for a firm’s familiarity with the local environment and its interconnectedness with indigenous business stakeholders (Goldberg, 1983). It differs from the reputation aspect discussed above because a longer presence in a host country does not guarantee the firm a good reputation there (Lang & Lang, 1988). Reputation is not built from the duration of operations but from superb images concerning a firm’s product, services, and business conduct. Longer duration of operations plays a positive role through time-based experience, familiarity, and interconnectedness, which in turn reduces the liability of newness and fosters the development of relational and economic attachments between a foreign firm and its institutional constituents (Levinthal & Fichman, 1988). Given this condition, the same level of RPS will be more performance enhancing because fortified attachment, socially and structurally, reduces transaction costs and appropriability hazards in interorganizational exchanges (Granovetter, 1985). As such attachments increase, a foreign firm’s acceptance by a host country’s political groups and business communities increase, which in turn provides a better economic environment for improving firm performance. In most emerging economies, where the role of relational networks outweighs that of formal mechanisms (and even legal frameworks), RPS becomes more powerful in accentuating firm growth when time-induced attachments are heightened. Furthermore, organizational-level relationships can be established through personal ties (e.g., guanxi in China; Fan, 2002; Fu, Tsui, & Dess, 2006). Cultivating and developing such personal ties needs time, requiring a continuous and long-term commitment (Luo, 2000). Due to this reason, the longer duration of a foreign subsidiary in China makes it more viable and possible to gain from its RPS. We finally posit the following:

Hypothesis 6: The positive link between RPS and subsidiary performance will be stronger for MNC subsidiaries in an emerging market if the duration of their local operations is greater.

Method

Sample

The dynamic, complex, and transformational nature of the Chinese economy offers an interesting ground on which to scrutinize and test various issues, especially the study of strategic activities of the MNCs competing there (Child, 1994). The data for this study was collected through a combination of questionnaire surveys and secondary sources. We used the Directory of Guangdong Foreign-Invested Firms (FIFs) and the FDI in Shanghai Database as our sampling pool, containing basic information of 1,138 and 734 FIFs in these two respective regions (no overlaps). From this sample pool (1,872 combined), we selected FIFs as our target if they (a) had been in China for more than 3 years (time-lag effects of performance; Peng & Luo, 2000), (b) were in manufacturing sectors (the service sector has a very different set of government policies), (c) had invested at least US$100,000 (small investors behave differently from MNCs), and (d) focused on host country market sales instead of export market (export FIFs receive different treatments from the government and depend differently on host country environments compared to those seeking local sales). This yields 1,274 FIFs as the target sample.

The respondents consisted of executives of top management teams (TMTs) as the study required the participation of such top managers (Hakansson & Snehota, 1995). The survey, which was conducted from November 2006 and lasting until April 2007, had two parts: Part I contains question items on RPS as described below, and Part II contains performance- and firm-specific information. The principal respondent was asked to fill out Part I and to have a TMT member whom the principal respondent believed to be the most knowledgeable fill out Part II. Previous studies suggest that this approach ensures convergent recollections of respondents on the same event to make distortion less likely (Podsakoff & Organ, 1986) and also helps to reduce common method bias.

The following steps guided the development of the questionnaire instrument. First, the survey instrument was reviewed by 3 scholars in international management and 11 FIF managers, including 3 executives who formerly worked in China and now work in the United States, “examining the content validity of the scale” (DeVellis, 1991, p. 75). These pretests were used to detect weaknesses and improve the quality of individual questions and the overall questionnaire (Converse & Presser, 1986; Cooper & Schindler, 1998). Second, the refined questionnaire based on the feedback from the pretest was then pilot tested through (a) face-to-face interviews by one of the authors with 5 senior managers of FIFs, as the interviews conducted in settings outside both the interviewer’s and interviewees’ offices may make interviewees feel more comfortable and respond more frankly (Sekaran, 1992), and (b) surveyed with 18 EMBA students who work in international business areas. The refined questionnaires showed that respondents were familiar with the variables and were consistent in understanding the questions in the survey, indicating overall face validity.

