Corporate Diplomacy in the Age of US-China Rivalry PDF

r Academy of Management Perspectives 2022, Vol. 36, No. 4, 1007–1032. https://doi.org/10.5465/amp.2021.0076 A R T I C L E...

r Academy of Management 2022, Vol. 36, No. 4, 1007–1032. https://doi.org/10.5465/amp.2021.0076 A R CORPORATE The rise of China geopolitical order. and corporate strategy, relations, international idly changing geopolitical porate diplomacy the nonmarket strategies international relations. transition in country uate the broad consequences develop a framework lens of geopolitical address global governance pressures (bilateral importance of alignment in the new geopolitical diplomacy remains The rise of China has arguably been one of the most significant challenges to the existing geopo- litical order in recent years (Economist, 2020, 2021). Over the past 10 years, China has been increasingly viewed as a strategic competitor on economic, political, and values fronts and a threat by the United States (Allison, 2017; de Graaff, ten Brink, & Parmar, 2020; Economist Intelligence We thank the editor, Phillip Phan, and two anony- mous reviewers for their constructive feedback. We appreciate the helpful comments by Arie Lewin on an earlier draft of the paper. This work has been sup- ported in part by the Canada Research Chair program and by the Jindal Chair at UT Dallas. Copyright of the Academy of Management, all written permission. Users may print, download, 1008 rivalry will likely dominate geopolitics in the foresee- able future.1 This new geopolitical environment has led both academics and practitioners to argue for better inte- gration of geopolitics with corporate strategy. Both Buckley (2022) and Teece (2020) not only argued for the importance of that integration, but also pointed to the critical importance of corporate diplomacy (defined below) as an increasingly central element of corporate strategy. Phan (2019: 1) also called for more research to understand “firm and managerial behaviors in the context of political discontinuities that affect business operations on a grand scale.” Similar calls have been made by practitioners who have suggested that the increased global complexity will require top managers and board members to devote more attention to geopolitics (Chipman, 2016; Detomasi, 2022). For example, the U.K. Risk Coalition has suggested adding an extra “G” (for geo- political risk) to ESG—that is, “ESG2”—and calls for comprehensive guidance to help companies address geopolitical challenges (Risk Coalition, n.d.). Accordingly, we focus on a timely, important, but previously underexplored question: What are the implications of the new global geopolitics rooted in the U.S.–China rivalry for corporate diplomacy strategies of multinational enterprises (MNEs)? We define corporate diplomacy as MNE nonmarket (political and social) strategies that both respond to and shape country diplomacy and international rela- tions (IR). This definition explicitly links the geopo- litical environment to corporate diplomacy. We employ elements from IR theory (Walt, 1998; Witt, 2019), combined with the nonmarket strategy (NMS) concepts of bridging and buffering (Mellahi, Frynas, Sun, & Siegel, 2016) and the international business (IB) concept of institutional multiplicity (Sun, Doh, Rajwani, & Siegel, 2021) to inform our analysis. Our research examines not only the corporate diplomacy of American and Chinese MNEs that are at the core of hegemonic rivalry, but also how U.S.–China rela- tions shape the corporate diplomacy of MNEs from other countries. Specifically, we first evaluate the nature and dynamics of country diplomacy and IR. Country diplomacy refers to how countries pursue their for- eign policies (Berridge, 2005). Following an IR per- spective (Walt, 1998; Witt, 2019), we suggest that a 1 Indeed, the Russia–Ukraine conflict may itself be viewed through the lens of the U.S.–China rivalry, as the two assume different positions with respect to Russia (Allison, 2022). 2022 Linking Country Diplomacy and Corporate Country 1 Diplomacy (defined by economic and national security policies) MNE nonmarket realism. Second, we develop a dual-lens framework that considers both geopolitical realism and institu- tional multiplicity in analyzing corporate diplomacy strategies of MNEs. Overall, our framework can help both academics and practitioners better understand the geopolitical challenges and opportunities con- fronting MNEs. COUNTRY AND CORPORATE DIPLOMACY: FRAMING THE ISSUES Our basic approach is summarized in Figure 1, which presents a coevolutionary perspective to under- standing country diplomacy and corporate diplo- macy. Our approach is rooted in various elements from the two-stage models employed in the IR and IB literatures (Putnam, 1988; Ramamurti, 2001; Stopford & Strange, 1991). In the first stage, we consider country diplomacy and country-to-country relations—IR. In the second stage, we evaluate the corporate diplomacy strategies that both respond to and shape country diplomacy and IR. Country diplomacy refers to how countries pursue their foreign political, economic, and security cies (Berridge, 2005; Lee & Hocking, 2010; Lee & Hudson, 2004). IR scholars have argued that a diplo- matic system includes not only country-to-country 1010 using NMS as an organizing framework “has poten- tial for a more comprehensive and integrative view” of corporate diplomacy activities, including both corporate political activity (CPA) and corporate social responsibility (CSR) activity. Our definition also follows IR studies in recognizing that MNEs are important international actors that practice diplo- macy, and that their interactions with nation-state are influenced by and can also influence country policies (Burmester, 2021; Kim & Milner, 2021; Rug- gie, 2018; Stengel & Baumann, 2017). Corporate diplomacy includes both CPA and CSR activities, which is consistent with recent approaches in NMS that have emphasized the possible comple- mentarities between CPA and CSR activities in achieving corporate goals (Curran & Eckhardt, 2020; Mellahi, Frynas, Sun, & Siegel, 2016; Sun et al., 2021). Although CPA is the most obvious and widely stud- ied action that MNEs may take to deal with challenges arising from unfavorable foreign policies and interna- tional tensions, CSR activities are also important cor- porate diplomacy activities to address these issues. CPA and CSR activities can be linked. As we discuss below, CSR activities can provide a buffering mecha- nism that protects MNEs from political risks, notably at times when CPA is less effective. Our definition of corporate diplomacy covers strategies such as divestment from a host country in response to geopolitical conflicts and home- government pressures rather than market pressures (e.g., recent exits of MNEs from Russia), or the recon- figuration of supply chains (e.g., terminating rela- tionships with suppliers in Xinjiang, China) in response to conflicts in values between countries. These cases suggest that the boundary between mar- ket and nonmarket strategies becomes increasingly blurred in an environment characterized by geopolit- ical tensions. By linking corporate diplomacy to country diplo- macy, we identify the two-way interconnection between them. The relationship between MNEs and nation-states and their joint evolution has been an important question in the IB and IR literature (Dun- ning, 1998; Gilpin, 1976; Ikenberry, 2011; Stopford & Strange, 1991). For example, Vernon (1971) famously argued that the global reach of MNEs was challeng- ing state sovereignty. The discussion of the balance between corporate and state power has reemerged as the global geopolitical situation changes, both in IB (Boddewyn, 2016; Casson, 2020; Doh, McGuire, & Ozaki, 2015; Kobrin, 2015; Witt, 2019) and political science (Ballor & Yildirim, 2020; Curran & Eckhardt, 2018; Kim & Milner, 2021). 2022 China’s Rise: A World Increasingly Rooted in Realism China’s rise appears to disrupt the liberal order along all the relevant dimensions of economic relations, values, and national security. The core concern of the existing powers (particular the United States) is that China increasingly poses both national security and economic challenges, while at the same time promoting a value system that differs from that which underpins the liberal world order (Globerman & Shapiro, 2009; Walt, 2021; Yang, 2020). As summarized by Harris and Sullivan (2020), China’s “authoritarian capitalism” is chal- lenging “market democracy”—the prevailing model at the heart of the liberal world order. Using the dual lens of economic and national security issues, Figure 2 illustrates some of the complex relationships. Specifically, we suggest that the U.S.