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Toward a Cooperative View of MNC-Host Government Relations: Building Blocks andPerformance ImplicationsAuthor(s): Yadong LuoSource: Journal of International Business Studies, Vol. 32, No. 3 (3rd Qtr., 2001), pp. 401-419Published by: Palgrave Macmillan JournalsStable URL: http://www.jstor.org/stable/3069488Accessed: 22/11/2009 07:06

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Toward a Cooperative View of MNC-Host Government Relations:

Building Blocks and Performance

Implications

Yadong Luo UNIVERSITY OF MIAMI

This study examines cooperation- based relations between MNCs and host goveiunents. We theorize that resource commitment, personal relations, political accommodation, and organizational credibility are four building blocks for improving an MNC's cooperative relationships

At the turn of this new century, the nature of MNC-host government

relations (MGRs hereafter) is incremen-

tally shifting from conflictual-adversarial toward cooperative-complementary (Dunning, 1998). MGRs are resurfac-

ing as a critical yet complex issue

attracting the attention of both academ- ics and practitioners. Previous studies

generally assumed an adversarial rela-

tionship between MNCs and host governments and thus inadequately addressed the cooperative side of the rela-

tionship. Consequently, prior research on the determinants of MGRs tended to

with governments. Analysis of 131 MNCs in China validates the importance of these blocks in shaping MNC- govennment relations and the importance of these relations in shaping the performance of MNC subsidiaries.

focus on power or control-related param- eters such as an MNC's distinctive resources (Fagre and Wells, 1982; Poynter, 1982; Moran, 1974; Vernon, 1971), goal and stake asymmetries (Grosse and Behrman, 1992; Kobrin, 1987), industrial

competition (Doz and Prahalad, 1980;

Ring, Lenway and Govekar, 1990), and

corporate attributes (Kim, 1988; Vachani, 1995). Although several scholars, notably Dunning (1997) and Stop- ford (1994), have begun to address the

importance of cooperation with host

governments, we still do not know how MNCs establish and develop such rela-

Yadong Luo is Associate Professor of Strategy and International Business at the University of Miami. The author would like to thank the guest editors and three anonymous reviewers for their thoughtful comments. The earlier version of this paper was presented at the First International Business Research Forum, Temple University, April 7-8, 2000. The author gratefully acknowl- edges helpful comments by the participants of this forum, especially Lorraine Eden, Michael Hitt, Mike Kotabe, Farok Contractor, Ravi Ramamurti, Arvind Phatak, and J. Jay Choi.

JOURNAL OF INTERNATIONAL BUSINESS STUDIES, 32, 3 (THIR QUARTER 2001): 401-419 401

COOPERATIVE VIEW OF MNC-GOVERNMENT RELATIONS

tionships. The first objective of this

study is, therefore, to identify building blocks to develop cooperative MGRs from the MNC perspective.

Meanwhile, prior research on the con-

sequences of MGRs has emphasized bar-

gaining results, such as ownership level and regulatory stance (Brewer, 1992; Boddewyn and Brewer, 1994; Grosse, 1996; Kobrin, 1982; Lecraw, 1984; Vachani, 1995). These results fit the tra- ditional bargaining model, which is concerned mainly with market entry or investment treatment. However, as MNCs shift their strategic concerns from initial

entry to subsequent operations, these

bargaining results are unable to ade-

quately capture the outcomes concerned

currently by international executives. This is an important gap because the ob-

jective of improving MGRs is to eventu-

ally succeed in foreign operations. To

remedy this, our second objective is to

investigate how cooperative MGRs influence financial return, market expansion, and asset efficiency of foreign subsidiaries.

This study chooses an emerging market (China) as an empirical setting to ver-

ify our propositions. As the largest emerging market in the world, China is an interesting and rich setting in which to examine MGRs. The country is the second largest host for MNCs, behind

only the United States. Since government authorities in China influence in-

dustry policies, investment priorities, and operational activities, an MNC's

host-country relationships become crucial to firm growth.

THEORY AND HYPOTHESES

The Cooperative View The conflict-based view of previous

studies was underpinned by bargaining

and transaction cost theories. Although it did not exclude some elements of co-

operation, this view was dominated by the assumption that MGRs were a bar-

gaining game in which each party could use the balance of power to gain a larger share of benefits (Fagre and Wells, 1982). Both parties sought self-interest with

guile in a highly uncertain and unverifi- able bargaining process (Moran, 1985). An MNC's bargaining power came from its contributed resources or ownership- specific advantages; while a government's bargaining power arose from its control of market access or location-specific advantages (Boddewyn, 1988; Poyn- ter, 1985). Governmental deterrence was therefore an inverse function of an MNC's bargaining power. Goal incongru- ity and stake asymmetry between MNCs and governments also shaped the process and outcome of the bargain. When one party's goals and interests deviated

widely from the other's, or the party had no other alternatives, its bargaining power weakened (Grosse and Behrman, 1992; Kobrin, 1987). Furthermore, an MNC's bargaining power was likely to obsolesce over time once it had sunk its assets in the host country and the host

government became less dependent on the firm (Vachani, 1995; Vernon, 1971).

