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My research examines the interdependence between the foreign investment decisions of multinational corporations and the political and social environments in which they operate. Identifying and adapting to cross-national differences in the political and social environment are among the foremost challenges faced by managers of multinational firms. Strategies to influence those environments by winning the hearts and minds of pivotal external stakeholders can be even more challenging. The cumulative impact of such strategies by managers and the response by external stakeholders thereto impacts the evolution of the political and social environment in one country and across the international state system.



In developing theoretical arguments regarding these relationships, I draw from the disciplines of economics, political science, and sociology but consider myself a scholar of the interdisciplinary field of international business. My primary interest is not in development economics, international political economy, social movement theory or neo-institutional theory, though I draw from each of these research traditions. Rather, I seek to understand how managers of firms that differ in their costs and competencies and that span national political environments (1) react to the variation in the political environments in which they could currently operate; (2) seek to influence those political environments in real time; and, as a result, (3) shape the political environments in which they and their peers will operate in the future. I focus on explaining and providing insight into strategic decisions by managers who act with a profit motive, but with a severely limited understanding of the causal mechanisms that link their actions to economic outcomes in multiple political environments.




The performance of multinational firms is strongly influenced by their ability to identify the risks and opportunities in the political environments in which they operate and to craft strategies that influence policy outcomes in those environments. The global economic and financial crises of the late 1990s resurrected the interest of both academics and practitioners in political risk management. The optimism that characterized the early part of that decade regarding the inevitability of convergence between industrialized countries and those emerging markets that had adopted the basic principles of free-market economics foundered on the realization that the institutional supports for capitalism were more complex and context-specific than previously recognized. The more recent global financial crisis, continued rise of Chinese economic and political power and newfound global competition for access to natural resources have only heightened interest in the intersection of global strategy and the political and social environment.



That environment is an increasingly important driver of non-technical risks that can delay the opening of or disrupt the operations of facilities thereby reduing their financial performance. Estimates of the magnitude of incurred losses range enormously by industry, country and time period. Figures ranging from an 8 to 10 percent of total expected returns[1], or equivalent to a 33-46 percent increase in taxation, or a 13 percent increase in risk premium[2] are commonly cited. My own recent study of the market capitalization of 26 small independent gold mining companies with international operations found that political and social factors were roughly twice as important as the net present value of the gold the firms ostensibly controlled in predicting their market value.[3]


These unconventional risks are not easily hedged using financial instruments or mitigated by farsighted contracting. Given the strong dependence of realized outcomes on managers’ efforts and capabilities in identifying and managing political risk, the available insurance and financial instruments for protecting long-term foreign direct investment against future changes in the policy environment are sparse and extremely expensive. Each of these instruments also rationally leaves substantial residual risk with the investor that must be strategically managed.


The tools available to both managers and academics to design appropriate influence strategies, however, remain nascent. My efforts to enhance the sophistication of these strategies draw upon, contribute to and integrate relevant insights from multiple relevant disciplines and fields.

(1) While scholars in new institutional economics and positive political theory have long argued that the structure of political institutions can have strong effects on economic outcomes and scholars in mainstream economics increasingly accept this argument, empirical progress in demonstrating this linkage was for limited for some time by an atheoretical approach to measuring those political institutions. While theoretical arguments increasingly focused on the checks and balances present in a country’s political institutions as a primary determinant of investment and growth, researchers relied on measures that were orthogonal to this construct or subject to severe coding biases. In my dissertation research, I used spatial modeling tools developed in positive political theory to construct a new cross-national time-varying measure of the constraints faced by political actors in altering the policy environment. I used cross-national panel data to show that such political constraints are associated with reduced variability in policies, higher investment, and higher economic growth.


(2) The strategic management literature has long highlighted that firm-specific resources or capabilities may contribute to the existence of sustained performance heterogeneity but struggled to empirically identify that link given the presence of unobserved firm characteristics plausibly linked to firm-level measures of resources or capabilities and performance. A second segment of my research seeks to address this challenge by demonstrating that firm-specific experience in politically hazardous environments is linked to subsequent firm-level outcomes in other politically hazardous environments.