–China rela- tionship is unique. China’s rise as both an economic and military power threatens American hegemony by disrupting the existing balance of power.3 Both economic and security tensions are high and are exacerbated by value differences, leading to increased reliance on realism-based policies by both countries (Allison, 2017; de Graaff et al., 2020; Harris & Sullivan, 2020). Moreover, when there is an economic and tech- nological rivalry between countries, the definition of national security can expand from traditional military considerations to include broader economic and tech- nological domains (Ball, 2019; Capri, 2020). Thus, eco- nomic and security concerns become interrelated in terms of country diplomacy (Harris & Sullivan, 2020; Lai, 2021). Accordingly, realism-based policies are not only about military policies and security alliance building, but are also increasingly applied to economic and technological issues for national security reasons, with the goal of improving a country’s relative power and influence in a global environment. An example of realism-based economic policies is the series of export controls and inward foreign 3 While the recent conflict between Russia and Ukraine suggests that Russia represents a significant challenge to U.S. hegemony, the power of Russia derives largely from its military strength. Russia’s economic power has been declining and will likely continue to decline with the economic sanctions from the West. In this regard, Hass (2022) characterized Russia as a country in terminal decline, while China is a rising power with an interest in remaking the international system to better accommodate its interests. In this sense, the U.S.–China rivalry is unique and remains the most significant force shaping a new world order (Blinken, 2022). 1012 The Rise of Differences with China over economic rules and values BRI countries Russia Most BRI countries (including economic relations with relations. Russia (and over influence of Western may bring the two countries closer. Notes: BRI countries refer to countries Partnership. of influence. A constructivist view suggests that countries can use common values and aspirations (especially those in contrast with the values of the rival country) to seek or strengthen partnerships with other countries (Kobrin, 2015; Rousseau & Garcia-Retamero, 2007). Aligning efforts with allies and acting with com- mon purpose and in common cause is indeed one of the main strategies of the Biden administration to com- pete with China (Blinken, 2022; United States Trade Representative, 2021). Alliance-building activities by the United States and the common interests and values shared by the United States and its allies may lead to a diffusion of realism-based policies to U.S. allies. In Figure 2, we group Australia, Canada, New Zealand, and the United Kingdom as countries with relatively high security and economic concerns about China. These countries are closely aligned with the United they are in the “Five Eyes” intelligence network and are the United States’ closest security allies. They are also, like the United States, liberal market economies with shared economic values, including a relatively 2022 including many of those that have signed onto China’s BRI, are sympathetic to China’s focus on state-led development, which will, in turn, limit the of U.S.-based policies and, in fact, favor policies from China (Walt, 2021). Alliance building by the United States and China is affected not only by their own diplomacy, by the possibly unpredictable actions of other tries, which makes the U.S.–China rivalry and the geopolitical environment for MNEs both dynamic and unpredictable. For example, the recent military conflict between Russia and Ukraine may have a pro- found effect on the EU’s diplomacy regarding China, and the world may become even more rooted in real- ism if the EU allies with the United States and if China allies with Russia. Although it remains to be seen how the conflict may affect the EU’s relation- ship with China, it appears highly likely that Russia will move closer to China as its economy is heavily sanctioned by the West. We therefore suggest in Figure 2 that most BRI countries, including Russia, benefit from economic relations with China, are less concerned about China’s rise, and are more likely to become China’s allies in the new geopoliti- cal order. In summary, viewed in the context of geopolitical relations with an emergent China, the new world order becomes rooted more heavily in realism because of the U.S.–China rivalry and its diffusion to other countries. However, the new world order is not completely rooted in realism for at least three rea- sons: (a) China has been deeply integrated into the global economic system, and some countries give more weight to commercial (as opposed to national security) interests; (b) China itself still assigns high weight to liberalism-based policies, as indicated by its recent liberalization of the financial sectors to the United States; and (c) even the United States still retains elements of cooperative strategies. Constructivism-based policies may emerge if shared values between the United States and China can result in collective action in some areas, such as cli- mate change. According to U.S. Secretary of State Antony Blinken (2022), the relationship with China is a very complex one: “we’ll compete with confi- dence; we’ll cooperate wherever we can; we’ll con- test where we must.” As a result, the context for corporate diplomacy is much more complex and dynamic than in the past, not only for U.S. and Chinese firms, but also for MNEs based in other countries that do business in both countries. 1014 A World Rooted More Heavily Liberalism International 1. Pursue economic Relations interdependence and Perspective support intergovernmental rules-based institutions. 2. Issues are largely economic, with the Corporate belief that liberal Diplomacy economic relations promote peace. Bridging (Compliance) 1. Bridging strategies with international congruence between home and host countries. 2. Bridging or compliance legitimacy on economic rules common values and Development through multilateral agreements. Buffering (Influence) 1. Buffering strategies governments to investment measures. significant in that MNEs increasingly adopt these rules and values in their operations through supporting various global governance initiatives, such as the United Nations (UN) Global Compact (Dau, Moore, Doh, & Soto, 2022) and the UN Sustainable Development Goals (UNSDGs) (Van Zanten & Van Tulder, 2018). By complying with and supporting commonly recog- nized and widely diffused global rules and values, MNEs are well positioned to achieve legitimacy on a global basis. Under realism, this scenario changes as the nation- state becomes a more important stakeholder and dis- agreements between rival countries over both rules and values emerge. MNEs now face competing and often conflicting expectations from stakeholders in rival countries (Stevens, Xie, & Peng, 2016). As com- mon values and rules are less widely diffused, using bridging or compliance strategies to achieve legitimacy on a global basis becomes more difficult. Indeed, “minilateral” (as opposed to multilateral or global) 2022 started to dominate the “economic cabinet” in the gov- ernment’s decision-making in 2013, against the back- ground of the deteriorating relationship between Russia and the West and tensions over Ukraine. As the environment moved toward realism, the authors docu- mented that corporate buffering strategies became less effective as MNEs were not able to gain access to, and influence over, the security cabinet. At the same time, MNEs’ contacts and relationships with the economic cabinet became less useful in a realism-based environ- ment (Yakovlev et al., 2018). After the recent outbreak of the armed conflict between Russia and Ukraine, many Western MNEs have decided to withdraw from Russia, essentially admitting that such contacts and relationships had little value. Thus, when realism results in military conflict, the corporate diplomacy decision becomes limited to the degree of compliance with the home country. We summarize these broad implications of the geopolitical transition in Table 1. Corporate diplomacy may be different under real- ism, but realism does not make corporate diplomacy irrelevant. To fully understand corporate diplomacy under realism, we dive deeper through the dual lens of geopolitical realism and cross-border institutional multiplicity (Sun et al., 2021). While the literature to date has paid much more attention to political chal- lenges faced by MNEs in the host country (De Villa, 2021), we suggest that the movement toward realism draws attention to corporate diplomacy at multiple institutional levels. Therefore, we examine corporate diplomacy strategies at each of the four levels identi- fied by Sun et al. (2021): multilateral, bilateral, host, and home. Developed in the next section, our basic argument is that in a world leaning more toward real- ism, corporate diplomacy options and effectiveness vary, contingent on the institutional environments in which an MNE operates (Table 2). Multilateral Level: Global Governance Gaps and Corporate Diplomacy Global governance is about “defining and imple- menting global rules and providing global public goods” (Scherer & Palazzo, 2011: 900). Global gover- nance involves “a purposeful order that emerges from institutions, processes, norms, formal agree- ments, and informal mechanisms” (Benedict, 2015: 155). Global governance, therefore, involves agree- ments that transcend national boundaries, including those that are primarily formal agreements among nation-states (the WTO and North Atlantic Treaty Organization) and less formal agreements that involve multiple stakeholders organized around 1016 Corporate Diplomacy Issues Contradictory Multilateral Level: Pressures Global Governance Gaps Dilemmas Increase Under Increase Under Realism Realism 1. U.S.