The cooperative view differs from the conflictual view in several ways. First, the conflictual view is principally framed within an economic and political analysis, whereas the cooperative view is built on strategic (resource sharing) and sociological theories. MNCs and

governments are interdependent on each other for critical resources in today's world economy. Sharing resources coop- eratively creates more payoffs for both than controlling privately. This cooperation can create synergies because their resources are often complementary and

JOURNAL OF INTERNATIONAL BUSINESS STUDIES 402

YADONG Luo

their interests compatible (Dunning, 1998). Because they are long-term oriented, MGRs become gradually embedded in social exchanges subject to the norm of reciprocity, which further accentuates cooperation (Granovetter, 1985).

Second, the conflictual view is concerned mainly with the early (entry) stage of MGRs; on the other hand, the

cooperative view emphasizes the after-

entry or operational stage of MGRs. From the government's viewpoint, the MNC's

ongoing contribution after entry (e.g., re- investment, input localization, and R&D) is increasingly crucial to the host econ-

omy. From an MNC's perspective, its for-

eign operations increasingly depend on educational, technological, and industrial infrastructures built by host governments. Governments themselves can also be important customers, suppliers, or

partners of large transactions conducted

by MNCs. Due to these factors, both governments and MNCs now have stronger motivations for reciprocal cooperation than for respective control.

Third, unlike the conflictual view that often treats governmental intervention as the proxy for MGRs (Brewer, 1992; Poyn- ter, 1985), the cooperative view defines MGRs as the strength or structure of an MNC's cooperative relationships with

governmental authorities. As cooperation proceeds, an MNC benefits from various institutional supports, an effect unable to be captured by using the intervention measure. Moreover, the

regulatory regime is shifting from overt to covert and from direct to indirect

(Dunning, 1997). Using the policy issue (area) or regulatory type (form) method to define the content of MGRs (e.g., Kofele-Kale, 1992) is a poor proxy for

capturing the dynamics of this shift. To better account for the content of MGRs,

our study measures MGRs by the

strength of an MNC's relationship with

government authorities, where "relation-

ship" is defined as linkages with the im-

plication of continued exchange of support or assistance.

Fourth, the conflictual view does not

recognize the role of managerial ties, whereas the cooperative view attaches

high importance to local networking with officials. From the strategy perspective, networking with officials reduces

regulatory stringency and accentuates institutional support (Oliver, 1996). Net-

working also provides a balance to the cumbersome bureaucracy by helping firms circumvent rules and counter market uncertainty in poorly established le-

gal systems. Networking also facilitates information exchange with officials, thus

reducing information costs and improving environmental analysis. It enhances an MNC's flexibility in response to institutional changes.

Fifth, unlike the conflictual view, which discusses the determinants of MGRs from the bargaining perspective, the cooperative view articulates these determinants from the angle of adaptation and legitimacy. The conflictual view has addressed the importance of resource dependence and political accommodation in elevating bargaining power (Grosse and Behrman, 1992; Kobrin, 1987; Moran, 1985) but fails to explain how these factors improve local operations through cooperative MGRs. The co-

operative view seeks to identify such determinants that spur organizational ad-

aptation and legitimacy, which in turn escalate cooperation with governments.

Finally, the conflictual view that focuses on ownership shares or treatment

changes as outcomes. The cooperative view, on the other hand, moves this focus to host country performance. Al-

VOL. 32, NO. 3, THIRD QUARTER, 2001 403

COOPERATIVE VIEW OF MNC-GovERNIMNT RELATIONS

though the dynamic bargaining model has considered the effect of long-term operations, it still focuses on the propor- tion of foreign ownership retained by the MNC over a period of time (Vachani, 1995). It considers only a firm's success in preventing erosion of the terms of its deal with the host government. The co-

operative view, however, employs a stra-

tegic perspective and considers a firm's financial and operational performances as MGRs outcomes. As a result of continuous reduction of entry barriers while

facing increasing competition during operations, in the real world, the strategic concern of MNCs has shifted from entry to operations. Accordingly, assessing the financial and operational consequences of MGRs have become essential to any analysis of the outcomes of MNC-host

country relations.

MGR Building Blocks A process view of MGRs suggests that

the interaction between MNCs and governments is a complex, dynamic, and

interdependent process in which MNCs can make efforts to shape MGRs (Bod- dewyn, 1988). Government is not exoge- nous to the economy. Instead, the institutional environment can be shaped by the organization since MNCs can inter- nalize government decision-makers

(Boddewyn and Brewer, 1994). Put dif-

ferently, MGRs affect the achievement of economic returns while they themselves are determined by conditioning factors that reflect an MNC's organizational or

managerial endeavors, which we term as

building blocks of MGRs. We argue that the process of develop-

ing MGRs is both economically constructed and socially embedded. Eco-

nomically, building MGRs is a cognitive process in which MNCs and governments depend on each other's resources

in search of respective economic goals. MNCs build relations with governments in attempts to maximize economic returns from international expansion, mit-

igate the liabilities of foreignness, and minimize transaction costs associated with a high level of asset specificity (Rosenzweig and Singh, 1991; Murtha and Lenway, 1994). Whether a firm can maximize economic rents from owner-

ship, internalization, and location ad-

vantages is influenced by the extent to which the firm exerts itself in the ame- lioration of business-government relations. Under this economic incentive, MNCs adjust their political behavior and

organizational commitment in their in- terface with host governments. This political behavior is largely reflected in an MNC's political accommodation while

organizational commitment is reflected in its resource complementarity and or-

ganizational credibility. Together, they manifest a firm's deliberate attempt to increase investment returns or reduce transaction costs through improved ties with governments.