(3) Whereas scholars in new institutional economics and positive political theory highlight the importance of checks and balances as a constraint on policy change and scholars of interest groups highlight countervailing pressures for change, limited research links these perspectives. A third segment of my research examines the impact of competing interest group pressures within a given structure of checks and balances to influence the policymaking process to influence cross-national variation in policy outcomes.


(4)   As cross-border linkages continue to expand, scholars of comparative politics who examine the domestic pressures faced by national political actors to consider or adopt given policies are increasingly overlapping with scholars in international political economy and neo-institutional theory who examine how international pressures can alter policy outcomes. The actions of policymakers in other countries may offer cues as to appropriate behavior or experiences that can inform policy choice. Multilateral lenders can also influence domestic policy outcomes through their conditional lending practices. In my fourth research stream, these foreign pressures combine with domestic interest group pressures and political structures to influence the global pattern of policy adoption including half-measures such as ceremonial adoption, policy translation and retrenchment as well as abandonment.


(5)   Efforts to explain firm-level influence in international political environments and the impact of that influence on performance must draw on scholarship spanning each of these segments. My ongoing research demonstrates the powerful business case for sophisticated stakeholder engagement and identifies the components of best practice strategies in this increasingly critical area of international business. This work draws from and contributes to scholarship on non-market strategy, corporate social responsibility, sustainability and global strategy.


I review these five segments of research (depicted in Figure 1) in turn.

 (1) Political Constraints and National Economic Outcomes [1999-2004]


My interest in the strategic management of political risks and opportunities grew out of a long-standing interest in the political economy of policy reform. I studied international trade policy as an undergraduate; worked for the International Monetary Fund after completing an M.A. in International Relations at the Paul H. Nitze School of Advanced International Studies of Johns Hopkins University; and spent the summer after the first year of my doctoral studies conducting field research in New Zealand. My interest in each of these endeavors was in understanding the drivers of successful market-oriented reform.


What convinced my private sector interviewees in New Zealand that the next government would not renege on the radical reforms implemented in response to a financial crisis in 1984 was the redesign of New Zealand’s electoral system. They explained that opposition to the radical nature of the reforms led to a public outcry and an attempt to limit the concentration of power of subsequent governments. The electoral system was changed in a manner that promoted greater representation of diverse interests in Parliament and, as a result, coalition governments. Political actors subsequently faced greater difficulties in formulating new policy initiatives. Efforts to secure a change in policy had to gain the assent of actors from different political parties, frequently including those who represented different constituencies or who were driven by different ideologies. This change reduced the concentration of power held by subsequent government and “locked-in” current policies. To be sure, reforms encountered some difficulties,[4] were altered at the margin, and “softened” over time, but the fundamental thrust of the 1984 transformation of the New Zealand economy remains to this day.


In post-electoral reform New Zealand or in other countries characterized by checks and balances in national political institutions, the variability in future policies is lower than when political power is more concentrated. Reduced policy variability, like reduced inflation, reduces uncertainty thereby promoting investment, particularly of capital that is long-lived and difficult to redeploy. It also minimizes the extent to which such investments are motivated by a political rent-seeking calculus as opposed to an economic efficiency calculus, thus enhancing growth by increasing both the capital stock and the productivity of that capital.


To test these arguments empirically in a panel of countries with widely varying formal institutional structures, I developed a simple spatial model that incorporated information on the number of independent institutional actors with veto power over policy change and the heterogeneity of preferences within any institutional actor. By making some simplifying assumptions about the distribution of preferences, I was able to transform readily available data from political science databases into a cross-national time-varying measure of the feasibility of policy change in a country. The main results of the derivation, consistent with extant theory, are that (1) each additional veto point (a branch of government that is both constitutionally effective and controlled by a party different from other branches) provides a positive but diminishing effect on the total level of political constraints, and (2) homogeneity (or heterogeneity) of party preferences within an opposed (or aligned) branch of government is positively correlated with the level of political constraints. This political constraint index (POLCON) is featured in all of my empirical work, and the underlying theoretical arguments behind it are featured in my comparative and conceptual analyses as well.