–China rivalry will 1. aggravate global governance full gaps in areas that concern rival national security (e.g., digital compliance technologies) and in areas countries. where rival countries have 2. International fundamental value may facilitate partial differences (e.g., human compliance rights). In these areas, there When is no simple compliance MNEs strategy with global rules for approach and consider MNEs. stakeholder 2. There will be more both countries. “minilateral” governance led by the United States or with government China and joined by requirement countries that share common leads interests or values. MNEs the can exercise corporate simultaneously diplomacy to facilitate the activities creation or influence the country. rules of minilateral 4. Not governance. but such do not say, matter in addressing tensions challenges. strategies that can help partially fill the global gover- nance gaps arising from realism. As disagreements between rival countries in a realism-based world expand, we expect to observe more minilateral governance, possibly led by the United States or China and joined by countries that share common interests or values. Minilateral alli- ances led by the United States and China are emerg- ing in various areas, including both broad economic initiatives (IPEF versus BRI) and more narrow initia- tives, such as financial messaging systems (SWIFT versus CIPS). MNEs can exercise corporate diplo- macy to facilitate the creation of minilateral alliances and influence the rules of the alliances. However, it is reasonable to believe that MNEs from countries friendly with the United States (or China) will exert more influence on minilateral governance led by the United States (or China) compared to MNEs from rival countries. The question is whether MNEs 2022 standards. Some evidence suggests that Big Tech companies, such as Google and Microsoft, as well as industry lobbying groups in technology and phar- maceuticals, have been active in lobbying for transat- lantic agreements that standardize and liberalize cross-border data flows (Fanta, 2021). Such corpo- rate diplomacy efforts of MNEs potentially shape and are shaped by the recent U.S.–EU diplomacy. There is no doubt that the abovementioned U.S.– EU governmental collaborations provide room for non-Chinese MNEs operating in the United States and the EU to exercise corporate diplomacy to shape standards for emerging technologies. It is less clear whether Chinese MNEs operating in the United States or the EU can also play a role in influencing these standards. The TTC was established with a clear statement regarding its underlying democratic values, which suggests a limited role for MNEs from China (Miller, 2021). However, among industry lobby groups in the EU, at least two included Chi- nese firms: the European Services Forum (Huawei) and Digital Europe (Huawei, Lenovo, Xiaomi). Although Chinese MNEs are a distinct minority in these associations, the question of whether Chinese MNEs can engage in collective action outside of China is likely an important area for future research. Similarly, more research is required to whether non-Chinese MNEs such as U.S. MNEs can exert influence on China-led global initiatives through, for example, the American Chamber of Commerce in China. It is possible that in areas where on independent policy-making on its governance approach, the influence of Western MNEs in China is limited. Thus, identifying areas in which there is more goal alignment between Western MNEs and the Chi- nese government is critical to understanding their influence over China’s policies and initiatives. It is noteworthy that countries that join minilateral agreements involving the United States may also join those involving China. Contingent on their val- ues and economic interests, some countries join U.S.-led security alliances but at the same time are part of a trade or investment agreement with China. For example, RCEP has 15 members, including China as well as U.S. allies (Australia, Japan, and New Zealand) but not the United States itself. Thus, RCEP illustrates that even in a world moving toward realism, there is not yet complete disengagement. From the perspective of corporate diplomacy, an important research question is whether MNEs had any role in shaping agreements such as RCEP. Such research can be built on, and compared with, recent studies on the role of corporate lobbying, often 1018 that a strategy of compliance, either with interna- tional labor standards (the case of H&M) or with host- country-specific requirements (the case of Muji), becomes less effective when values are divergent across countries. In general, MNEs face the questions of how to balance competing stakeholder pressures in the global environment and how to secure legitimacy in the eyes of relevant stakeholders that have diver- gent rules and values (Stevens et al., 2016; Sun et al., 2021). Full versus partial bridging (compliance) strate- gies. Given the sometimes-conflicting stakeholder pressures and legitimacy dilemmas under realism, what are the bridging (compliance) options for MNEs? With two rival countries (Rival 1, Rival 2), we suggest that MNEs that conduct businesses in both countries, including those originating from Rival 1, Rival 2, or third countries, can take actions to achieve full compliance with Rival 1 or Rival 2, or partial com- pliance with both rivals. These two options follow Oliver’s (1991) typology of firm responses to institu- tional pressures. Full compliance helps MNEs to achieve legitimacy in the eyes of one set of stakehold- ers, but may lead to the withdrawal of legitimacy by the other set (Stevens et al., 2016). A partial compli- ance strategy refers to an MNE’s efforts to partially sat- isfy the demands of both sets of stakeholders. In this case, MNEs attempt to achieve legitimacy with both sets of stakeholders, perhaps through some form of compromise (Oliver, 1991). This type of strategy mir- rors a “playing ball” strategy, whereby corporations “tread a fine line” between the interests of home and host countries without offending either (Young, Bru- ton, Peng, & Yu, 2022). What may affect MNEs’ choice of full versus par- tial compliance strategies? A firm should adopt a holistic approach of examining situations in both home and host countries to understand the nonmar- ket implications of a firm’s actions in both countries (Stevens et al., 2016). Specifically, we suggest that both country diplomacy and firm characteristics can affect the choice. First, foreign policies of the rival countries may shift an MNE’s evaluation of the rela- tive importance of achieving legitimacy in these countries. One extreme case is when Rival 1’s foreign policies are overwhelmingly condemned by many countries. In the meantime, there may be strong pres- sures from Rival 2 that demand MNEs take actions in support of Rival 2’s political objectives (e.g., to sanc- tion Rival 1). Under such conditions, achieving legit- imacy in the eyes of Rival 2 becomes of paramount importance for an MNE from Rival 2; as a result, the MNE will likely take actions to achieve full 2022 sharing, whereas U.S. law prohibits such sharing), Apple set up a partnership with a local Chinese com- pany and let the Chinese company deal with data requests by the Chinese government (Nicas, Zhong, & Wakabayashi, 2021). In another example, TikTok faced the distrust of the U.S. government on data security and privacy issues and was under pressure to sell its U.S. businesses to U.S. companies. How- ever, it was prohibited by the Chinese government from selling its critical technologies to U.S. firms. To partially satisfy both government demands, TikTok sought partnerships with politically well-connected U.S. firms (Oracle and Walmart) to deal with the U.S. government’s data concerns and to avoid the direct sale of its technologies to U.S. firms (McKinnon & Bender, 2020). These cases suggest that MNEs need to take a holistic approach by considering the expecta- tions of both home-country and host-country stake- holders in their choice of partners (Stevens et al., 2016). Choosing partners that are viewed as legitimate by the stakeholders of both countries may increase the effectiveness of a partial compliance strategy. However, partial compliance strategies such as inter- national partnerships may have limitations in realism- based settings. In particular, the extent to which MNEs can achieve both political and social legitimacy in both rival countries requires further research. For example, TikTok’s partnership approach may have succeeded in the United States, but its approach also encountered negative public sentiment in China as TikTok was viewed as catering too much to U.S. demands (Yu, 2020). In the case of Apple, questions have been raised about the inconsistency between Apple’s established high standards in customer data protection in the United States and its compliance strategy in China (Nicas, Zhong, & Wakabayashi, 2021). In other words, although Apple’s strategy shields the company from potential legal obligations in the United States, its legit- imacy in the eyes of the public in the United States may be compromised as it complies with the Chinese law. It appears that under realism, compliance strate- gies aimed at achieving legitimacy in one lead to the loss of legitimacy in the rival understanding of this trade-off regarding two different countries needs to be further ened (Stevens et al., 2016; Sun et al., 2021). We suggest that a perspective focusing plementarity between CPA and CSR activities (Mel- lahi et al., 2016; Sun et al., 2021) will understand how firms can address legitimacy dilem- mas in a cross-border setting. For example, when a firm’s