Political accommodation refers to the extent to which an MNC has been re-

sponsive and contributive to the social needs or governmental concerns (e.g., education, pollution control, hospital fa-

cilities). Without this accommodation, MNCs are likely stereotyped as "exploit- ing consortium" by the indigenous government or society. Resource complementarity concerns the extent to which an MNC's contributed resources match the government's desire for developing its national economy. This complementarity affects economic incentives of one

party as to whether to maintain or increase resources on which the other

party depends. Changes of these incentives will alter the economic foundation for developing MGRs. Finally, organiza-


YADONG Luo

tional credibility involves the degree of an MNC's trustworthiness as perceived by the public and officials. Without this

credibility, it will be more difficult for MNCs to build and maintain relations with governments in a long-term process; both cognitive and relational struc- tures required to understand and evalu- ate each other will be absent. Kostova and Zaheer (1999) argue that improved organizational legitimacy (i.e., increased

acceptance by the host country institutional environment) escalates an MNC's local credibility as perceived by political groups and business community, which, in turn, provides a better institutional environment for developing MGRs.

Building MGRs is also a socially embedded process. It is relational, arising from repeated interactions in long-term exchanges. Social exchange theorists

suggest that a party (or individual) that rewards another obligates this party to return the favor. In order to maintain other social exchanges in the future, the receiving party must reciprocate (Granovetter, 1985). Firms seek informal or social approaches such as network- based, personalized exchanges with political institutions to safeguard operations when the political environment is unstable and the economic environment is volatile (Oliver, 1996). In both social

exchange and organizational theories, personal relations are widely recognized as the key driver or mechanism for institutional attachment (Burt, 1997; Granovetter, 1985). This implies that MNCs can use improved personal relations between senior executives and ma-

jor officials to solidify their relations with government authorities. Because a

party's trustworthiness helps to escalate attachment, organizational credibility also nurtures social exchanges in which MGRs are embedded over time.

These discussions suggest four build-

ing blocks for improving MGRs, namely, political accommodation, resource com-

plementarity, organizational credibility, and personal relations. While personal relations principally derive from social

exchanges and strengthen MGRs at the individual level (between senior managers and officials), the other three build-

ing blocks emerge mainly as organizational efforts to increase legitimacy and

solidify MGRs at the institutional level. Research on networks suggests that cul-

tivating cooperative ties with regulatory bodies involves both cognitive and social domains of embeddedness (Uzzi, 1997) and requires both individual and institutional interlocks (Burt, 1997). An absence of one of these domains or interlocks will give rise to a failure of Pareto

improvement for cooperation that is not bound by a contract but embedded in social exchanges (Granovetter, 1985). The four building blocks are thus all im-

perative, simultaneously and collec-

tively stimulating MGRs.

Among these building blocks, resource

complementarity provides an economic foundation in promoting long-term ex-

changes. Without this foundation, MGRs cannot be sustained despite an MNC's efforts to cultivate such relations. Stop- ford (1994) states that the interdependence of complementary resources between MNCs and governments glues them together in long-term exchanges. Political accommodation signals an MNC's political commitment to host

country needs, thus determining a level of reciprocation from governments. Grosse (1996) and Dunning (1993) assert that an MNC's responsiveness to host

government needs is an effective chan- nel to strengthen formal or informal ties with governmental agencies in Latin America and Asia. Accommodating gov-

VOL. 32, No. 3, THIRD QUARTER, 2001 405

COOPERATIVE VIEW OF MNC-GovERNMENT RELATIONS

ernmental needs mirrors a firm's commitment to relationship building as perceived by regulatory bodies and political bureaucrats (Kim, 1988). Organizational credibility proffers a trust basis on which MGRs are built and a stimulating environment in which MNCs and governments cooperate. Without this credibil-

ity, it will be difficult to build MGRs due to the high costs of information search-

ing and interpretation from the government perspective. Lastly, personal relations between executives and officials are a social catalyst that bolsters the de-

velopment of MGRs. Peng and Luo (2000) demonstrate a link between the

strength of personal relations with officials and improved firm performance. This link exists because such personal ties shape the regulatory environment and local resource allocation from which MNCs benefit. Propositions on these

building blocks follow. Resource Complementarity As noted

by Buckley and Casson (1988), resource

indivisibility between two parties is an

important condition for generating synergies from cooperation. When committed resources from each party are com-

plementary, interdependence is en- hanced. The party that depends on the other party's complementary resource will be expected to be more committed to, and better cooperate with, the resource provider. Thus, the greater the resource complementarity between two

parties, the better interparty relation-

ships are likely to accrue. Contributing distinctive resources that are vital to a host economy yet unavailable or rare lo-

cally will be perceived by the governments as a stimulus for the host econ-

omy. This, then, increases governmental incentives to maintain good relation-

ships with resource-contributing MNCs. Because resource complementarity is a

bilateral alignment, MNCs will also ded- icate more to MGRs if they have to rely on complementary resources that can

only be offered by the host government (e.g., resource acquisition, industry access, preferential treatment, distribution

arrangement, and problem solving). Therefore:

Hypothesis 1: The greater the resource

complementarity between an MNC and the host government, the stronger the relationship between them as perceived by MNC managers, ceteris paribus.