The survey was printed in both Chinese and English and was mailed with a cover letter explaining the purpose of the survey and ensuring the confidentiality of the respondents. To ensure a higher response rate, we printed the questionnaires in two separate parts, one containing Part I and the other containing Part II so that the principal respondent could easily pass Part II to an identified respondent and each could focus on their respective part of the questionnaire. In the second week following the first mailing, we sent a reminder letter. Of 1,274 surveys initially mailed, 21 were returned because targeted respondents could not be identified, and 52 declined to participate in the survey, leaving 1,201 useful contacts. Of the 1,201 we received 427 responses, 83 having incomplete information. We followed up these incomplete questionnaires by having the doctoral students in the business school in Shanghai call or visit them. We received an additional 14 completed questionnaires from these follow-ups. Thus, our final sample contains complete information on 358 FIFs, a useful response rate of 30%. Of all informants, 103 are mainland Chinese, 179 ethnic Chinese expatriates, and the rest non-Chinese expatriates.

The final sample FIFs are from 20 industries (see the list in Tables 2 and 3) in 17 countries. Of the 358 sample FIFs, 157 are from Shanghai, 166 from seven cities in the Guangdong province, and 35 from Jiangsu (Kunshan, Wuxi, Suzhou, and Nanjing) province. The t tests in firm-specific characteristics (subsidiary size and invested capital) showed no significant differences between the samples from these regions.

Measures

RPS orientation is measured by four questionnaire items adapted from Hillman (2003). The questionnaire items are given in the appendix. The reliability test shows these items having an alpha of .89. Because these four items are highly interrelated, we calculated mean average to represent RPS.

Among economic environment variables, regulative distance was measured by five items: (a) legal framework (from the International Institute for Management Development’s World Competitiveness Yearbook, various years), (b) protection of intellectual property (from the World Economic Forum’s Global Competitiveness Report, various years), (c) burden of regulation (from the World Competitiveness Yearbook), (d) the rule of law (from Kaufmann, Kraay, & Mastruzzi, 2003), and (e) government effectiveness (from Kaufmann et al., 2003).⁶ As these five items are highly interrelated (correlation alpha = .884), we calculated mean average of the five items for each of the respective 17 countries in our sample and subtracted the scores of China from the scores of these source countries to get the absolute differences between China and subsidiaries’ home countries (for each country, we calculated a 2-year, i.e., 2000 and 2002, average score of each of the five items).

Industry accessibility was defined as a binary measure. The Ministry of Commerce (formally MOFTEC) maintains control of industry accessibility by specifically designating the industrial sectors where foreign direct investments are encouraged, restricted, or prohibited. In the sample, foreign subsidiaries in restricted sectors are coded as 0 and in encouraged sectors coded as 1 (no sample firm in prohibited industries). Environmental uncertainty at the industry level was measured by standard deviations of profit growth in an industry for the period between 2000 and 2004. This measure is analogous to the previous measures of environmental uncertainty (Snyder & Glueck, 1982; Tosi, Aldag, & Storey, 1973). The data for this variable were collected from China Statistical Yearbook published by the China State Statistical Bureau. Lastly, economic development was quantified by the average gross domestic product (GDP) growth rate between 2000 and 2004 for each locale where a foreign subsidiary resides. The data were collected from the annual statistical yearbooks of Shanghai, Guangdong, and Jiangsu provinces. As a large percentage (43.85%) of our sample came from Shanghai, we caution that the level of economic development in this study may not perfectly represent the entire country’s economic development. Nevertheless, we checked and found that the average GDP growth rate neither significantly differs between Shanghai and the average of the entire country nor between Shanghai and other locales in our sample.

As a proposed moderator, subsidiary reputation in the host country was measured by the survey information. We asked the respondent to indicate total number of awards that his/her company has received in the past 3 years in various activities, such as best customer service, quality excellence, and so on, at three levels: central government/industrial sector, provincial/municipal, and city. Those awards that publicly recognize a FIF’s achievements in a given business category tend to create a good image of the FIF and increase its reputation. To calculate the reputation measure, we used the level of awards received to first develop a weight, then multiplied the number of awards received by this weight to get a weighted score of reputation, as the awards at national and industrial levels can have broader recognition, hence higher influence (greater weight) than local awards. A FIF gets a weight of 7 if it received awards at all three levels, a weight of 6 if it received both national/industry and provincial awards, a weight of 5 if it received either national or industrial awards only, a weight of 4 if it received province/municipality and city awards, a weight of 3 if it received provincial/municipality only, a weight of 2 if it received only city awards, and a weight of 1 if it received no awards at these levels. Another proposed moderator, length of operation, was measured by the total number of years a given subsidiary had been operating in China. This information came from the directory and the aforementioned databases.