CPA in the host country leads to legitimacy defi- cits in the eyes of the public in the home country, the 1020 principles … DJI abhors any use of our drones to cause harm, and we are temporarily suspending sales in these countries in order to help ensure no one uses our drones in combat. (Strumpf, 2022) Similarly, regarding the legitimacy dilemma MNEs face in sourcing products or hiring labor from Xin- jiang, Apple emphasizes its supplier code of conduct in its decision-making: “We will continue doing all we can to protect the rights of workers across our sup- ply chain and ensure everyone is treated with dignity and respect” (Lin, Xiao, & Kubota, 2021). Future research can examine these different types of rhetori- cal strategies and their consequences for legitimacy and performance. Moreover, the question of whether MNEs align or decouple their rhetorical and material strategies in response to geopolitical tensions also requires more research. Such research can be built upon prior studies on symbolic and substantive cor- porate strategies to examine whether it is possible that firms have symbolic compliance with a stakeholder (e.g., government) in response to geopolitical tensions without making substantive changes in their business activities (Marquis & Qian, 2014; Meyer & Rowan, 1977). Reactive versus anticipatory bridging (compli- ance) strategies. Oliver and Holzinger (2008) sug- gested that bridging (compliance) strategies are not necessarily passive. While firms can be reactive in developing processes and aligning structures to con- form to stakeholder expectations, firms can also be intentional by establishing best practices in anticipa- tion of public policy changes (Oliver & Holzinger, 2008). In fact, Teece (2020) suggested that MNEs’ ability to scan the political environment, continu- ously and in a timely manner, can represent dynamic capabilities required to respond to a bifurcated global governance world and the uncertainty related to it. In the example discussed earlier, H&M likely did not anticipate the intensified EU–China diplo- matic tensions and the negative consequences of its disclosure of supply chain decisions in China. As a result, its actions led to a legitimacy dilemma. To avoid such dilemmas, MNEs need to hone their capa- bilities to monitor and anticipate changes in the geo- political environment and calibrate their corporate diplomacy accordingly. Developing such abilities is critical for U.S. or Chi- nese MNEs that are at the heart of the hegemonic rivalry, as well as for third-country MNEs. MNEs from third countries need to understand not only how U.S.–China rivalry may evolve, but also the for- eign policy response of their home countries, notably with respect to the home country’s decision about 2022 and vice versa) as both groups desired more friendly and more stable relations between Russia and the West (Yakovlev et al., 2018). However, the brokering and facilitating roles of MNEs are substantially diminished when country diplomacy of the rival countries is almost entirely rooted in realism and many MNEs exit the host country. Given that the U.S.–China rivalry is not entirely rooted in realism and that many MNEs operate in both countries, the extent to which MNEs can contribute to peacemak- ing in such a context requires the attention of both corporate executives and academics. Host Country: Liability of Origin and Corporate Diplomacy In a world increasingly characterized by realism, MNEs more commonly face a liability of origin (LOR) in a rival host country. LOR is related to, but is also different from, the concept of liability of foreign- ness (LOF). Both concepts describe the disadvan- tages of MNEs doing business in a host country. LOF refers to the additional costs for MNEs relative to local firms, and emphasizes MNE disadvantages because of where they are not from (Zaheer, 1995). In contrast, LOR stresses MNE disadvantages from the perspective of where they are from (i.e., their specific nationality) (Kolk & Curran, 2017; Marano, Tash- man, & Kostova, 2017; Ramachandran & Pant, 2010). LOR is manifested in various types of legitimacy bar- riers for MNEs in the host country, such as extra reg- ulatory burdens and negative public sentiment toward MNEs from a specific home country. Recent research has started to examine important sources of LOR that arise from the host country’s animosity toward the MNE’s home country (Arikan & Shenkar, 2013; Shapiro, Li, & Feng, 2020; Tan & Yang, 2021). Realism reduces corporate diplomacy effective- ness to address LOR. Research on firms from emerg- ing economies has shown that to overcome the LOR, MNEs can leverage “institutional borrowing” (Pink- ham & Peng, 2017: 345) to demonstrate their trans- parency and compliance with liberal economic values by, for example, being publicly listed in advanced economies. MNEs from emerging econo- mies can also adopt high CSR standards to demon- strate their commitment to environmental protection and sustainability so as to overcome their liability of being from emerging economies (Gu, Yang, & Zuo, 2021; Marano et al., 2017; Tashman, Marano, & Kos- tova, 2019). Under realism, however, a host country places more emphasis on the potential national security 1022 knowledge spillovers to local firms, while many Chi- nese firms are still perceived as technology laggards whose acquisitions in advanced economies are used to improve their technological strength. Differences in technological capabilities of U.S. and Chinese MNEs partially explain the more liberalism-based pol- icies in China designed to attract U.S. high-tech MNEs and the more realism-based policies in the United States intended to discourage Chinese high-tech MNEs in the United States. Thus, MNEs’ technologi- cal resources and capabilities remain critical sources of bargaining power over the host government in a world characterized by more realism. Such resources and capabilities can increase the effectiveness of cor- porate diplomacy efforts to secure a favorable busi- ness environment while buffering themselves from adverse regulatory changes. Distance and defiance strategies to address LOR. Another understudied strategy that can poten- tially alleviate an MNE’s LOR and help maintain its legitimacy in a host country is for the MNE to keep some distance from its home government. For exam- ple, an MNE can avoid obtaining contracts and subsi- dies provided by the home government. In an extreme case, a defiance strategy can be employed. Defiance refers to an MNE’s efforts to attack, challenge, or dis- miss the demands of a stakeholder (Oliver, 1991). In our context, MNEs can defy the home-country stake- holder’s demands to bridge legitimacy gaps with host- country stakeholders. However, this strategy may put MNEs at risk of losing legitimacy at home. An exam- ple of defiance is Ericsson’s public disagreement with the Swedish government’s decision to ban Huawei from Sweden’s telecom network (Woo, 2021). After the Swedish government’s decision, Ericsson faced an LOR in China as the Chinese government was con- templating restricting Ericsson in China. Ericsson’s defiance strategy may ear Perspectives T I C L E DIPLOMACY IN THE AGE OF U.S.–CHINA RIVALRY JING LI DANIEL SHAPIRO Simon Fraser University MIKE W. PENG University of Texas at Dallas ANASTASIA UFIMTSEVA Asia Pacific Foundation of Canada is arguably one of the most significant challenges to the existing Responding to calls for an integrated approach to geopolitics we employ interdisciplinary insights from international business, and nonmarket strategy to explore how the rap- environment rooted in the U.S.–China rivalry affects cor- of multinational enterprises. We define corporate diplomacy as of firms that respond to and shape country diplomacy and We (a) examine how the U.S.–China rivalry has led to a diplomacy away from liberalism and toward realism, (b) eval- of that transition for corporate diplomacy, and (c) to assess corporate diplomacy under realism through the dual realism and institutional multiplicity. Specifically, firms must gaps (multilateral level), contradictory stakeholder level), a liability of origin (in the host country), and the rising with national security priorities (at home). We show that world rooted more heavily in realism, active corporate important. Unit, 2022; Hass, 2020; Ikenberry, 2008; Mastro, 2019; Prestowitz, 2021; Walt, 2021). Although the recent conflict between Russia and Ukraine may suggest that Russia represents a significant chal- lenge to the U.S.-led liberal world order, the U.S.–China rivalry is seen by the U.S. government as the most unique and the most formidable dynamic shaping a new world order (Blinken, 2022). Relative to Russia, China has developed the economic and technological capabilities to in- creasingly challenge the United States and has at the same time become more integrated into the world economy (Grosse, Gamso, & Nelson, 2021; Larson, 2020; Nye, 2020; Teece, 2020). Thus, the economic and political challenges posed by the U.S.–China 1007 rights reserved. Contents may not be copied, emailed, posted to a listserv, or otherwise transmitted without the copyright holder's express or email articles for individual use only. Academy of Management Perspectives November country’s foreign policies can be based on realism, liberalism, and constructivism, but the weights given to each approach vary across issues, countries, and time. We use this perspective to explain why and how the U.S.