The International Corporate Political Activities of Multinational Enterprises: Relationship with Strategy, Structure and Performance

ABSTRACT International business (IB), being an integral part of economic activity, clearly involves both political and institutional factors. However, although IB literature is replete with conceptual and empirical works on how multinational enterprises (MNEs) influence and react to their economic environments, by contrast, relatively little attention has been given to how MNEs engage in political activities influencing government policies to shape their competitive environment. In this study, a model of the determinants of political strategies used by foreign subsidiaries of MNEs is developed and tested. By drawing on conceptual ideas of three theories: (a) behavioural theory of the firm, (b) transaction cost theory, and (c) institutional theory and integrating these with IB and corporate political activity (CPA) literatures, the study presents a model of subsidiary CPA and how that influences subsidiary legitimacy, political outcomes and subsidiary performance. Using the structural equation modelling-based PLS methodology, the model is tested with survey data obtained from Australian subsidiaries of MNEs. The results highlight the firm-level variables that determine MNE subsidiaries’ involvement in CPA. The findings show that innovation and mimetic isomorphism are the two key strategic determinants of a subsidiary’s political involvement, while the two organisational variables that explain subsidiary CPA are dedicated political structure and size. The strategic and organisational variables that are insignificant antecedents of subsidiary CPA are subsidiary age/tenure, related diversification and multi-domestic strategy. With regard to the environmental characteristics, the results highlight the importance of regulation as an influence on subsidiary CPA. In respect to outcomes, attaining legitimacy and maintaining it is one of the main objectives of subsidiaries’ involvement in CPA and the other goal is to obtain favourable political outcomes. The research does not show an overall significant positive influence of subsidiary CPA on performance. However, the study strongly suggests that one of the CPA strategies, financial incentive, has a direct positive link with subsidiary performance. This implies that a financial incentive strategy is an effective CPA strategy of MNE subsidiaries for a significant improvement to their performance. The study makes important theoretical and empirical contributions to the IB and CPA literatures, with valuable implications for practitioners and policy planners. It extends earlier works in synthesising conceptual ideas in IB, institutional theory, strategic management and CPA literatures. By extending the model beyond the effects of firm and environmental level characteristics on CPA to CPA outcomes in terms of political outcomes, subsidiary legitimacy and performance in one integrated model, the study not only focuses on the antecedents of subsidiary CPA, but also examines the effectiveness of MNE subsidiaries’ CPA. The study, by using a large-scale survey and the analytical technique of structural equation modelling (SEM), represents an important empirical contribution to the CPA literature that is so far largely casebased. The use of a survey and the analytical method of SEM to examine MNE subsidiaries’ CPA help to generalise theory and thereby addresses an important methodological gap in the extant CPA literature. Besides the variables that figure prominently in extant CPA literature, the study includes two new strategic variables namely innovation and mimetic isomorphism. Additionally, the study empirically tests the impact of CPA on subsidiary legitimacy. In doing so, this study contributes to the development of measures for subsidiary legitimacy, political outcomes, and mimetic isomorphism. Finally, given finite organisational resources, managers are under pressure to choose a judicious blend of competitive and political strategies to create enduring competitive advantages for superior performance. The findings of the study will help managers understand CPA as part of their overall firm strategy and organisational factors for social and economic advantage and assist host governments to better understand how MNEs operate in their jurisdiction