Finally, subsidiary performance is obtained by asking the respondent to rate sales performance and after-tax return on investment (ROI) with the recent 3 years as the reference time frame (a commonly used timeframe to avoid the single-year performance bias in a highly volatile market). The respondents rated their subsidiary on the following 7-point scale: After-tax return on the total investment: 1 = negative net return, 2 = between 0% and 5%, 3 = between 5% and 10%, 4 = between 10% and 15%, 5 = between 15% and 20%, 6 = between 20% and 25%, and 7 = greater than 25%. Annual increase in total sales: 1 = negative net return, 2 = between 0% and 5%, 3 = between 5% and 10%, 4 = between 10% and 15%, 5 = between 15% and 20%, 6 = between 20% and 25%, and 7 = greater than 25%. These two measures are most commonly used to appraise subsidiary performance (Luo, 1999; Roth & Morrison, 1992) and show a positive relationship between the objective and perceptual measures of firm performance (Geringer & Herbert, 1989). Since the two items are highly correlated (r = .838, p < .000), we used the mean of the two items to indicate performance. Guttman spit-half reliability (R = .67) exhibited a reasonable consistency between the objective performance data (sales) and the mean of the two subjective items based on 61 subsample whose sales information was available to us. In testing all models in the study, we included a group of control variables: (a) subsidiary size (number of employees in 100), (b) entry mode (1 = wholly owned; 0 = otherwise), (c) total invested capital (US$100,000), (d) region (1 = Shanghai; 0 = otherwise), (e) country of origin (1 = from the Greater China area; 0 = otherwise), and (f) industry dummies (coal mining and dressing as a comparison group). All these control variables were measured based on information from the archival directory and database mentioned above.

Results

Table 1 presents the descriptive statistics of all variables used in the analyses. The correlation matrix shows that subsidiary performance is correlated with RPS in a significant manner. RPS is also related to several economic and institutional environment conditions, including regulatory distance, industry accessibility, and economic development. Interestingly, a subsidiary’s employment size and investment size are both positively related to performance.

Table 1.

Descriptive Statistics and Correlations (N = 358).

Variables		M	SD	1	2	3	4	5	6	7	8	9	10	11	12
1.	Subsidiary performance	5.15	1.57
2.	Relational political strategy (RPS)	3.94	0.89	.33***
3.	Regulatory distance	3.18	0.75	.03	.37***
4.	Environment uncertainty	1.59	0.32	.10	.10	.05
5.	Industry accessibility	0.22	0.41	−.09	−.19**	−.09	.03
6.	Economic development	0.13	0.47	.02	−.21**	.05	.03	−.01
7.	Subsidiary reputation	1.97	2.14	.10	.16*	.04	.02	−.06	.05
8.	Length of operation	9.04	4.78	.01	.01	−.06	−.04	−.03	.07	.13*
9.	Subsidiary size	13.95	28.16	.14*	.06	−.08	.02	−.03	.02	.10	.13*
10.	Invested capital	21.30	86.68	.16*	.09	.07	.01	−.01	.06	.11	.09	.14*
11.	Entry mode (wholly owned)	1.43	0.50	.05	.08	.02	.04	−.07	.05	.08	.04	.06	.07
12.	Region (Shanghai)	0.53	0.49	.01	.07	.05	.09	.11	.04	.02	.08	.03	.10	.06
13.	Country of origin (Greater China)	0.25	0.41	.11	−.09	.12	.06	.02	.07	.04	.15*	.05	−.09	.07	.06

p < .10. **p < .05. ***p < .01.

To test Hypotheses 1-4, we conducted a hierarchical multivariate regression analysis in which RPS was treated as a dependent variable, and the four economic environment parameters we proposed were treated as independent variables (see Table 2). VIF (variance inflation factor) values in the full model (Model 2, Table 2) are less than 1.5, ruling out the possibility of multicollinearity. As the full model shows, all four independent variables are found to have significant effects on RPS. Specifically, we proposed a pair of competing hypotheses concerning the relationship between regulatory distance and RPS—the positive sign per the institutional theoretic logic but the negative sign per the cultural familiarity logic.

Table 2.

Testing Hypotheses 1-4: Economic Environment and Relational Political Strategy (N = 358).

