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Uncovering the complex relationships between political risk and MNE firm legitimacy: Insights from Libya

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Abstract

Using the before–after natural experiment occasioned by the Arab Spring in Libya, we explore how market and non-market activity affect foreign firm legitimacy in times of political turmoil. Although all MNEs in Libya had to cultivate strong ties to Qadhafi to succeed during his 40 years of rule, we found that those that also invested in social-benefit projects and in social ties with families with few ties to the Qadhafi family earned a broad-based legitimacy that helped them survive Qadhafi’s overthrow. Our findings contribute to the political risk and political behavior literature the notion that the pursuit of firm legitimacy in general, and especially in the eyes of social-sector actors, is an effective hedge against political risk. More theoretically, our findings support the addition of a social-sector-based path to firm legitimacy in the host country that complements and may at times substitute for, the government-based path to foreign firm legitimacy. Practically, our findings suggest that MNEs’ facing severe political risk can improve their prospects for survival by investing in relationships with influential social groups and by offering goods or services that are perceived as socially valuable.

Abstract

Utilisant l’expérience naturelle avant-après du cas du Printemps arabe en Libye, nous étudions la façon dont les activités marchande et non marchande influencent la légitimité des entreprises étrangères en temps de troubles politiques. Même si toutes les entreprises multinationales en Libye ont dû développer des liens étroits avec Kadhafi pour réussir au cours de ses 40 années de règne, nous avons trouvé que celles qui ont également investi dans des projets sociaux et dans des relations avec des familles ayant peu de liens avec Kadhafi ont bénéficié d’une forte légitimité qui leur a permis de survivre au renversement de Kadhafi. Nos résultats contribuent à la littérature sur le risque politique et le comportement politique, avec l’idée que la poursuite de la légitimité des entreprises en général - et aux yeux des acteurs du secteur social en particulier - est une couverture efficace contre le risque politique. Au niveau théorique, nos résultats soutiennent l'ajout d’une voie fondée sur le secteur social pour asseoir la légitimité d’une entreprise dans le pays d’accueil, qui complète et peut parfois remplacer la voie fondée sur le gouvernement pour asseoir la légitimité des entreprises étrangères. Sur le plan opérationnel, nos résultats suggèrent que - face à un risque politique élevé - les entreprises multinationales peuvent améliorer leurs chances de survie en investissant dans des relations avec des groupes sociaux influents et en offrant des biens ou des services perçus comme ayant une valeur sociale.

Abstract

Usando el experimento natural previo y posterior ocasionado por la primavera árabe en Libia, exploramos como la actividad de mercado y no-mercado afecta la legitimidad de empresas extranjeras en tiempo de confusión política. Aunque todas empresas multinacionales en Libia habían cultivado fuertes relaciones con Gaddafi para tener éxito durante su mandato de 40 años, encontramos que aquellas empresas que también invirtieron en proyectos socialmente beneficiosos y en lazos sociales con familias con poco nexos con la familia Gaddafi ganaron una legitimidad mayor que les ayudó a sobrevivir la caída de Gaddafi. Nuestros hallazgos contribuyen a la literatura de riesgo político y comportamiento político, con la noción que la búsqueda de legitimidad empresarial en general, y especialmente ante los ojos de los actores del sector social es una protección eficaz del riesgo político. A nivel teórico, nuestros resultados apoyan que la inclusión de una ruta hacia la legitimidad basada en el sector social en el país anfitrión que complemente y puede sustituir un camino basado en el gobierno hacia la legitimidad. A nivel práctico, nuestros hallazgos sugieren que las empresas multinacionales que enfrentan severos riesgos políticos pueden mejorar su posibilidad de sobrevivencia mediante la inversión en relaciones con grupos sociales influénciales y mediante el ofrecimiento de bienes y servicios que son percibidos como socialmente valiosos.