Before using this measure to examine questions in the fields of international business, I assessed its validity by demonstrating that the Political Constraint Index is a statistically and economically significant determinant of economic growth.[5] A related article, coauthored with Bennet A. Zelner (University of Maryland), demonstrated that POLCON is also a robust determinant of cross-national variation in telecommunications investment.[6] To address concerns of left-censoring, a follow-on article extended the analysis backwards in time for telecommunications and electricity generation investment to the inception of these technologies (a period of 119 years).[7] In all three of these papers, the positive effect of POLCON is greater for countries with relatively lagging levels of output or investment. In a final paper in this stream, I identified one causal mechanism by which political constraints have a positive impact on growth and investment. Specifically, I demonstrated that cross-national variation in POLCON explains observed volatility in eight of nine different categories of fiscal spending and revenue.[8] I also found that the negative effect of POLCON on observed policy volatility is higher in the aftermath of a macroeconomic shock than in periods of economic stability.


(2) Political Constraints and Global Strategy [1999-2004]


In the next segment of my research, motivated by a desire to craft stronger linkages between my interest in political constraints and the broader management literature, I showed that the pressure for policy change emanating from the political environment does not have an equal impact on all firms. Multinational firms can insulate themselves from adverse changes in policy by adapting their investment strategies. Specifically, I demonstrated that the choice of which country to enter, what entry mode to choose for that entry, the sequence of entry type (e.g., a sales office versus a manufacturing plant) and the survival of those subsidiaries are all a function of both the political environment and firm-level characteristics that enhance the investing firm’s influence over policy outcomes. Political risk management capabilities were a specific form of a more general set of capabilities that contributed to sustained firm-level performance heterogeneity.


A firm’s asset profile, experience profile, and level of technological sophistication will each influence the observed reaction to and performance implications of political hazards.[9] Variation in each of these dimensions generates differences in the costs and benefits to a multinational firm’s partners, buyers, and suppliers (their counterparties) of opportunistic behavior. As the value of an asset in its next best use declines (e.g., a billion dollar investment in an immobile electrical generating plant, cellular license, or semiconductor fabrication facility) or can otherwise be rapidly depreciated (e.g., a patent or brand), multinational managers must assess the costs and benefits to counterparties of opportunistic behavior not only in the market but also in the policymaking process, where these counterparties could also seek to secure advantage. Suppliers can seek to renegotiate the price of fuel, the cost of installing cell towers, or wage rates directly and independently simply by threatening non-supply or indirectly, with the aid of the government, which can help them gain leverage in their bilateral negotiations.


The first two articles in this research stream demonstrated the firm-level variation in the impact of political hazards on the choice of entry mode. Prior literature in transaction cost economics and internalization theory in international business had argued that multinational firms are increasingly likely to choose a wholly owned subsidiary as contractual hazards (i.e., the incentives for opportunistic behavior by counterparties) increase. Prior literature in political risk management had argued that multinational firms are increasingly likely to choose a joint venture as political hazards increase. In a co-authored article, Oliver Williamson (University of California, Berkeley), the chair of my dissertation committee, and I explored the implications of combining these two theoretical arguments.[10] Our analysis uncovered important interdependencies among contractual and political hazards. As joint venture partners chosen to mitigate political hazards can use their influence with political actors in a manner that serves to magnify contractual hazards, it is insufficient to consider merely the level of contractual hazards and political hazards independently. Instead, we developed theoretical arguments and, in a subsequent sole-authored article, I presented empirical evidence that managers choosing between a joint venture and a wholly owned subsidiary for their operations consider not only contractual hazards or political hazards but also the extent to which the former magnify the latter.[11] 