–China rivalry leads to the increasing adoption of foreign policies based on realism in both countries. Realist policies are designed to increase one’s own power and influence, while diminishing that of the rival country. We also discuss competition between the United States and China in terms of alli- ance building, a subject that is clearly of relevance to the ongoing Russia–Ukraine conflict and the posi- tions taken by the United States and China with respect to the conflict. We employ elements of NMS to illustrate that, in general, traditional corporate diplomacy strategies employed in a liberal world order may become less effective under realism. We then provide a more fine-grained assessment of corporate diplomacy issues under realism by exploring how realism adds substantial complexity to the institutional environments in which MNEs operate. We rely on the recent survey of international NMS by Sun et al. (2021), who suggested that MNEs face institutional multiplicity in the international nonmarket environment. Accordingly, we empha- size the contextual complexity faced by MNEs and identify the main corporate diplomacy issues and options under realism at each institutional level. Using the dual lens of geopolitical realism and insti- tutional multiplicity, we show that although the nature of corporate diplomacy is different and complex under realism, its importance as a strategy remains sig- nificant. At the multilateral level, we focus on the role of MNE corporate diplomacy in the creation of gover- nance rules among countries that share common val- ues and interests. At the bilateral level, we consider corporate diplomacy strategies to navigate conflict- ing stakeholder pressures and legitimacy challenges brought on by the U.S.–China rivalry. At the host country level, we focus on the increased liability of origin under realism and the strategies used to respond to it. At the home country level, we consider the increasing importance of the home country and the ability of MNEs to influence home government polices by aligning with the home government’s national security priorities. Our article therefore responds to calls for an inte- grated approach to geopolitics and corporate strat- egy, and contributes to both research and managerial practice. First, we propose a definition of corporate diplomacy that is consistent with an integrated view of geopolitics and corporate strategy and use it to illustrate the broad effects of a world more rooted in Li, Shapiro, Peng, and Ufimtseva 1009 FIGURE 1 Diplomacy of Multinational Enterprises (MNEs) Country 2 Diplomacy International (defined by economic and Relations national security policies) Country diplomacy and international relations can be based on: realism liberalism constructivism MNE Corporate Diplomacy (political and social) strategies that both respond to and influence country diplomacy and international relations relations, but also country-to-firm relations (Stop- ford & Strange, 1991). In fact, country diplomacy and IR have evolved toward a model that requires the nation-state to engage cooperatively with a wider set of stakeholders, including multilateral institutions, nongovernmental organizations (NGOs), and MNEs (Boddewyn & Doh, 2011; Dunning, 1998; Stengel & Baumann, 2017). Therefore, MNEs can be perceived as international actors in an evolving system, and their behavior is shaped by and potentially shapes country policies and IR (Burmester, 2021). Our definition of corporate diplomacy is MNE nonmarket (political and social) strategies that both respond to and shape country diplomacy and inter- national relations. As Doh, Dahan, and Casarion (2022) pointed out, there is no accepted definition of corporate diplomacy in the literature.2 Our defini- tion identifies corporate diplomacy as a subset of NMS and provides an explicit link between country diplomacy and corporate diplomacy. Doh et al. (2022: 2) also suggested that much of the corporate diplomacy literature has no theoretical lens and that poli- 2 Doh et al. (2022) preferred the term “international business diplomacy.” Because of our explicit link to country diplomacy, we prefer “corporate diplomacy.” Academy of Management Perspectives November In sum, our approach connects the multidiscipli- nary literature on country diplomacy and corporate diplomacy and emphasizes their coevolution. Below, we first examine the evolving international political environment facing MNEs because of China’s rise and the increasing U.S.–China rivalry, before we discuss the implications of this for MNE corporate diplomacy. s DYNAMICS IN COUNTRY DIPLOMACY AND INTERNATIONAL RELATIONS We employ IR theories (realism, liberalism, and constructivism) to understand country diplomacy (Snyder, 2004; Walt, 1998). Realism-based theories focus primarily on the balance of power and on a country’s actions to enhance national security by expanding its sphere of influence to counterbalance or dominate others, either responding to or creating diplomatic tensions (Lobell, 2017; Waltz, 2010). Real- ism, therefore, gives prominence to state actors and national security. By contrast, liberal theories empha- size mechanisms to mitigate international conflict by promoting liberal values (e.g., free markets and democracy), economic interdependence among coun- tries, and intergovernmental institutions that create and align rules (Keohane & Nye, 1987). Under lib- eralism, the scope of actors expands beyond the nation-state to include international institutions and nonstate actors (including firms), connected through economic ties. The constructivist view focuses on the creation of shared and collective values (including cultural and social norms) and suggests that collaboration is more likely when countries share norms and values (Rousseau & Garcia-Retamero, 2007). More emphasis is placed on collective action among various nation-state and nonstate actors (including MNEs and NGOs). Country diplomacy can rest on realism, liberalism, constructivism—or a combination of them. Whereas realism-based policies reflect or create international tensions, liberalism-based or constructivism-based policies reduce tensions through collaboration between countries (Walt, 1998). For example, real- ism helps to explain the Cold War period charac- terized by a hegemonic rivalry between the United States and the Soviet Union. Liberalism and con- structivism largely explain the liberal world order following the demise of the Soviet Union, which was characterized by global economic agreements and multilateral institutions, together with convergence on a rules-based order and shared values (free mar- kets and democracy), led by a dominant hegemonic power. Li, Shapiro, Peng, and Ufimtseva 1011 direct investment (FDI) restrictions that the United States has employed to enlarge the screening power of its government agencies (e.g., the Committee for world Foreign Investment in the United States [CFIUS]) to IR theory: prevent Chinese firms’ use of critical U.S. technologies or acquisition of U.S. technology companies. These ly policies are designed to protect U.S. global technology leadership and contain a rival’s ability to catch up. Such policies are sometimes called techno-nationalist policies and are based on the increasing conflation of economic and national security goals (Capri, 2020; Farrell & Newman, 2019; Luo, 2022; Mastro, 2019). Although the use of realism-based policies increased substantially during the Trump administration, there has been continuing and growing strategic competi- tion between the United States and China on eco- nomic, national security, and ideological or political grounds for some time (U.S.–China Economic and Security Review Commission, 2020). Although the more liberalism-based view of the Clinton administra- tion led to the admission of China to the World Trade Organization (WTO) in 2001, a more realism-based approach by the United States toward China began under the Obama administration and its “Pivot to Asia” strategy. This approach was intensified in the Trump era with a series of policies to confront China.4 This approach has continued under Biden (Ashbee & Hurst, 2021). To balance the power and influence of China, Biden has initiated or supported new ini- tiatives such as the Indo-Pacific Economic Frame- work for Prosperity (IPEF), the G7 Panel on Economic Resilience, the European Union (EU)–U.S. Trade and Technology Council (TTC), the Initiative for Demo- cratic Renewal (a summit), and the Australia–U.K.– U.S. security alliance. Such continuity of U.S. policies toward China suggests that the U.S.