Political Accommodation Political re-

sponsiveness to the social needs of a host nation can be achieved through various

ways, such as local employment, job training, education of local nationals, pollution control, and financial support for local infrastructure, schools, research, sports, and other public interests. As a result of significant participation by many MNCs in host industries, governments have become increasingly concerned with MNCs' corporate citizen-

ship, pressuring them to be more accom- modative to these needs. This implies that MNCs more politically responsive to a host country's social and political needs are more likely to maintain pro- ductive relationships with governmental authorities. The underlying logic is that, over the long run, the bargaining position of firms can be best safeguarded if their business interests accommodate rather than neglect or dominate public interests in host nations (Kim, 1988). From the host government viewpoint, an MNC's political accommodation shows its commitment to the host society. High accommodation mitigates the liability of

foreignness as perceived by officials and amplifies the firm's credibility and

legitimacy as perceived by the public


YADONG Luo

(Kostova and Zaheer, 1999). Peng and Luo (2000) suggest that political accommodation is often perceived as a sub- stantial "public favor" as perceived by officials, which, in turn, immensely increases a firm's "face value", a monetary analogy for business-government relations. Therefore:

Hypothesis 2: The higher the political accommodation to the social needs of a host country, the stronger the rela-

tionship between the MNC and the host government as perceived by MNC

managers, ceteris paribus.

Organizational Credibility Credibility refers to the degree of a party's trustworthiness. Sources of credibility include

social-responsibility image, adherence to social norms, institutional harmony, cor-

porate reputation, customer loyalty, so-

lidity of relations with the business com-

munity (i.e., suppliers, distributors, and

competitors), previous trustworthiness, experience in partnering with other local firms, and reciprocal support for network members, among others. For for-

eign firms in a host country, organizational legitimacy is a key part of their trustworthiness and this legitimacy increases as the above social-responsibility image, adherence to social norms, and institutional harmony improve. An MNC's high credibility as perceived by the public or officials in a host country boosts its relationship with authorities and the long-run sustainability of this. This credibility is critical to establishing a desired relationship with a host government because it limits the likelihood of opportunistic behavior in a business environment that lacks developed rules of law or traditionally does not strictly enforce laws. In general, foreign companies are in an inherently disadvanta-

geous position compared to local firms

in building organizational credibility. Thus, organizational credibility already accumulated in a host country becomes a

strategic asset. An MNC's established

credibility will be perceived as its long- term commitment and adaptation to in-

digenous interests by the society. This not only legitimizes the organization but also stimulates its trust building with authorities. Therefore:

Hypothesis 3: The higher the organizational credibility as perceived by a host society, the stronger the relation-

ship between the MNC and the host

government as perceived by MNC

managers, ceteris paribus.

Personal Relations Personal relations between MNC executives and government officials are a critical dynamic force suppressing opportunism and

boosting trust, thus prolonging cooperation and stabilizing exchanges between MNCs and governmental agencies. The

greater the environmental uncertainty, the more likely that firms will rely on

managerial ties to enter exchange rela-

tionships. Social capital is more important in an imperfect competition characterized by weak institutional support and distorted information (Burt, 1997). In an environment where formal institutional constraints such as laws and regulations are weak, informal channels such as those embodied in interpersonal ties may play a more important role in

facilitating economic exchanges. Despite continued reforms, officials at various levels of governments in emerging economies still have considerable power to

approve projects, allocate resources, and

arrange financing and distribution. Per- sonal connections with officials are often more important than legal standards. Be- cause managerial ties between the

boundary spanners can transform into



interorganizational relations (Oliver, 1996), harmonious personal connections with officials will nourish an MNC's relations with government authorities. In

many emerging markets like China, personal-level trust is often institutional- ized, making personal relations into a form of interorganizational relational

capital that neither market nor hierarchical mechanisms can offer. Therefore:

Hypothesis 4: The stronger the personal relationship between MNC executives and government officials, the

stronger the relationship between the MNC and the host government as perceived by MNC managers, ceteris paribus.

MGR and Performance Cooperation can create operational

and financial synergies (Axelrod, 1984). Likewise, cooperative MGRs may generate operational as well as financial benefits for MNCs. Cooperative behavior refers to the adjustment of a party's behavior to the actual or anticipated preferences of the other party. When such cooperation is strengthened, MGRs become an organizationally embedded

competitive advantage and will generate sustained relational rents (Stopford, 1994). As the regulatory regime on FDI in

developing countries is shifting from the

rigidity to elasticity (i.e., treatments are

negotiable), improved MGRs enable an MNC to operationally benefit from governmental support in distribution ar-

rangement, resource attainment, reduced localization requirement, or infrastructure access. They also enable the firm to

financially benefit from institutional

privileges such as lower taxation rates, cheaper financing, and easier currency swap. These operational as well as financial benefits will stimulate operational

and financial performances in a host

country. These performance implications are

not necessarily the same between MGRs at the regional level and those at the national level.1 As a result of continuous decentralization and privatization, many large emerging economies (notably China, Russia, and India) each in fact consist of a large number of increasingly autonomous governments in diverse re-