In a series of six articles co-authored with Andrew Delios (National University of Singapore), we highlighted that not all multinational managers will be equally susceptible to political hazards or equally successful in influencing the policymaking process. We argued that, over time, managers operating in politically hazardous environments develop better routines for influencing that process. Specifically, managers’ ability to maintain incentive alignment not only with their counterparties but also with a broader class of political and economic actors that can support them in the policymaking process improves via experiential learning. Our first article considered the impact of political hazards on the choice of entry mode for a given country. We demonstrated that the sensitivity of a multinational firm to either political or contractual hazards declines in its relevant international or host-country experience.[12]


Our second article considers the antecedent decision of which country to enter.[13] As a multinational firm evaluates a host country as a potential target for a new manufacturing plant, its managers must grapple with substantial uncertainty. The organization’s existing knowledge and capabilities acquired in prior operations are imperfectly transferable to the potential host country. Managers must identify and adapt to differences in the organization of factor markets; the preferences of workers and local consumers; the formal and informal mechanisms for handling disputes with workers, buyers, suppliers, or the government; and the structure of policymaking within the government. In grappling with this uncertainty, managers can turn to various sources of information, including observing the behavior of their peers and learning through their own experience.


Prior literature in neo-institutional theory has long argued that in the face of uncertainty, managers are more likely to imitate their peers or draw lessons from their own prior experience in seemingly related contexts. Scholars have highlighted a variety of potential causal mechanisms underlying this relationship, including the social legitimacy conferred by conforming to widely or previously adopted practices and the informational cues inferred by surveying the past actions of firms with similar characteristics or one’s own past actions.


We tested this well-supported conditional relationship in the context of the decision by Japanese multinational firms to build a manufacturing plant in a foreign country. We extended prior work by examining the impact of peers’ prior behavior and prior related organizational experience under two different types of uncertainty: that specific to the multinational firm in the potential host country and that specific to the potential host country in which the multinational firm may invest. Our findings suggested that imitative strategies and information-based strategies, while helpful in mitigating firm-specific uncertainty, are of less help in mitigating policy uncertainty. One rationale for this finding is that the acquisition of information on the policymaking process can only reduce the range of uncertainty down to some lower bound determined by the country’s level of political hazards. Consequently, strategies for dealing with policy uncertainty can not exclusively rely on information acquisition. Instead, a firm also employs strategies that directly influence policy outcomes, such as allying with local firms.


These results contributed to neo-institutional theory by highlighting that the commonly invoked construct of uncertainty can be usefully separated into uncertainty specific to the firm and uncertainty specific to the potential market. To our knowledge, no prior empirical study had exploited variation in both of these sources of uncertainty. By taking advantage of this possibility in our international context, we were able to demonstrate that the conventional wisdom that imitative strategies are an effective response to uncertainty may not be generalizable to all forms of uncertainty but, rather, may be specific to uncertainty that is remediable through the accumulation of information. We also contributed to the political risk management literature by demonstrating the deterring effect of political hazards and the robustness of this effect to information gained from observing peers’ prior behavior or from a firm’s own experience in the potential host country. These findings suggest a need to identify mechanisms other than simple learning that lead some multinationals to be more or less sensitive to policy uncertainty.


In a follow-on third article, we demonstrated an important qualification to this result: multinational firms who have extensive international experience in other politically hazardous countries are less sensitive to the deterring effect of political hazards when evaluating a potential host country market.[14] Together, the results of these two articles suggest that (1) political hazards remain a strong deterrent for investment even in the face of other sources of information suggesting that a potential host-country market is attractive; and (2) multinational firms can, through accumulated experience in politically hazardous markets, develop the ability to identify and mitigate the negative effects of political hazards.


In our fourth article, we demonstrated that the conventional wisdom about the appropriate order of entry by multinational enterprises into a host country which argues for beginning with a sales office and escalating over time to higher commitment entry modes holds only for entries into countries with low political hazards.[15] In politically hazardous environments, by contrast, entry sequences eschew sales offices which may be seen as acts of competition with local suppliers or incumbent producers and could thus be more likely to incur the enmity of political or regulatory actors. Instead, entry sequences start with a manufacturing plant for export which generates politically popular jobs and hard currency earnings.