–China rivalry will likely persist in the near future, and represents a funda- mental shift in the geopolitical environment for MNEs. The competing hegemons can also engage in alliance-building activities to increase their spheres 4 The economic policies include a trade war with China in 2018 and 2019, the expansion of U.S. investment screening provisions under the Foreign Investment Risk Review Modernization Act in 2018, and the addition of over 100 Chinese companies to the Entity List from 2017 to 2019 (Gibson Dunn, 2020; McKinnon & Bender, 2020). Moreover, the United States launched a global economic initiative called the Blue Dot Network Initiative with Australia and Japan in 2019 to compete directly with the China-led Belt and Road Initiative (BRI). On the military front, Trump revived military alliances in the Asia Pacific, such as re-establishing the Quadrilateral Security Dia- logue in 2017. Academy of Management Perspectives November FIGURE 2 China and a World Rooted More Heavily in Realism United States National security and economic concerns about China both increase and reinforce each other and are United Kingdom amplified by value differences. Canada Realism-based policies Australia dominate in relation to China. New Zealand These are liberal market economies and members of EU the “Five Eyes” intelligence Economic relations with alliance with the United States. A mix China (liberalism-based of liberalism- and realism- policies) dominate EU based policies. diplomacy toward China, but value differences may limit scope of agreement. Japan South Korea ASEAN Despite national security concerns, Asian countries Russia) benefit from pursue economic relationships China and focus on commercial with China. Liberalism-based others) share China’s concerns policies (e.g., RCEP) separated dominated institutions, which from national security concerns. National security concerns regarding China that have signed onto China’s Belt and Road Initiative; RCEP, Regional Comprehensive Economic low tolerance for state support and industrial policies that characterize China’s economic models. Diffusion of realism-based policies, however, may be limited by the economic relations between a country and China. For example, economic consid- erations (rather than national security issues) have played an important role in the EU’s diplomacy toward China and, as a result, the EU is relatively more inclined than the United States to favor liberalism-based policies toward China.5 Despite security concerns, many countries in the Association of Southeast Asian Nations are also dependent on China in terms of trade and investment and thus tend to adopt liberalism-based policies toward China through trade agreements, such as the Regional Com- prehensive Economic Partnership (RCEP). At the same time, many countries in the developing world, States as 5 As of this writing, the EU is reconsidering its national security and military situation in light of the Russia– Ukraine conflict, but it remains to be seen how this may affect the EU’s relationship with China. Li, Shapiro, Peng, and Ufimtseva 1013 CORPORATE DIPLOMACY IN A WORLD ROOTED MORE HEAVILY IN REALISM influence Table 1 provides a summary of different IR per- a diffusion of spectives and highlights the ways in which a world order more weighted toward realism challenges the nature and effectiveness of traditional corporate but also diplomacy strategies. We subsequently dive deeper coun- to provide a more nuanced assessment of corporate diplomacy issues under geopolitical realism and institutional multiplicity. Our analysis builds on and extends the NMS liter- ature to understand corporate diplomacy in a chang- ing geopolitical environment. Following Mellahi et al. (2016), we distinguish between two central mechanisms—bridging and buffering—through which NMS affects firm performance. Firms bridge with the nonmarket environment by adapting organizational activities to conform with external regulatory or social expectations (Meznar & Nigh, 1995). In contrast, firms resort to buffering strategies to insulate themselves from external interference or to influence the environments to their advantage (Meznar & Nigh, 1995). The distinction between bridging and buffering is similar to that of compliance and influence in Oliver and Holzinger (2008). The distinction between bridging/compliance and buffering/influence strategies is compatible with our coevolutionary perspective that focuses on how the external environment shapes and is shaped by corporate diplomacy. We also follow NMS studies relying on multiple theoretical lenses (Mellahi et al., 2016; Sun et al., 2021). Specifically, we primarily employ institutional theory—especially a legitimacy- based perspective—to understand the new challenges and opportunities for corporate diplomacy of MNEs. We also adopt a resource-based view (RBV) and resource dependence theory (RDT) at times to under- stand the heterogeneities among MNEs in their cor- porate diplomacy options and effectiveness under realism. Table 1 provides an overview of the challenges for bridging and buffering strategies of MNEs when the world transitions from being based more on liberal- ism or constructivism to being based more on real- ism. Prior research on corporate diplomacy has typically been positioned against the background of a liberal world order in which liberal and construc- tivist views prevail (Nye & Keohane, 1971; Teece, 2020). Liberal rules and values are diffused widely among countries through intergovernmental institu- tions and international agreements (Drezner, 2001; Henisz, Zelner, & Guillen, 2005; Simmons & Elkins, 2004). Against such a background, it is not surprising Academy of Management Perspectives November TABLE 1 in Realism Challenges Traditional Corporate Diplomacy Constructivism Realism 1. Pursue global 1. Self-interested nation-states increase their cooperation to promote sphere of influence relative to competitor common values and countries. provide global public 2. New world order dominated by the U.S.–China goods (environment, rivalry and efforts to increase their sphere of public health). influence. 2. Issues include how to 3. Issues are largely focused on national security, define and pursue increasingly linked to technology. common values or global public goods. of MNEs ensure compliance 1. Realism disrupts the global diffusion of values liberal economic rules and value and rules. Thus, using bridging or compliance MNEs and stakeholders from strategies to achieve legitimacy on a global basis becomes more difficult for MNEs. strategies may create 2. When realism results in military conflict, a global basis for MNEs as common corporate diplomacy is limited to decisions (e.g., liberal economic rules) and regarding divestment and degree of compliance (e.g., United Nations Sustainability with the home country. Goals) are diffused widely institutions and international are focused on influencing host 1. Nation-state becomes a more important adopt liberalized trade or stakeholder, particularly on issues of national Such influence can be security, and in these areas MNE influence in liberal economic order. the host market likely diminishes and corporate diplomacy may become more limited to compliance. 2. Influence in home markets may increase if MNEs can support home country national security and economic goals, particularly in the case of conflict. governance, defined by more narrow criteria such as common geography or values, may emerge and grow (Kobrin, 2015). At the same time, as rules and values are increas- ingly linked to national security under realism, the host government becomes more hostile toward MNEs from a rival country. When the host country favors liberalism-based policies, MNEs may exert influence by lobbying the host government to remove unfavor- able regulations or to join rules-based international trade or investment agreements (Curran & Eckhardt, 2018; Kim & Osgood, 2019). However, under realism, MNEs’ influence in the rival host country may be diminished, and corporate diplomacy may become limited to compliance with the host country rules. Our view that under realism MNEs exert less influ- ence in the host country receives support from recent studies on corporate diplomacy of foreign MNEs in Russia. Yakovlev, Freinkman, and Ershova (2018) illustrated how in Russia the “security cabinet” Li, Shapiro, Peng, and Ufimtseva 1015 shared values or shared interests (Benedict, 2015; Pisani-Ferry, 2018). The latter can include a variety of activities in which MNEs participate. These range from implementation of the UNSDGs (Van Tulder, Rodrigues, Mirza, & Sexmith, 2021), to the creation of global standards such as the Global Reporting Ini- tiative (Barkemeyer, Preuss, & Lee, 2015), to the pro- vision of global public goods in response to climate change, such as the Montreal Protocol on ozone depletion. Thus, MNEs can contribute to global gov- ernance, often in collaboration with nation-states and other nonstate actors (Eberlein, 2019). A world increasingly rooted in realism empha- sizes hegemonic rivalry and a zero-sum mindset, and highlights differences in values and rules. From a business ethics perspective, Donaldson and Dunfee (1994) pointed to the importance of macro-social contracts that provide a set of universal principles (hyper-norms), that transcend individual communi- ties or countries, and that apply to all. However, where there are strong value differences across coun- tries, there may not be agreement about the hyper- norms. Thus, it becomes more difficult for rival countries to agree on and diffuse common rules and values or to engage in collective action to provide global public goods.6 As a result, the U.S.