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