Our fifth article considered the determinants of survival of Japanese overseas subsidiaries. We exploited cross-national variation not just in political hazards but also in political regime change to ascertain that experienced firms that have higher survival rates in politically hazardous markets do so not because they have better information but rather stronger influence over host-country governments.[16] Delios and I have also published a conceptual overview of our joint work.[17]


In another article (co-authored with Jeffrey T. Macher, Georgetown University), we examined the choice by semiconductor manufacturers of where to build an overseas fabrication facility.[18] We found technologically advanced manufacturers, while attracted to technologically advanced nations, are unwilling to accept higher political hazards in return. By contrast, if their technologically lagging counterparts go to technologically sophisticated nations, they also tend to choose those nations that are politically hazardous  We surmised that these lagging firms are forced to take on the risk that they can reap the benefits of technological spillovers before adverse political events devalue their investment.


Unlike studies that identify experienced firms as more capable and thus better performers, these analyses are less vulnerable to the common critique that experience is confounded with unobserved firm heterogeneity because the relationships we posit are conditional ones. We argue that firms with certain types of experience will perform better or worse as a function of other independent variables. While unobserved firm heterogeneity remains an empirical problem with which we grapple, the strength and robustness of these conditional effects strongly suggest that our empirical constructs are, in fact, capturing relevant differences in capabilities to identify and manage political risk.


Two additional articles, two book chapters, and a working paper in this stream highlight the heterogeneity among multinational firms in their ability to protect and generate value through the strategic management of political risks and opportunities.[19]


(3) Domestic Pressures, Political Constraints and National Economic Outcomes [2004-2006]


While the policy stability created by stronger political constraints was clearly an important element of the policy environment of interest to investors and managers, I increasingly also recognized the importance of policy change that supported private sector investment and innovation particularly in state-dominated or regulated countries or sectors. As a result, I sought to expand the political environment in my research to encompass not only the strength of the constraints in the current policymaking process but also the relative strength of the key political and economic actors that seek to influence that process.[20]


Zelner and I explored the relationship between national political constraints and the strength of the industrial consumers of electricity on investment by 78 state-owned electricity generation companies over the period 1970-94.[21] We demonstrated that industrial users are able to successfully lobby the government to reduce overinvestment or the inefficient use of existing investments by state-owned enterprises, for which they pay disproportionately. We also showed that the relative success of industrial users in securing their desired policy outcome is a function of the political constraints in the policymaking process. When political constraints are high, industrial users are less successful in reducing overinvestment. In two conceptually related papers, I examined the impact of political institutions and interest-group pressures on trade policy. In the first article, I emphasized the importance of sustained macroeconomic and social progress for sustained liberalization of trade policies.[22] In a second co-authored paper, Edward Mansfield (University of Pennsylvania) and I found that unemployment serves as a powerful force to limit the expansion of free trade or even impose protectionist policies in a panel of 58 countries over the period 1980-2000 but this effect is moderated by national political constraints.[23] Another co-authored paper with Zelner analyzed multinational firms’ preferences about political governance as a function of domestic pressures and political constraints.[24]


(4) Domestic and Foreign Pressures, Political Constraints and National Economic Outcomes [2005-present]


Motivated by my perceptions of enormous potential complementarities between studies of policy adoption in comparative politics and international political economy that were my focus in the previous segment and in neo-institutional theory from which I had successfully drawn in my earlier research, I next sought to contribute to the ongoing development of interdisciplinary scholarship at the intersection of these fields. My first study in this stream (co-authored with Zelner and Mauro Guillen, University of Pennsylvania), studied the global diffusion of market-oriented infrastructure reform.[25] We demonstrated that peer adoption of structurally proximate or equivalent nations using measures developed in sociological studies of social networks and the conditional lending of multilateral institutions (e.g., the World Bank, International Monetary Fund, and Regional Development Banks) both had an important impact on policy adoption.