gions. Although building blocks of MGRs apply to all levels of governments within a host nation, regulatory policies enacted by governments at different levels or in different regions are highly id-

iosyncratic. Thus, the institutional environment in which MGRs enhance MNC

performance differs according to these levels or regions. This implies that an MNC must deal with various authorities characterized by a complicated matrix structure. This matrix vertically includes two levels (regionwide and nationwide) and horizontally includes multiple authorities such as (1) a political government, (2) administrative bureaus (e.g., foreign exchange control bureau, foreign investment commission, and taxation bureau), and (3) a related industrial de-

partment (e.g., department of the information industry) within each level. MGRs at the regional level concern how

strong they are with respect to the above three types of authorities in a focal re-

gion (mostly city). MGRs at the national level concern how strong they are with

respect to nationwide governmental authorities that are beyond the focal location but are influential on the MNC's industrial access, resource procurement, distribution arrangements, or product marketing.

Superior relationships with regional authorities may result in various investment privileges in site selection, infra-


YADONG Luo

structure access, financial treatment, and resource acquisition. For instance, many regional governments in China can ex-

empt foreign companies from local in- come taxes, reduce their value-added tax, and provide them with low-interest loans or even zero-charge land use. These benefits increase their financial returns. In addition, good relations with local authorities in the focal region provide a stable operating environment. Such relations can be used to mitigate possible hazards of unanticipated intervention or policy changes from various authorities at the national level. More-

over, heightened relations with a re-

gional government can help solve con- flicts with suppliers, competitors, and

buyers in the same region. These business community stakeholders may be under the control, of the same local au-

thorities, either through ownership or administrative power. Further, strong relations improve the efficiency of product inputs such as labor and capital. Local authorities may also create "unnatural" market imperfections by granting mo-

nopoly power or position to foreign com-

panies that have better relations with them, so that new competitors are driven out. These advantages can lead to superior outcomes in financial return, asset

efficiency (sales per asset), and market

expansion. Superior relationships with national

authorities result in a wider scope of

supportiveness from authorities beyond the investment location. This spans the

relationship with the central level governmental authorities, as well as with all related regional-level authorities that are not located in the primary investment

region but that influence a firm's activities such as distribution, sourcing, and

marketing. Most MNCs rely on or must use indigenous supplies located in other

regions. Moreover, when the central government continues to delegate power to

regional governments, the latter institutions often erect tangible or intangible market barriers against products made in other regions, a phenomenon known as "regional protectionism". Broaden-

ing the scope of governmental relations increases the scope of geographical and

product markets. Thus, we envisage that the benefits from improved MGRs at the national level will lead to a

higher level of market expansion and sales per asset. Although an increased market scope may bolster a firm's econ-

omy of scale, transaction costs associated with marketing in other regions are normally higher. It will also cost more for MNCs in product adaptations for other regions where customers may have different needs or preference. This suggests that the advantages of MGRs at the national level are unlikely to generate high financial returns. Therefore:

Hypothesis 5: The stronger the MGRs at the regional level, the higher the (a) financial return, (b) market expansion and (c) asset efficiency in the host

country, ceteris paribus.

Hypothesis 6: The stronger the MGRs at the national level, the higher the (a) market expansion and (b) asset effi-

ciency in the host country, ceteris paribus.

RESEARCH METHOD

Data Source Data were collected from several pri-

mary and secondary sources. The information needed to measure most antecedent and concurrent variables was obtained from a survey of senior managers of MNC subunits conducted in China in



early 1998. Eight senior managers were asked to identify any ambiguities in the terms, concepts, or issues revealed in the

preliminary version of the questionnaire. Some minor changes in wording were made based on their feedback.

Sample firms were identified mainly from the List of Foreign-Invested Enter-

prises in China published by China's State Statistical Bureau in 1994 and the

Directory of Foreign-Invested Enterprises compiled by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) in 1996. Export-oriented subsidiaries and minority-equity joint ventures were excluded as they did not sub-

stantially interact with the local environment or were not controlled by MNCs. Thus, 500 MNC subunits located in Southern China and Beijing were ran-

domly selected from these sources. Questionnaires were sent to senior man-

agers through local contractors, along with a cover letter explaining all related

concepts. After several follow-up re- minders, 131 usable questionnaires were returned (83 from Southern China and 48 from Beijing). Of these, 77 are domi-

nant-equity joint ventures and 54 are

wholly foreign-owned subsidiaries. In order to check the response reliability, we semi-structurally interviewed 20 senior managers from ten MNC subsidiaries in Nanjing (two from each). The in- terview results demonstrated a high con-

sistency with their answers on the

questionnaire and between the two inter- viewees from each firm (Guttman R>0.79). To test the representativeness of the sample, the mean equity, investment, and sales of the sample firms were

compared with the population nationwide, using information obtained from the China Statistical Yearbook (1996). All t statistics were insignificant, indi-

cating no significant bias from the population in these respects.

