Political connections, the liability of foreignness, and legitimacy: A business historical analysis of multinationals’ strategies in Chile

Abstract

Research Summary: We conduct a historical analysis of the multinational corporations’ strategy of creating connections with a host country’s elite as a way of legitimizing its operations in contexts characterized by long‐term political, social, and economic changes. We argue that the success or failure of these strategies depends on (a) the perceived legitimacy of these connections among a host country’s society during times of change and (b) the capability of the multinational’s political connections to shield it from challenges arising when the host country’s social structure is undergoing deep transformations. We outline and follow a business historical approach that combines the theoretical frameworks of international business, strategy, organizational theory, and political science to analyze multinationals operating in Chile’s energy and telecommunications sectors from 1932 to 1973. Managerial Summary: Western multinationals face hard challenges when trying to legitimize their operations vis‐à‐vis the host country’s societies in emerging and underdeveloped countries. One strategy developed by multinationals to neutralize potential challenges to their legitimacy has been to establish connections with influential members of the host country’s elites. We study how this strategy fares in host countries that are undergoing dramatic political and economic changes. We first argue that overtly maintaining open connections with an elite that is viewed as a relic of an illegitimate past can become a liability. And, second, that highly visible connections are more likely to become a liability in times of political and social change than less visible ones. We illustrate our arguments with a historical study of the strategies followed by American telecommunications and oil multinationals in Chile.

Navigating the New Normal: Political Affinity and Multinationals’ Post‐Acquisition Performance

“…As political affinity increases, MNEs enjoy market value enhancement due to aligned national interests between home and host markets. This finding adds to the recent discourse on the legitimacy‐based view of political risk, which has recently been discussed in the context of emerging economies, including in China, Chile, and the East African countries (Bucheli and Salvaj, ; Stevens and Newenham‐Kahindi, ; Stevens et al, ). The interplay between home and host market stakeholders’ demands for legitimacy will need to be factored in to formulate MNE’s international strategy and for continuous assessment after the acquisition, even when the target resides in a developed market.…”

“…Moreover, the findings of this study add to the current literature on MNEs’ non‐market strategy. Developing political ties with local government officials for the purpose of mitigating political risk has been discussed as an effective strategy for firms considering entering emerging economies (Bucheli and Salvaj, ; Sun et al, ). MNEs that acquire targets in a developed market may likewise solicit the home country government’s support in aligning political interests with the host market, taking a proactive approach to enhance their legitimacy.…”

Varieties of populism

“…Currently, we focus on aspects of formal institutions (e.g., veto points, nature of elected representation, or an independent judiciary), informal institutions (e.g., administrative implementation, culture, religion, openness, or corruption), and micro-level risks that target specific aspects of business (e.g., intellectual property, importing restrictions, specific regulations, or transfer pricing rules). While the literature has downplayed the micro riskbut which has still been studied in a number of contexts, particularly intellectual property (e.g., Khoury, Cuervo-Cazurra, & Dau, 2014) and in the attempt at MNEs to gain legitimacy (e.g., Bucheli & Salvaj, 2018), we would argue that, more importantly, our conception of institutions does not account for the nature of the political marketplace and the philosophy, intent, and strategy of the political actors responsible for such outcomes.…”

Corporate political connections in global strategy

“…The voids‐bridging function of CPC in foreign markets, either through political strategies or by partnering with host country state‐owned firms, can influence MNEs' entry strategies (Chen et al, ) as well as their performance (Brockman et al, ). However, strategies of deploying CPC in host countries can backfire and turn into liabilities when the political regime changes (Bucheli & Salvaj, ; Siegel, ).…”

“…Focusing on MNCs' legitimization strategies through building CPC with the host country's elites, Bucheli and Salvaj () examine the operations of Esso, Shell, and ITT‐CTC in Chile from 1932 to 1973. Using a historical research method to analyze the evolution of the political scene and the political affiliations of MNE boards, they find that these firms' legitimacy was affected differently as the country underwent social, political, and economic changes.…”