This research stream included a large field component in which Zelner and I interviewed over 300 managers, analysts, consultants, lawyers, regulators and politicians in the electricity and telecommunication sectors of 14 emerging markets over three years. In country after country, we listened to managers complain not about the lack of checks and balances in the national political institutions, but rather the power of the mob opposed to market-oriented reforms in infrastructure services, particularly those reforms that were perceived to be imposed by multilateral lenders (see [26] for a summary of the East Asian experience). Drawing upon this field work, Zelner and I offered an interdisciplinary framework to assess the sustainability of recently enacted policies.[27] Returning to the question that prompted my trip to New Zealand, we asked when can investors believe a government announcing a radical set of market-oriented reforms? Extending the analysis beyond the earlier insights into the importance of political constraints that dominate much of the policy literature to date, we provided a richer interdisciplinary framework in which new policies, in contrast to their more established counterparts, are not taken for granted but rather are evaluated based on the outcomes that they generate or the process by which they reach those outcomes. Given the cognitive limitations of the economic and political actors in the policymaking process, however, there is a large range of potential policy outcomes. The actual observed outcome is the result of the political battle among interest groups with a stake in the issue (investors, key classes of consumers, and those affected by any externalities) to gain the support of uninformed, unorganized, or unaffected interest groups who are needed to generate a coalition powerful enough to overturn the existing policy. This battle occurs within the structure of established political institutions that may limit the discretion of political actors to change the existing policy. Overall, relative to extant models of policymaking, our framework places a greater emphasis on history and perceptions of distributive or procedural justice by stakeholders that can rapidly generate strong domestic pressures for policy change.


In an empirical test of this framework (co-authored with Zelner and Guy Holburn at the Richard Ivey School of Business, University of Western Ontario), we examined the determinants of policy retrenchment -- the degree to which a government reinstates the objectives of a globally diffusing policy innovation’s predecessor without repealing the new policy to balance conflicting institutional forces.[28] Our study examines 801 private investments in electricity generation and telecommunication services in 62 countries from 1989 to 2001. We found that retrenchment is more likely when policy adoption occurred despite initial weak support for the policy innovation, contemporaneous political conflict occurs during the period of policy legitimation, foreign pressures to adopt recede or foreign pressures to retrench rise.


This paper made several contributions to the analysis of global policy diffusion. First, it built on recent developments that sought to combine the role of global legitimacy pressures that lead countries to adopt similar policies with national political forces that may constrain or enable such policy adoption. First, we drew upon media reported event data developed in international conflict studies to develop a measure of normative belief structures and cognitive constructs that make some countries more amenable to market-oriented reform. In countries where the media reports a higher degree of cooperation between actors outside of the government towards business enterprises, subsequent market-oriented reforms are more sustainable. Using a similarly derived measure of media reported conflict between domestic political actors, we were also able to identify the time sensitive role of domestic political contestation in triggering retrenchment. These domestic factors combine with time varying foreign pressure in so far as World Bank or International Monetary Fund exposure may ebb over time and foreign governments may themselves retrench. Our analysis of these domestic and foreign pressures highlighted mechanisms that lead to imperfect or incomplete adoption of globally diffusing policies and the possibility that some adoptions may be reversed in spirit. This outcome that we analyzed is itself an innovation to the literature adding to the existing policy outcomes of institutionalized adoption, ceremonial adoption (in which the policy has at most limited structural impact), translation (in which the policy is adapted from the onset of adoption) and abandonment.