–China rivalry may aggravate global governance gaps in areas that concern national security (e.g., digital technologies and critical minerals), where there are fundamental value differences (e.g., human rights), and where a global agreement on collective action to address global challenges is critical (e.g., climate change and global health). Thus, in these areas, global governance becomes contested, likely result- ing in a minilateral world defined by common inter- ests or values (Kobrin, 2015). Corporate buffering actions to influence minilat- eral governance. Prior studies have suggested that firms become more politically active when govern- ment institutions are weak, so that firms begin to take on tasks normally associated with the govern- ment (Scherer & Palazzo, 2011). These studies, how- ever, have typically not specified the nature of the international environment, and the governance gaps in these studies have been mainly caused by weak country institutions rather than by international rivalry and realism-based country diplomacy. Thus, we call for more research on corporate buffering 6 This becomes a variation of the “Kindleberger Trap” (Nye, 2017), whereby hegemonic rivalry can reduce col- lective actions to provide global public goods. Academy of Management Perspectives November TABLE 2 under Geopolitical Realism and Institutional Multiplicity Bilateral Level: Stakeholder Home Country: and Legitimacy Host Country: Alignment with National Liability of Origin (LOR) Security Priorities Is More Issues Increase Under Realism Important Under Realism MNEs can choose between 1. Under realism, legitimacy 1. Corporate influence on the compliance with one challenges for MNEs are home government (or its country or partial increasingly related to where allies) can be significant with both rival the MNEs are from. when MNEs align 2. American or European themselves with the national partnerships MNEs appear to face lower security goals of the LOR in China than the level government. with both rivals. of LOR faced by Chinese 2. MNEs can exercise their choosing a partner, MNEs in the United States corporate diplomacy to should take a holistic and its allies. MNEs’ benefit from and shape their technological resources and home country’s industrial expectations in capabilities remain critical policies or global initiatives. sources of bargaining power 3. MNEs can employ 3. When corporate compliance over the host government. realism-based national 3. MNEs may use distance and security arguments to in one country defiance strategies to address advocate for new policies or to legitimacy losses in LOR. Whether to use such to delegitimize their rival country, MNEs can strategies depends on both competitors from the rival increase CSR institutional arrangements in country. in the rival the home country and 4. MNEs from third countries firm-level characteristics. face the question of whether only what firms “do,” 4. CPA is less likely to generate and how to exercise their also symbolic actions positive outcomes in the corporate diplomacy to as what they “say” or host market. MNEs may influence their home instead conduct more CSR government’s decisions geopolitical activities to supplement or about whether (and in what and legitimacy even replace CPA in order to areas) to strengthen ties with earn political legitimacy in the United States or China, the host country. or to remain independent. from rival countries and allies can exert any influ- ence at all. A good case to illustrate our view on minilateral governance regards norms and standards for digital technologies. As digital technologies are increas- ingly associated with national security, hegemonic rival countries are more inclined to establish their own standards and norms among like-minded coun- tries. As discussed earlier, the United States and the EU recently established TTC to align policies on reg- ulations and standards for new technologies and to promote democratic values (Michaels, 2021). China has launched its Digital Silk Road (DSR) aimed at improving recipient countries’ digital infrastructure, which can shape digital standards in countries that embrace the DSR (Ghiasy & Krishnamurthy, 2021). Under these conditions, MNEs are more likely to concentrate their corporate diplomacy efforts in the home country and its allies to develop norms and Li, Shapiro, Peng, and Ufimtseva 1017 through collective action, in supporting interna- tional agreements (Ballor & Yildirim, 2020; Curran & Eckhardt, 2018, 2020; Kim & Milner, 2021). We have suggested so far that more minilateral governance will appear in areas that feature intense strategic competition and value differences between the incumbent hegemon, the United States, and the rising power, China. What about the prospect for global governance and the role of MNEs in areas, such as climate change, where the rival countries may share similar values and demonstrate a willing- ness to cooperate? Theoretically, there may be more room in these areas for MNEs to leverage corporate diplomacy to facilitate constructivism-based global governance. However, because climate change can be closely related to technology and innovation, cli- mate change may be viewed as linked to national security, thus limiting its application as a common or universal value. In other words, realism-based country policies may still dominate in the area of cli- mate change, and thus understanding the coevolution of country and corporate diplomacy is necessary to examine the role of MNEs in shaping global gover- nance on climate change. Similar concerns may apply in the area of global health (Almeida, 2020; Ruckert, Labonte, Lencucha, Runnels, & Gagnon, 2016). understand Bilateral Level: Contradictory Stakeholder Pressures, Legitimacy Dilemmas, and Corporate Diplomacy China insists Under realism, stakeholders from rival countries may have contradictory demands and expectations of MNEs, resulting in legitimacy dilemmas in their cor- porate diplomacy activities. In other words, actions satisfying stakeholders in one country may enhance the legitimacy of an MNE in that country, but may lead to the withdrawal of legitimacy by stakeholders in another country (Stevens, Xie, & Peng, 2016). A case in point is the recent backlash faced by retailer H&M (and others) in China over the decision to end relationships with suppliers in Xinjiang over labor rights issues (Shepherd, 2021). In contrast, Muji, a Japanese MNE that expressed its support for using suppliers from Xinjiang, may encounter legitimacy challenges in countries other than China (Fujikawa, 2021). The source of the dilemma is the different per- spectives on human rights held by China and the Western powers. Although the decision is about a market relationship with a supplier, this decision is also an element of corporate diplomacy because it affects firms’ legitimacy in the eyes of the stakehold- ers in different countries. The two examples show Academy of Management Perspectives November compliance with Rival 2. Recent exits of some U.S. and European firms from Russia amid the Russia–Ukraine conflict illustrate this point (Cutter, Glazer, & Maloney, 2022). Note that when strong government pressures are in the form of laws and regulations, corporate diplomacy is often limited to full compliance. Exam- ples include some U.S. MNEs’ decisions to exclude suppliers from Xinjiang in their supply chains in response to the United States’ Uyghur Forced Labor Prevention Act, and the Chinese ride-hailing com- pany Didi’s decision to delist from the New York Stock Exchange to comply with China’s national security law (Lin, Xiao, & Kubota, 2021; Lu, 2022). Second, MNEs’ resource dependence on each rival country is likely another key determinant of full ver- sus partial compliance strategy, because their resource dependence may affect their sensitivity to achieving legitimacy in the eyes of the stakeholders in each country. While a strong resource dependence on one rival country likely leads to full compliance with this country, a strong dependence on both countries likely leads to corporate diplomacy efforts aiming to achieve partial compliance with both countries. Anecdotal evidence illustrates both types of bridging strategies. For example, when under competing pressures from the Western and Chinese governments about whether to endorse China’s new national security laws in Hong Kong, HSBC, a British bank that operates in Hong Kong, chose to endorse the law and comply with the Chinese government’s requirements (Riordan, 2020). HSBC’s full compliance strategy with China is proba- bly driven by its dependence on the Chinese market and its desire to ensure access to critical resources con- trolled by the Chinese government. Such a strategy, however, will likely lead to legitimacy losses in the eyes of stakeholders that oppose China’s national security laws on Hong Kong. MNEs such as Apple, Ericsson, and Tesla instead seek partial compliance with both rival countries because of the importance of the markets in both the United States and China for these companies. Future research can combine RDT with a legitimacy-based view to understand which MNEs choose the full versus partial compliance strate- gies and what the performance consequences are for MNEs’ businesses in the rival countries. Partial compliance with both rival countries is challenging but may be achieved through interna- tional partnerships, as illustrated by some actions of high-tech MNEs in dealing with conflicting govern- ment demands. Given the competing pressures of the Chinese and U.S. governments on data sharing (with the Chinese national security law demanding MNE compliance with government requests for data Li, Shapiro, Peng, and Ufimtseva 1019 firm may simultaneously increase its CSR activities at home. Similarly, when a firm’s compliance with home-government legal requirements results in legiti- macy losses in the host country, the firm can also engage in more CSR activities in the host country as a hoped-for solution to address such losses. Unlike prior studies that have focused on the complementary rela- tionship between CPA and CSR activities in a one- country