Dependent Variable: Relational Political Strategy (RPS)	Model 1	Model 2
Controls
Subsidiary size	.107^*	.105^*
Entry mode (1 = wholly owned)	.071	.062
Invested capital	.095	.098
Region (1 = Shanghai)	.025	.028
Country of origin (1 = Greater China)	.089	.092
Reputation	.071	.069
Length of operation	.105^*	.107^*
Industries
Food processing	.097	.102
Beverage	.108^*	.106^*
Textile	.095	.098
Garment and fiber	.011	.006
Logging	.014	.016
Timber	.037	.034
Furniture	.014	.011
Papermaking	.025	.021
Electric equipment	.101	.102
Measure instrument	.097	.101
Metal products	.054	.051
Petroleum processing	.011	.015
Raw chemicals	.033	.035
Pharmaceutical products	.106^*	.109^*
Chemical fiber and plastic	.089	.097
Machinery manufacturing	.014	.012
Transport equipment manufacturing	.062	.067
Electronic components	.045	.015
Telecomm equipment	.111^*	.108^*
Independent variables
Regulatory distance		.147****
Industry accessibility		−.134***
Industry uncertainty		.119**
Economic development		−.132***

Model F	2.238***	2.937****
Model R²	.128	.162
Adjusted R²	.071	.107
Δ R²		.036
Δ F		3.337****

Note: The entries are standardized regression coefficients.

p < .10. **p < .05. ***p < .01. ****p < .001.

Our analysis of 358 foreign subsidiaries in China discovers a positive and significant coefficient of regulatory distance on RPS (β = .147; p < .001), which supports Hypothesis 1a (institutional logic) and rejects Hypothesis 1b (cultural familiarity logic). Rejection of Hypothesis 1b implies that as regulatory distance increases, all foreign investors, regardless of their country of origin or cultural familiarity with the host country environment, tend to increase the use of RPS. It follows that regulatory barriers overwhelm the firm’s familiarity with local environments. Since China joined World Trade Organization on December 11, 2001, its central government has also harmonized the regulatory treatments to foreign investors coming from different countries. This change, along with growing competition among MNCs from different countries, may be an additional reason behind the rejection of Hypothesis 1b.

Hypothesis 2 predicts that the accessibility of industry is negatively associated with the use of RPS. In other words, the easier it is to access a target industry, the lower its RPS usage. The coefficient of industry accessibility is significantly negative (β = −.134; p < .01), leading support to Hypothesis 2. Hypothesis 3 predicts that the higher the industrial uncertainty, the more foreign subsidiaries are likely to pursue RPS. This hypothesis receives support (β = .119; p < .05). Hypothesis 4 proposes that the use of RPS is negatively associated with the level of economic development in the region where a focal subsidiary is located. The negative and significant coefficient of economic development in relation to RPS confirmed this hypothesis (β = −.132; p < .01). The hierarchical comparison between Models 1 and 2 in Table 2 further unveils that the four economic environment factors collectively increase the predicting power in explaining the variance of RPS in a profound and significant fashion (ΔF = 3.337, p < .001).

To verify Hypotheses 5 and 6, we performed a moderated multivariate regression analysis (Table 3). Before doing so, we mean centered the variables comprising interaction terms to minimize the possible multicollinearity (Aiken & West, 1991). The diagnostic statistics of variance inflation factors (VIF) in all models showed that VIF values were all less than 2, indicating no threat of multicollinearity. Judging by the variance explained, entering two moderators significantly increased the predicting power of the model (ΔR² = .088; F = 19.60; p < .001). Based on Model 3, we entered two interaction terms (RPS × Reputation and RPS × Length of Operation) in Model 4. The coefficients showed significant and positive effects of the interaction terms on subsidiary performance (β = .230 and p < .001 for RPS × Reputation; β = .306 and p < .001 for RPS × Length of Operation). The significant change in ΔR² also suggest that adding these interactive variables significantly enhanced the model explanatory power (ΔR² = .067; F = 13.68; p < .001). To further confirm these moderating effects, we plotted the above interaction effects (Figure 2). As seen in Figure 2a, the interaction plot involving the reputation is compelling. The slope is much steeper for subsidiaries with high reputation in the host country, indicating that RPS has a greater impact on subsidiary performance when the subsidiaries enjoyed higher reputation. Similarly, Figure 2b shows that the effect of RPS on performance becomes more positive and stronger for subsidiaries with a longer duration of operations in the host country. These results lend support to both Hypotheses 5 and 6, confirming the positive moderating effect of a subsidiary’s reputation in the host country and its duration of operations on the positive link between RPS and performance.