We also offered important guidance to policymakers and investors regarding the temporal dynamics of market-oriented reform. Even if foreign pressure to adopt a policy is successful, the process of institutionalization of that policy has only begun. Excessive foreign pressure particularly in the presence of unusual leverage (e.g., due to a conditionality agreement with the World Bank or International Monetary Fund) may actually be a risk factor for long-term investment. Policies and strategies that meet equity objectives or follow the precepts of procedural justice may be necessary for these reforms to withstand the test of time. Welfare or project valuation analyses which ignore these dynamics and examine the initial few years after policy adoption could therefore generate erroneous conclusions leading to a cascade of ill-conceived policy recommendations and investment or strategic decisions. A related book chapter built upon these policy insights by probing more deeply into the historical parallels between the initial adoption of electricity generation in Latin America in the late 19th and early 20th centuries and the more recent cycle of policy reform to generate insight into these policy dynamics.[29] Another related study highlights the negative impact on public good provision of concentrations of domestic political and foreign economic power.[30]


In recently published paper also in this stream (co-authored with my first doctoral advisee Srividya Jandhyala and Mansfield), we developed the theoretical basis and empirical evidence for a three stage model of global policy diffusion in the context of Bilateral Investment Treaties (BITs).[31] In the first stage, BITs are adopted by pairs of countries who perceive them to be of greatest potential use in stimulating foreign direct investment. Later, they take on a symbolic role as an appropriate policy for countries who wish to signal their market orientation or openness to foreigners. In this stage, the patterns of signatories shifts markedly away from dyads that link a capital exporting country to a capital importer (e.g., Germany-Hungary) to dyads in which both countries are capital importing and seem to have little prospect for bilateral investment flows (e.g., Hungary-India). Finally, in the third stage, after the true costs of signing BITs is revealed (by the arbitration cases that follow the East Asian and Argentine financial crises), the pattern of signing reverts to a more calculating and rational orientation predominately linking capital exporters and importers.


In a large scale and ongoing project (co-authored with Zelner, Jandhyala and Mansfield), we have amassed a unique data set examining the adoption, implementation, retrenchment and abandonment of a wide array of neoliberal policies in all countries in the world. We develop an objective means to code the adoption of market-oriented reforms in multiple policy domains using techniques originally developed to detect structural breaks in time series data. This methodology provides an objective coding of initial policy adoption as well as the sustainability of that policy. In a series of papers, we plan to examine the determinants of the sequence of policy adoption and the outcome of adoptions. We will consider both domestic (e.g., domestic political structures, interest group cleavages and economic conditions) and foreign pressures (e.g., peer country adoptions and multilateral lending) in our analysis as well as the connections between and characteristics of various policy domains. We also expect that the dataset itself will be of great interest to other scholars for follow-on research.


(5) Pressures, Constraints, Influence and Performance [2009-present]


After more than ten years contributing to the building the necessary interdisciplinary theoretical and empirical foundations, I have recently been able to turn my attention to the core topic that has motivated me all along: the analysis of firm-level strategies to influence the political and social environment in which they operate and the efficacy of these strategies. To date, the empirical literature examining the returns to such strategies to win the hearts and minds of external stakeholders has been highly equivocal, providing limited evidence of at best a marginal and contingent positive relationship between these efforts and financial performance. Theoretical explanations for the imbalance between rhetoric in support of such activities and their limited financial impact draw upon agency theory to focus on either managers’ incentives to extract rents from the economic value chain or shareholders or the particular set of circumstances required for redistribution of existing rents among members of the economic value chain to enhance financial performance. I draw upon the interdisciplinary foundations developed in the first four segments of my scholarship to develop another theoretical argument consistent with the original tenets of instrumental stakeholder theory. I argue that efforts to win the cooperation of and reduce the conflict with external stakeholders, rather than merely altering the distribution of rents among direct factors of production, can be conceived of as investments in political and social capital. Such investments in relational governance reduce the risk opportunistic hold-up by a broad range of political and social actors thereby enhancing the probability that a business plan can proceed on schedule and on budget and, ultimately, generate sustainable shareholder value. Scholarship in interest group theory, coalition politics and social networks informs the choice of which external stakeholders to target domestically and internationally. Firms and coalitions of organizations will vary in the efficacy of their targeting according to their ability to construct and deploy convincing, emotionally appealing and context-specific frames. The impact of such targeting will also vary in country-level political constraints.