A second survey was conducted in

early 1999 to measure organizational credibility of collected sample firms as

perceived by the public and officials. We sent a short questionnaire, together with a brief introduction of each company (products, brands, history, foreign par- ent, etc.), to 60 EMBA students (including 25 officials) and 55 participants (including 29 officials) in the Advanced

Management Training Program, both in Southeastern University, China. Of 97

responses we collected, 91 were used after omitting 6 responses that came from executives of the main sample firms.

We made several efforts to check the threat of common method variance aris-

ing from same-source responses to MGRs and its antecedents including resource

complementarity, personal relations, and political accommodation. In early 1999, we sent the same questionnaires to 38 randomly selected senior managers who had responded to the early round. Correlation analysis of 29 responses ex- hibited strong consistency among these items between the two different periods (all at p<.0001). Second, we conducted a global factor analysis in which all variables in the first survey were included in a same model. The results suggested that the latent structure remained stable and item loadings held together in proposed variables. Third, we interviewed 24 government officials in the city of Nanjing in December 2000, asking their views of the

relationship between the regional (Nan- jing) government and our sample MNCs in this city (N=20). We found a significantly high consistency between the results reported by these officials and by MNC managers earlier (all correlation coefficients at p<.001).2 These efforts


YADONG Luo

suggest that there are no noticeable threats of common method variance.

Variable Measurement Antecedent variables were all com-

puted as the average of multiple survey items on a seven-point Likert scale. Of these, resource complementarity was measured by a respondent's assessment to the extent to which an MNC's contributed resources (technological, organizational, and financial) to operations in China (1) are complementary to economic needs of the Chinese central government; (2) are contributory to the economic development of the region in which its project is located; and (3) help advance the technological and innova- tive level of local firms. Second, personal relationship was defined as the responses to (1) the strength of personal connections and ties of senior managers in the subsidiary and/or headquarters with key officials in political governments in China; (2) the strength of personal connections and ties of these managers with major officials in administrative authorities in China; and (3) the strength of personal connections and ties of these managers with senior officials in industrial departments in China. Third, political accommodation was measured by the responses to (1) the extent to which an MNC has been responsive and contributive to social needs of the nation (e.g., production localization, environment protection, research promotion, sports sponsorship), and (2) the extent to which an MNC has been responsive and contributive to social needs of the region in which its project is located (e.g., local employment, job training, education support, participation of infrastructure building). Finally, using information from the second survey, organizational credibility as perceived by the public

was defined as the responses to the level of (1) corporate reputation and customer loyalty; (2) solidity of relations with the business community (suppliers, competitors, distributors, and buyers); (3) experience in partnering with other local firms; (4) adherence to social norms and social-responsibility image; and (5) institutional harmony and trustworthiness. The reliability of the above four constructs was confirmed by the high level of Cronbach's alpha (-.67). The unidi-

mensionality of these constructs was val- idated by the communality estimates found in our exploratory factor analysis (-.78).

Among two concurrent variables, MGRs at the regional level were measured by the average of responses to how superior and strong the existing relationships were, on a 7-point Likert scale from 1 (very weak) to 7 (very strong), with (1) a political (i.e., executive) government; (2) administrative authorities; and (3) an industrial department, in the region (city or county) in which the investment is located. MGRs at the national level were defined as the average of the responses to how superior and strong the existing relationships were with (1) related governmental authorities at the central level; (2) related authorities at the provincial level; and (3) related authorities in other regions that are beyond the focal location but that can influence the firm's resource procurement, distribution, and marketing within China. Cronbach's alpha (-.76) and

communality estimates (-.84) confirmed the reliability and dimensionality of both constructs. Despite these checks, the measurement of MGRs was still one- sided (MNC) assessment and future research should try to obtain matched sam- ples to define MGRs from both MNC and government perspectives.



Using objective information from the CD-Rom database developed by the

Computer Center in the MOFTEC, we

computed the average return on investment (net profit/total investment), rela- tive sales growth rate (firm's sales growth /industry's sales growth), and average asset turnover (total sales/total assets) between 1997 and 1998. These three indi- cators represent financial return, market

expansion, and asset efficiency, respec- tively. Information on an industry's sales

growth was obtained from correspond- ing editions of the China Statistical Yearbook.

This study controls for several contex- tual and organizational factors in exam-

ining the determinants and conse-

quences of MGRs. In the group of con- textual factors, we included industrial

growth, regulatory stringency, and cultural distance as control variables. In- dustrial growth is measured by an indus-

try's net profit growth using information from the China Statistical Yearbook.

Regulatory stringency is a categorical construct, ranging from 5 if an MNC's

industry lies in the Restricted Category to 1 if in the Encouraged Technological Category, based on The Orientation Di-

rectory of Industries for FDI, compiled by the State Council, China. Finally, cultural distance is computed following Kogut and Singh's composite index

(1988) and based on Hofstede's (1980) and Huo and Randall's (1991) data. In the group of firm- or project-related factors, we controlled for the length of operations (# of years operating in China), entry mode (1 if wholly owned, 0 otherwise), project's zone location (1 if in an economic or technological zone within the city, 0 otherwise), and project's re-

gional location (1 if in Beijing, 0 otherwise) based on the information from the

survey. Table 1 displays some descrip- tive statistics for all related variables.