Table 3.

Testing Hypotheses 5-6: Results of Moderated Multivariate Regression (N = 358).

Dependent Variable: Subsidiary Performance	Model 1	Model 2	Model 3	Model 4	Model 5
Controls
Subsidiary size	.114**	.116**	.121**	.118**	.108^*
Entry mode (1 = wholly owned)	.056	.070	.067	.068	.061
Invested capital	.112**	.109^*	.116**	.107^*	.113**
Region (1 = Shanghai)	.021	.018	.021	.017	.016
Country of origin (1 = Greater China)	.115**	.113**	.108^*	.105^*	.104^*
Industries
Food	.117**	.114**	.108^*	.119**	.106^*
Beverage	.119**	.102	.118**	.109^*	.105^*
Textile	.108^*	.099	.097	.092	.096
Garment and fiber	.021	.062	.069	.073	.068
Logging	.027	.011	.022	.025	.024
Timber	.013	.019	.021	.018	.019
Furniture	.025	.022	.018	.019	.021
Papermaking	.017	.021	.016	.022	.018
Electric equipment	.119**	.117**	.114^*	.108^*	.107^*
Measure instrument	.118**	.116**	.112**	.105^*	.109^*
Metal products	.058	.063	.066	.064	.053
Petroleum processing	.028	.036	.035	.032	.031
Raw chemicals	.049	.047	.043	.046	.042
Pharmaceutical products	.109^*	.099	.109^*	.108^*	.101
Chemical fiber and plastic	.076	.071	.075	.081	.077
Machinery manufacturing	.069	.066	.045	.044	.051
Transport equipment manufacturing	.119**	.121**	.119**	.118**	.109^*
Electronic components	.127***	.122**	.107^*	.109^*	.104^*
Telecomm equipment	−.094	−.095	−.092	−.105^*	−.098
Main effect
Regulatory distance		−.141***	−.147***	−.139***	−.133***
Industry accessibility		.108^*	.105^*	.106^*	.114^*
Industry uncertainty		−.112^*	−.109^*	−.107^*	−.097
Economic development		.119**	.121**	.099	.100
RPS		.123**	.126**	.098	.127**
Moderators
Reputation			.113^*	.115^*	.112^*
Length of operation			.121**	.114^*	.111^*
Interactions
RPS × Reputation				.230****	.228****
RPS × Length of Operation				.306****	.312****
RPS squared					−.129**

Model R²	.138	.178	.266	.323	.339
Adjusted R²	.082	.113	.208	.283	.291
Δ R²		.040	.088	.067	.026
Δ F		3.21**	19.60****	13.68****	4.84**

Note: The entries are standardized coefficients. RPS = relational political strategy.

p < .10. **p < .05. ***p < .01. ****p < .001.

Figure 2.

Moderating Effects of Reputation and Length of Operations.

Table 3 also reports the quadratic effect of RPS (RPS squared) on performance. Although we did not raise a formal hypothesis on this effect due to the lack of a theoretical ground that can properly justify the optimal level of RPS, we wanted to check whether increased RPS always equaled greater performance. The result in Model 5 shows that the quadratic effect of RPS is significant and negative (β = −.129 and p < .05). In other words, there is a negative curvilinear relationship between the use of RPS and performance. Because the main effect of RPS on performance remains positive after including the quadratic effect, the negative curvilinear effect suggests that the positive effect of RPS on performance declines (but still positive) as the use of RPS continues to increase. Put differently, the positive effect of RPS on subsidiary performance diminishes after the optimal point as RPS continues to increase. After the optimal threshold, the excessive use of RPS can no longer generate increasing returns as high as those yielded before the threshold point.

Conclusion

Results Discussion

This study explores how foreign firms competing in emerging markets design their RPS by aligning with institutional environments, while examining the consequential repercussions in market and profitability growth. Competing successfully in emerging markets becomes pivotal to many MNCs seeking global market leadership. As governments in host countries still serve as a powerful invisible hand, governing local economies and controlling national resources during social and economic transitions, business–government relationships are fundamental to firm growth. This importance is magnified for foreign firms because local firms generally enjoy the privileges afforded by favorable governmental rules in allocating indigenous resources and commanding market segments.