setting, future research should explore this relationship in a cross-border context. Rhetorical corporate diplomacy strategies. The discussion above focuses on what firms “do” to navi- gate bilateral tensions and legitimacy dilemmas. Li, Xia, Zajac, and Lin (2022) suggested that symbolic actions such as what firms say or do not say also mat- ters in addressing geopolitical tensions and legiti- macy challenges. Indeed, the more a particular company relies on external institutions for its legiti- macy, the more important these rhetorical displays become (Meyer & Rowan, 1977). Li et al. (2022) sug- gested that firms may choose between active rhetori- cal support for a policy (i.e., rhetorical commitment) or rhetorical avoidance whereby they do not openly express such support. While rhetorical commitment to a home government’s foreign policy may increase an MNE’s legitimacy in the eyes of the home government, it may also lead to legitimacy deficits in countries whose governments oppose the home government’s policy. Thus, when achieving legitimacy in both sets of countries is important, MNEs may choose rhetori- cal avoidance. Recent anecdotal evidence has suggested that cor- porate rhetoric varies among MNEs with respect to their positions on Russia. Both rhetorical commitment and avoidance have been observed. Some MNEs, such as BP, openly expressed opposition to Russia’s actions in Ukraine, demonstrating support for their home country’s foreign policy (Strasburg, 2022). By contrast, while curtailing business in Russia, Chinese technol- ogy companies Lenovo and Xiaomi have avoided mak- ing public statements about either the war or their country may operations in Russia (Strumpf, 2022). country. Our Moreover, MNEs may engage in neither rhetorical legitimacy in commitment nor avoidance regarding foreign poli- strength- cies. Instead, MNEs may adopt a rhetoric emphasiz- ing corporate principles and attempting to separate on the com- business decisions from geopolitical tensions. For example, Chinese drone maker DJI made the follow- be useful to ing public statement justifying its suspensions of business in both Russia and Ukraine: DJI has taken this action not to make a statement about any country, but to make a statement about our Academy of Management Perspectives November whether to join a specific minilateral alliance led by the United States or China. In general, we expect MNEs from third countries to increase their corpo- rate diplomacy activities, especially CPA, in both the rival countries and their home country to navigate the U.S.–China rivalry. Diplomatic roles of MNEs to alleviate bilateral tensions. Under realism, bilateral diplomatic inter- actions are sometimes limited. MNEs, with opera- tions in the rival countries, may serve as diplomatic middlemen that facilitate international communica- tions and even collaborations between governments. MNEs can potentially serve as peacemakers in coun- tries marked by tensions or unrest (Westermann- Behaylo, Rehbein, & Fort, 2015). Friedman (2005), for example, suggested a Dell theory of peace: two countries that are both a part of a major global supply chain, like Dell’s, are less inclined to fight a war against each other. The recent vaccine arrangement between Foxconn and TSMC (two Taiwanese MNEs) and Fosun (a Chi- nese MNE) illustrates the diplomatic role of MNEs in facilitating economic exchanges when governments cannot (Hille, 2021). Specifically, the dispute over Tai- wanese sovereignty had prevented the Taiwanese gov- ernment from purchasing vaccines directly from the German company BioNTech. Foxconn and TSMC purchased the vaccines from Fosun (which controls the distribution rights of BioNTech vaccines in Greater China) and then donated them to the Taiwanese gov- ernment. Prior studies have shown that a country’s diplomatic networks can serve as bridges facilitating MNEs’ international investments (Li, Meyer, Zhang, & Ding, 2018). Future research can further examine how MNEs’ international networks can help to overcome diplomatic impasses or help to improve diplomatic relations under realism. Such actions of MNEs can contribute to the accumulation of political goodwill and earn them legitimacy in both home and host coun- tries, which may lead to long-term positive perfor- mance consequences in both countries. Research on corporate diplomacy of MNEs in Rus- sia has shed light on the boundary conditions for MNEs to act as corporate diplomats. There is evi- dence that the relationships of trust between MNEs from countries with diplomatic tensions (European and Russian MNEs in the energy sector) played a positive role in facilitating diplomatic collaboration and economic exchange between the countries, espe- cially during geopolitical crises (Abdelal, 2015). In recent years, there were emerging coalitions between foreign and Russian firms (as demonstrated by domestic firms joining foreign business associations Li, Shapiro, Peng, and Ufimtseva 1021 threats posed by the MNEs from a specific home coun- try rather than on the MNEs’ compliance with the host country’s rules and norms. This is particularly the case when MNEs from the rival country are operating in industries critical to the national security of the host country (Stevens et al., 2016). The distrust between the rival countries significantly reduces the effectiveness of corporate diplomacy. Corporate diplo- macy failures of most Chinese high-tech MNEs—such as Huawei in the advanced economies, particularly the United States—illustrate this point (Maizland & Chatzky, 2020). Extensive research has been conducted on the lia- bility of state ownership, which is the legitimacy def- icit faced by state-owned MNEs in a host country, and on the strategies they have adopted to overcome such deficits (Bruton, Peng, Ahlstrom, Stan, & Xu, 2015; Cuervo-Cazurra, Inkpen, Musacchio, & Ram- aswamy, 2014; Sun et al., 2021). We expect that when a host country adopts realism-based policies toward a specific home country, legitimacy barriers faced by state-owned MNEs will be extended to pri- vate firms from the same home country as they face a common LOR. A good example to illustrate this point is that CFIUS has increased its scrutiny over Chinese buyers in general and become less inclined to distinguish among different types of Chinese buyers (e.g., state-owned versus private companies) for purposes of its “threat” profile assessments in mergers and acquisitions transac- tions (Mancuso, 2021). Thus, we expect that a shift in country diplomacy toward realism makes the legiti- macy challenges faced by MNEs, particularly those from China, more home-country-specific rather than ownership-specific. Asymmetries in LOR. Under realism, MNEs are likely to face an LOR when doing business in a rival country (Arikan & Shenkar, 2013). However, Chinese and U.S. MNEs appear to face asymmetric LOR in each other’s home country. Some U.S. MNEs have been able to deepen their engagement in both the United States and China and achieve legitimacy in both markets. For example, Tesla has won contracts and subsidies from the U.S. government while at the same time expanding a robust presence in China— having started its first major FDI project in China amid the trade war and supported by Chinese subsi- dies (Armental, 2019). We suggest that an MNE–host-government bar- gaining perspective is useful to understand the nature and extent of the asymmetry in LOR (Moon & Lado, 2000; Stopford & Strange, 1991). U.S. firms are often considered technology leaders that generate Academy of Management Perspectives November legitimacy in each market and thus its prioritization of stakeholder demands. Ericsson’s choice of the defiance strategy can be explained by the fact that its home country, Sweden, has a democratic political system that tolerates different political voices, and that China is important to Ericsson in terms of both revenues and technology learning. For example, Ericsson derived 8% of its revenue from China and 1% from Sweden in 2020, and, as Ericsson’s CEO emphasized, China is at the forefront of the 5G roll- out; thus, being shut out of the country implies missed opportunities in 5G learning (Woo, 2021). Overall, both institutional theory and RDT can be useful lenses for understanding MNEs’ choice of dis- tance and defiance strategies. Collective actions to address LOR. As MNEs from the same country of origin face some common challenges in the host country, it stands to reason that these MNEs may increasingly engage in collec- tive actions to address realism-based policies toward them. Through collective actions, MNEs may pool resources to form a common voice and avoid being individually targeted in a hostile host country. Stud- ies in Russia show that business associations were an important intermediary for collective actions of MNEs from the same home country (Holtbr€ ugge & Puck, 2009), and that the importance of business asso- ciations increased as tensions with the West grew (Yakovlev et al., 2018). We therefore also expect busi- ness associations to play a more critical role in corpo- rate diplomacy in a world increasingly characterized by realism. As an example of a compliance-based col- lective approach, the Russo–British Chamber of Com- merce successfully collaborated with the Russian government to develop specific mechanisms for Brit- ish MNEs to enforce the Law on Personal Data in Rus- sia that requires all personal data of Russian citizens to

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