RESULTS

We performed standardized multiple regressions to examine the antecedents (Table 2) and consequences (Table 3) of MGRs. VIF values in various models in both tables were checked. The results (all less than 2.5) eliminated the possi- bility of multicollinearity. The results from a modified Kolmogorov-Smirnov test for all variables in the two tables also confirmed the validity of the nor-

mality of these variables. The threat of

unequal variances (heteroscedasticity) was checked by the Levane test. The results (p>.10 for all predictor variables) showed no pattern of increasing or de-

creasing residuals, thus suggesting the

presence of homoscedasticity in the two

regression tests. As shown in Table 2 (Model 3), all four

building blocks we proposed are significantly associated with MGRs (p<.10 or lower), confirming our earlier hypotheses (H1 to H4). When we separate MGRs into the regional and national levels, it is found that all these mechanisms are significantly and positively associated with MGRs at both the regional level (Model 1) and the national level (except resource

complementarity, see Model 2). Of the four building blocks, personal relations, political accommodation, and organizational credibility affect MGRs at both the

regional and national levels. Resource

complementarity has a main effect on

regional MGRs but not on national MGRs. The heterogeneity of resource de- mand by various national-level governments may be the reason for this irrele- vance. The four mechanisms collectively have a greater statistical power in ex-

plaining the variance of regional MGRs


0z

0 TABLE 1 XP5W~ LDESCRIPTIIVE STATISTICS AND PEARSON CORRELATION MATRIX

'Variables Mean S.D. 1 2 3 4 5 6 7 8 9 10 11 12 13 14

1 Market expansion 1.05 0.33 2 Financial return 0.14 0.11 .24**

3 3 Asset efficiency 0.85 0.47 .33*** .20* x 4 MNC-Gov. relations 4.01 0.96 .21* .25** .18*

5 Resource ?o complementarity 3.84 1.02 .25** .12 .14 .23**

6 Personal relations 3.14 0.85 .16 .20* .22** .33*** .10 7 Political accommodation 3.89 1.15 .06 .13 .10 .19* -.02 .18* 8 Organizational credibility 3.45 0.93 .15 .23** .30*** .19* .04 .07 .17* 9 Industrial growth 12.70 3.22 .17* .18* .15 -.08 -.10 -.06 .09 .13

10 Regulatory stringency 2.02 0.31 -.23** -.10 -.05 .15 -.04 .14 -.02 .03 -.07 11 Cultural distance 7.71 2.12 -.11 .06 .05 .03 .14 -.28*** .08 .13 .06 .11 12 Zone location (1 if zone) 0.60 0.44 .10 .14 .11 -.22** .11 -.08 -.07 .17* .20* -.09 .13 13 Region location (1 if

Beijing) 0.37 0.21 -.07 -.09 .03 .24** .05 .29*** .33*** .18* .04 -.14 .06 .14 14 Length of operations 6.30 1.19 .29*** .24** .18* .13 -.03 .16* .05 .05 -.07 .04 -.04 -.02 .06 15 Entry mode (1 if wholly-

owned) 0.41 0.49 -.05 .09 .15 -.20* .02 -.24** .11 .16* -.07 .05 .14 .10 .11 .12

N = 131

*p < .05

**p < .01

***p<. 001

0


TABLE 2

DETERMINANTS OF MNC-GOVERNMENT RELATIONS (MGR): STANDARDIZED REGRESSION ANALYSIS (N = 131)a

MGR MGR MGR R&N Regional National Combined

Variables Model 1 Model 2 Model 3

Predictor Variables Resource Complementarity .26** .14 .18* Personal Relations .38*** .21* .35*** Political Accommodation .25** .16t .25** Organizational Credibility .16t .20* .15+ Control Variables Industrial Growth -.10 -.05 -.09

Regulatory Stringency .10 .17t .11 Cultural Distance -.13 .06 -.04 Length of Operations .04 .10 .08 Entry Mode (1 if Wholly-owned) -.21* -.18* -.21* Zone Location (1 if in zone) -.18t -.04 -.17t

Regional Location (1 if Beijing) .19* .24** .18*

Model F 9.71*** 5.86*** 11.04*** Adjusted R2 .48 .37 .53

aThe entries in the table are the standardized Ps and their significance levels;

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

(R2=.48) than the variance of national comparison suggests those in the capital MGRs (R2=.37). of China have maintained stronger per-

Table 2 also presents that MGRs tend sonal relations (t=2.91, p<.01) and to be stronger when firms are located higher political accommodation (t=6.41, outside of an economic or technological p<.001) than MNCs in Southern China. zone. When the sample was split into the Table 2 further shows a negative link zone group and the non-zone group, we between wholly owned entry mode and found significantly stronger personal re- MGRs at regional and national-levels lations with various officials for the non- (p<.05). zone group than for the zone group Table 3 exhibits the regression results (t=5.47, p<.001). It seems that foreign for the effect of MGRs on financial re-

managers seek stronger personal rela- turn, market expansion, and asset effi- tions with officials when they are located ciency, with each model significant at outside a zone where institutional con- p<.001. Regional MGRs are found to ditions are generally less favorable than have a significantly positive effect on fi- those within a zone. In addition, our nancial return, market expansion, and

sample MNCs invested in Beijing dem- asset efficiency. National MGRs demon- onstrate significantly stronger MGRs at strate a positive influence on market ex- both the regional and national levels pansion and asset efficiency but no siz- than those in Southern China. Our t-test able influence on financial return. This