This study goes a step further by showing that the positive effect of RPS on foreign subsidiary performance is further moderated by firm reputation and length of operations in the emerging host market. That is, the positive link between RPS and performance will be stronger when subsidiary reputation in the host country is superior or when firms have been operating in the host country for a longer period of time. The empirical finding on the quadratic effect of RPS on performance also suggests that after a certain point RPS begins to contribute less (though still positive) to performance. This evidence reminds us that, unlike technological or organizational capabilities, RPS may entail some deficiency when it is excessively used in a society under structural transformation. It is possible that too much reliance on RPS may be portrayed by business stakeholders negatively, showing signs of poor governance, weak leadership, problematic corporate culture, and illicit business ethics.

This study reveals the configuration between economic environments and RPS. In general, the promising yet uncertain and complex economic environment in an emerging market sends diverse, opaque, and even contradictory signals that increase the costs of transactions and the search for needed information. This study reveals that regulatory distance, industry accessibility, environmental uncertainty, and economic development have a significant association with the level of RPS orientation. MNC subsidiaries formulate their RPS in responding to the above environments by strengthening the orientation of RPS when facing (a) increased regulatory distance between home and host countries, (b) increased difficulty in accessing target industries, (c) increased environment uncertainty, and (d) poorer economic development in the host country. This alignment is important because RPS itself is a strategic investment involving risks and costs, further reinforced by the fact that these environment conditions are constantly changing. With this alignment, MNC subsidiaries are able to develop contingent strategies to deal with environmental hazards.

Theoretical and Managerial Implications

The ability of firms to manage their relationships with regulatory agencies and government institutions and to gain more favorable policy rulings in transition and emerging economies is one means of improving overall firm performance. Although the corporate political strategy literature and positive political theory literature have long established that business political behavior is both affected by micro- and macrobusiness environments and itself affects firm performance, the relational dimension of corporate political strategy has not been systematically examined. The key findings of our study suggest that MNC subsidiaries in emerging economies are not necessarily isomorphic in terms of their RPS used to deal with a host country’s institutional and economic environments. Institutional theory recognizes that MNC subsidiaries are confronted with pressures for isomorphism within the corporation (internal legitimacy) and within the host country (external legitimacy). The present study demonstrates that these subsidiaries facing different economic and institutional environments use very different levels of RPS to deal with the host country government. Thus, they are not institutionally isomorphic in terms of both RPS they employ and economic conditions they face. Furthermore, the strength of the relationship between RPS and subsidiary performance also varies across MNC subsidiaries, contingent on a specific subsidiary’s reputation and time-based experience in the host country. This means that they are not necessarily isomorphic internally either—Subsidiaries with superior internal capabilities, such as experience and reputation, tend to have a stronger positive link between RPS and performance.

Institutional dependency can be an appropriate phrase to capture the theoretic logic underlying our key findings and above discussions. Institutional dependency holds that MNC subunits facing varying microbusiness (industry-level) and macrobusiness (national-level) parameters are subject to varying vulnerabilities on government-instituted rules, which leads to idiosyncratic strategic needs for the use of RPS in response to regulatory and institutional environments. The resource dependence view argues that “organizations can lobby to have the government control the environment in their interest or can persuade established regulators to create favorable environmental contexts” (Pfeffer & Salancik, 1978, p. 107), but “the form or strengths of organizational adaptations depend on the nature and amount of interdependence confronted by the organization” (Pfeffer & Salancik, 1978, p. 108). Consistent with this view, the institutional dependency logic suggests that MNC subsidiaries are subjected to varying degrees of institutional control by the government due to the diverse environments in which they operate.

