Geopolitical tensions provide multinational corporations with diplomatic leverage, but ‘frenemy’ strategy can backfire

LAWRENCE – With increasing geopolitical tensions around the globe, multinational corporations (MNCs) face an unprecedented level of uncertainty in their business environments.

A University of Kansas professor's new study, titled “My Best Frenemy: A History-to-theory Approach to MNCs’ Corporate Diplomatic Activities,” seeks to unravel this issue.

“Our study provides lessons from history that share similar characteristics with a current situation,” said Minyoung Kim, the Frank T. Stockton Professor of Strategic Management at the KU School of Business. “In this light, our study illuminates not only the historical events we investigate but also their implications on issues we are witnessing today.”

Co-written by Marcelo Bucheli of University of Illinois Urbana-Champaign and Xavier Durán of University of the Andes in Colombia, the research shows how a multinational corporation can influence the diplomatic relationship between the host and the home country by acting as a diplomatic broker. However, this can backfire. If the MNC invests in site-specific assets in the host country after negotiating on the host country’s behalf, the host government can use these assets as “hostages” to pressure the MNC into negotiating on its behalf again in the multinational’s home country.

The research appears in the Journal of International Business Studies.

The global business environment has experienced a tectonic shift in recent years, entering into a new era of de-globalization and “slowbalization.” Geopolitical tensions and hostilities are among the outcomes of this new phase of globalization. 

“I was curious about the implications of this new era of globalization for business,” Kim said. “Specifically, I was curious whether it provides opportunities or challenges for MNCs. Then I encounter the historical case wherein MNCs implemented the corporate diplomatic activities to enjoy the opportunities from the geopolitical tensions but ended up becoming their own hostages.”

In order to examine the effects of such “frenemy” strategies, his team introduced the concept of corporate diplomatic activities (CDAs). These are defined as a set of political activities that MNCs develop and deploy to influence home and host countries’ diplomatic relations and, thereby, shape such relationships to benefit MNCs’ strategic goals.

As Kim cites in his paper, MNCs have employed CDAs for decades. For instance, during the 1959-1963 period following Ghanaian independence from British rule, the U.S. MNC Kaiser Industries used the firm’s political connections in Washington to facilitate development loans. 

A recent example of this, Kim wrote, includes cases that show how the more investments a U.S. MNC has in China, the higher the likelihood such a firm will lobby members of the U.S. government against American policies that limit China’s opportunities.

The historical study utilizes personal unpublished notes, secretly coded cables and memos not originally written for public distribution, Kim said.

Now in his 12th year at KU, Kim studies the intersection between strategic management and international business. He often focuses on how firms create value and how they appropriate the value they’ve created.

“Value creation refers to the size of the pie you create, and value appropriation refers to the size of the actual slice of the pie you take,” he said.

“Our study is another example highlighting the intertwined nature of value creation and value appropriation. That is, MNCs implemented the corporate diplomatic activities to create a large pie but did not enjoy it fully because they became the host country’s hostage and thus lost their bargaining power.”