YADONG Luo

TABLE 3

CONSEQENCES OF MNC-GOVERNMENT RELATIONS: MULTInP REGRESSION

ANALYSI (N = 131)a

Financial Return Market Expansion Asset Efficiency

Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Resource Complementarity .15 .13 .07 .10 .04 .05

Personal Relations .11 .16 .23* .21t .19t .22* Political Accommodation -.04 -.09 .10 .10 .13 .15 Orgpnizational

Credibility .36*** .34*** .37*** .39*** .24** .27** Regional MGR .26** .25** .18t National MGR .06 .21* .26** Control Variables Industrial Growth .19* .17t .21* .20* .17t .22* Regulatory Stringency -.22* -.28** -.09 -.07 -.07 -.05 Cultural Distance -.08 -.10 -.02 -.04 -.08 -.14 Length of Operations .25** .22* .19* .16t .08 .07 Entry Mode .09 .08 -.11 -.12 -.13 -.14 Zone Location .07 .06 -.10 -.11 -.07 -.03 Regional Location -.11 -.09 -.05 -.05 -.03 -.04

Model F 6.35*** 8.92*** 6.81*** 9.37*** 5.88*** 8.10*** Adjusted R2 .35 .40 .36 .43 .33 .39 A Adjusted R2 .05 .07 .06 Hierarchical F*b 4.88** 7.18*** 5.75**

#The entries in the table are the standardized P3 and their significance levels, where tp < .10; *p < .05; **p < .01; ***p < .001. #bF = (AR/Ak)(N-k2-1)I(l-R2) where k is the number of predictors and N the total sample size.

supports H5 and H6. While relationships with officials in a focal region and those

beyond the region are both important to an MNC's market expansion and asset

efficiency, they differ in the effect of

profitability. Because national MGRs could bring in numerous benefits to firms as we discussed earlier, a nonsignificant effect of national MGRs on prof- its imply high costs associated with re-

lationship building with national-level authorities.

Our hierarchical F test reported in Ta- ble 3 indicates that the inclusion of MGRs in the regression analysis in-

creases the model's explanatory power. Personal relations and organizational credibility are also found to have a main effect on performance.3 Our structural

equation modeling (SEM) analysis con- firms that the proposed building blocks are each associated with MGRs (p<.05 or lower) and MGRs are linked to performance measures (p<.10 or lower).4 The SEM analysis also suggests that organizational credibility influences the three

performance outcomes while personal relations affect sales growth and asset

efficiency but not financial return. The

insignificant effect of personal relations



on profitability is consistent with Peng and Luo's study (2000, p.498).

CONCLUSION

This study addresses MNC-government relations from the cooperative perspective and examines antecedent, concurrent, and consequent factors involved in the process of relationship building with governmental authorities in an

emerging economy. Building on cooperation-based theories such as resource

sharing and social exchange, we theorize that developing cooperative relations with governments is an economically constructed as well as a socially embedded process contingent on an MNC's or-

ganizational and managerial commit- ments to such relations. The cooperative view moves the theory of MGRs forward

by adding in sociological and strategic perspectives to what has been tradition-

ally an economic and political analysis. This view shifts the focus from the bar-

gaining for ownership shares and regulatory stances to ongoing cooperation dur-

ing operations. It shifts the content of MGRs from governmental intervention to the strength or structure of cooperation with governments, and the outcome of MGRs from obtaining or maintaining the terms of MNC-host country bargain to

operational performance consequences. In contrast to the conflictual view,

which identifies MGRs determinants as those that can elevate an MNC's bargaining power, the cooperative view identifies determinants that foster an MNC's

adaptation and legitimacy. We classified

organizational and managerial commit- ments for improving cooperative MGRs into four building blocks: resource

complementarity, personal relations, political accommodation, and organizational credibility. Improving MGRs ne- cessitates these four managerial conduits

to solidify economic attractiveness and social investments in the process of rela-

tionship building. Analysis of 131 MNCs in China validates that these four build-

ing blocks are significant antecedents of MGRs. MNC-government relations im-

prove when resources invested by MNCs are more complementary to institutional needs, personal relations with officials are strengthened, firms are more responsive to indigenous social demands, and

organizational reputation and trustworthiness are superior.

This study documents that the cooperative MGRs have a significant and positive influence on an MNC's overseas performance measures, such as financial return, market expansion, and asset

efficiency. Although MGRs are not the sole determinant of operational success, cooperation with host governments rep- resents a powerful predictor of performance variances. This study also distin-

guishes between regional- and national- level authorities. We find that relations with regional authorities improve both financial and sales-related performances, while relations with authorities beyond the focal region enhance sales-related

performance only. Thus, the depth and breadth of MGRs are both important to firms seeking market development. For MNCs merely pursuing profitability or cash flow, however, focusing on the breadth of MGRs is not advisable as it

requires enormous costs. In conclusion, as the world economy

becomes more integrated, MNC cooperation with host governments grows increas-

ingly critical yet more complex. In this

regard, Vernon's one major assertion, de-

spite being 30 years old (1971), still holds: The changing nature of dynamic relations between MNCs and a host country is a function of changing goals, resources, and constraints on each party.


YADONG Luo

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