Abstract

Usando o antes e o depois do experimento natural gerado pela Primavera Árabe na Líbia, nós exploramos como as atividades de mercado e não-mercado afetam a legitimidade da empresa estrangeira em tempos de turbulência política. Embora todas as MNEs na Líbia tenham tido que cultivar laços fortes com Kadafi para ter sucesso durante seus 40 anos de governo, descobrimos que aquelas que também investiram em projetos sociais e em relações sociais com famílias pouco ligadas com a família Kadafi adquiriram larga legitimidade que as ajudou a sobreviver após a queda de Kadafi. Nossos resultados contribuem para a literatura sobre risco político e comportamento político com a noção de que a busca pela legitimidade da empresa de forma geral e, especialmente, aos olhos de atores do setor social, é uma proteção eficaz contra o risco político. Sob um ponto de visto mais teórico, nossos resultados sustentam a adição de um caminho baseado no setor social para garantir a legitimidade no país de destino que complementa, e pode, por vezes, substituir, o caminho baseado no governo para a legitimidade da empresa estrangeira. Praticamente, nossos resultados sugerem que MNEs ao enfrentar um risco político grave podem melhorar suas perspectivas de sobrevivência investindo nas relações com grupos sociais influentes e oferecendo bens ou serviços que são percebidos como socialmente valiosos.

Abstract

我们利用由“利比亚的阿拉伯之春”引起的前-后自然实验, 探索了在政治动荡时期, 市场和非市场活动如何影响外国公司的合法性。虽然在利比亚的所有跨国公司为了成功都不得不在卡扎菲统治的40年间与其培养密切联系, 但是我们发现那些同时投资社会公益项目并与卡扎菲家族有极少联系的家族有社会联系的跨国公司获得了广泛的合法性, 这帮助它们在卡扎菲倒台后得以生存。我们的发现对政治风险和政治行为文献即通常所说的追求公司合法性的概念有所贡献, 尤其是在社会部门活动者的眼中, 这是一项有效规避政治风险的措施。更多地在理论上, 我们的发现支持在东道国的公司合法性上添加基于社会部门的路径, 这补充并有时代替基于政府路径的外国公司合法性。实用上讲, 我们的发现建议跨国公司面临严重的政治风险时可以通过投资于有影响力的社会团体的关系以及通过提供被感知到有社会价值的产品或服务来改善他们的生存前景。

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Notes

  1. Although we would have preferred to secure more interviews, this proved impractical due to conditions on the ground, concerns about confidentiality, and other challenges associated with the volatility of the situation in Libya. Further, because of the dangers at the time of the interviews, we also promised our informants that we would take modest steps to disguise the names of the MNEs as well as certain details (For this reason, interviews are cited in the text as “TEK, 2011)” or “Official, Turkish Ministry of Foreign Affairs” and are not mentioned in the reference list). While these concerns are less pressing today than during the data collection period, we have maintained the cloak of anonymity. In so doing, we have taken care not to distort critical relationships, relative scale or the like.

  2. Appendices with quotations, coding and some initial diagrams are available from the corresponding author.

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Acknowledgements

The authors would like to acknowledge the incredibly constructive feedback received from the anonymous reviewers and editor; this article is much, much better as a result of their comments. The authors would also like to thank their colleague Arun Kumaraswamy for encouraging us to draw insights from the data while enhancing the rigor of our thinking with the help of Boolean analysis. Finally, we thank the Ministry of Economy, Turkey and the Turkish Contractors Association for facilitating access to firms in a very challenging situation.

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  1. Department of Management, College of Business and Economics, California State University East Bay, Hayward, USA

    Izzet Sidki Darendeli

  2. Strategic Management Department, Fox School of Business and Management, Temple University, Philadelphia, USA

    T L Hill

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  1. Izzet Sidki Darendeli
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Correspondence to T L Hill.

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Accepted by Mona Makhija, Area Editor, 20 July 2015. This article has been with the authors for four revisions.

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Sidki Darendeli, I., Hill, T. Uncovering the complex relationships between political risk and MNE firm legitimacy: Insights from Libya. J Int Bus Stud 47, 68–92 (2016). https://doi.org/10.1057/jibs.2015.27

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