The above findings carry some practical implications. First, our findings confirm that RPS is one of the important strategies MNCs must employ. RPS captures the two critical essences defining business conduct in emerging economies: relationship building and business–government interface. When the law is weak and market transition is incomplete, relationship building becomes a key competency for businesses in obtaining external resources and institutional support. Foreign firms operating in these markets need to devote efforts to building relationship with government as a response strategy to the external constraints, such as the cases that many MNCs entering banking and insurance industries in China, Brazil, and India have recently strived, through their political strategies, to obtain greater geographic access and equity control in their local joint ventures. Second, our findings also suggest that the same amount of RPS effort contributes more to performance for longer-established foreign firms. This infers a distinction firms should be aware of: As a requirement, younger subsidiaries need to more proactively pursue RPS to compensate for the liability of newness; but as an actual outcome, the quality of RPS maintained by older subsidiaries seems superior. To update their newer positions and improve the quality of RPS, late movers should strive to learn more from established firms, both local and foreign, concerning the more productive mechanisms and approaches to building relationships with host country regulators and officials. Lastly, the important moderating role of reputation denotes to subsidiary management that building good reputation in the host market may not only help subsidiaries to develop brand name but may also enhance the effectiveness of intended RPS on performance attainment. Thus, RPS should neither remain at a standstill nor in a prefixed position; rather, it should be resilient and responsive to shifting parameters.

Limitations and Future Research

This study may be improved in several ways. For instance, our analysis was limited to only one emerging market and, as a result, variations of economic environments were manifested at industry and region levels within a diversified economy. Richer insights into the relationships between economic environments, RPS, and firm performance may be obtained by analyzing MNC subsidiaries in multiple countries and in different types of economies. This endeavor may enable us to examine national-level institutional voids, such as a weak legal system, a lack of market intermediaries and government sector corruption, in relation to RPS. Both economic environments and RPS vary across countries and economies, and how these two covary and coinfluence is of interest in both theory and practice because, as advocated by Giddens’ (1995) structuration theory, an organization’s political conduct can recursively shape structural properties, such as economic environments, to create a more congenial, social, and political climate to achieve both economic returns and organizational legitimacy. Similarly, the relationships between economic environments, RPS, and firm performance, we found, were associative rather than causal in nature. A multistage design or longitudinal data set can redress this limitation, verify the above structuration process, and reveal the evolutionary path and power of economic environments in affecting RPS, or vice versa, over time and across economies.

This study is also limited in its measuring of RPS because it focused only on the orientation of this variable without addressing the quality, structure, and methods of RPS. Although we could not include all these complex variables in a single study, our field studies in emerging economies reminded us that it is important for MNC subsidiaries to have RPS in place and to improve the quality and mechanisms of RPS in dealing with host country governments. The building blocks of RPS, such as resource commitment, personal ties, political accommodation, and corporate credibility, vary and change in response to actual conditions of economic environments. Future research should therefore extend further from what to how by uncovering the process, quality, and mechanisms of RPS formation and implementation. Moreover, we must acknowledge that the design of RPS is also shaped by a focal subsidiary’s strategic role and operational modes performed in the host country, and this role or mode may moderate the subsidiary’s RPS sensitivity to economic environments and its contribution to performance. For instance, foreign subsidiaries that are more locally integrated (i.e., depending more on both input and output markets in a host country) may be more prone to institutional obstructions in implementing RPS than those less locally integrated. As MNCs are establishing more subsidiaries within an emerging market, and thus likely to consolidate RPS by their umbrella company or center in this market,⁷ it is also important to address RPS at the group (a host of well-connected subsidiaries in the same country) level. This consolidation may strengthen an MNC’s bargaining power and coordinative ability in handling business–government relationships and thus, to some extent, buffer the impact of economic environments on RPS. In closing, this study is only one of many necessary efforts to study MNCs’ political strategies in emerging markets.

Footnotes

Appendix

Questionnaire Instrument for Relational Political Strategy

To what extent do you agree/disagree with the following statements? (1 = strongly disagree and 5 = strongly agree)

My company has developed relationships with various government agencies over time so that when issues arise that may affect the way our company operates in this country, the contacts are already in place to attempt to influence these issues

My company is generally interested in a variety of public policy issues and actively participates in various kinds of local government–sponsored events and activities that facilitate ongoing political involvement in this country

My company stresses strategic importance in cultivating and maintaining good relationships with government agencies concerned

My company encourages functional managers to develop and maintain good relations with government agencies

Authors’ Note

The authors appreciate the insightful comments and suggestions of the three anonymous reviewers commissioned by Business & Society.

Notes

Author Biographies

Yadong Luo is the Emery Findley Distinguished Chair and chairman of the Department of Management at University of Miami. His recent research focuses on global strategy, international management, and business in emerging economies.

Hongxin Zhao is David Orthwein Professor of international business at Saint Louis University. His research areas are in international business strategy, knowledge sharing, and social capital. He taught previously at National University of Singapore.

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