In an ongoing multi-year National Science Foundation funded project comprised of multiple papers described below (co-authored with Senior Research Fellow Sinziana Dorobantu and my second doctoral advisee Lite Nartey), we not only highlight the intellectual argument for focusing on stakeholder engagement as a means to transform the production process but, more importantly, we provide rigorous empirical evidence of the potential financial returns to such an approach as well as operational guidance to managers seeking to adopt it. This project draws upon a unique data resource developed over four years using several thousand hours of research assistant and doctoral coding of financial, operational and stakeholder data on the population of 21 publicly traded gold mining companies on the Toronto Stock Exchange whose sole assets are one, two or three gold mines in countries with per capita incomes below $11,000. This intensive coding effort includes the manual coding of over 50,000 stakeholder events from over 20,000 media reports covering these mines. Our sentence-level coding protocol identifies the population of media relevant stakeholders initiating an action or expressing a sentiment as well as the target of that action or statement. It codes the action or expression according to a well-developed scale in the conflict studies literature that quantifies the degree of cooperation or conflict among political and social actors.


In our first paper, we are able to make precise estimates of the relative contribution to market capitalization of resources versus stakeholder engagement strategies.[32] Our findings validate the claim of Yani Roditis, COO Gabriel Resources, who told us

“It used to be the case that the value of a gold mine was based on three variables: the amount of gold in the ground, the cost of extraction, the world price of gold. Today, I can show you two mines identical on these three variables that differ in their valuation by an order of magnitude. Why? Because one has local support and the other doesn’t.”

More precisely, our analysis shows that the market capitalization of these companies incorporates a 72 percent discount from the net present value of the resources as calculated using data on the quantity of gold reserves, the predicted costs of extraction, the price of unit of gold, and the estimated mine life. This discount is driven by uncertainty as to whether the gold will be extracted and the terms of the extraction. Using information on the level of cooperation or conflict between the firm and its stakeholders drawn from our stakeholder event database, as well as the level of political hazards that describes the broader political environment in the country, we are able to reduce this discount from 72 percent to as low as 12 percent. That is, 60 percent of the market capitalization of these firms is linked to political and social factors which is approximately double the percentage linked to the value of the gold in the ground.


While managers, scholars of stakeholder relations and some activists have long asserted the existence of a positive benefit from stakeholder engagement, empirical evidence using corporate level data has been equivocal at best. The focus among theorists and empirical scholars has turned to special circumstances where a link may yet exist. Our results point to a need to broaden the scope of such inquiry. Where stakeholder cooperation is necessary to transform an asset into shareholder returns, a direct link between productive efficiency and stakeholder cooperation obtains. This link offers an opportunity for instrumental stakeholder theory to address the question of which stakeholders are more important and how much should managers invest in their relationships. Current empirical efforts to examine corporate-level reporting and practices are too far removed from the operational practices of greatest concern to stakeholders both external and internal to the corporation. By tracking the actions and statements of media-relevant stakeholders, scholars and practitioners can avoid subjective biases, broaden the potential pool of covered firms and better identify which practices at which times substantively contribute to market valuation. The practical relevance and contribution of this paper are already recognized at this early stage as evidenced by its nomination for Best Applied Paper in International Management (The Robert H. Schaffer Award) at the 2011 Academy of Management meeting and Best Paper for Practical Implications at the 2011 Strategic Management meeting.


A second in process study undertakes an empirical analysis of theoretical arguments developed by Nartey who draws from social network theory to highlight two mechanisms by which a manager can alter the structure of the stakeholder network in a manner that elicits greater cooperation and/or less conflict. First, network ties between a firm and its stakeholders serve as prisms that enable third parties to infer characteristics or traits of unknown foreign firm from characteristics of its known local associates.  Thus, “whom” the firm is initially associated with and the substance of and extent of reciprocity in this association impact subsequent stakeholder cooperation and conflict. Second, as ties are conduits for information about actors in the network, tie structures that maximize the volume, diversity and richness of information available to the firm, enable the firm to improve cooperation and reduce conflict with stakeholders. We test these hypotheses using our stakeholder event database to construct time varying stakeholder networks for each mine that depict the evolving structure of relationships between the firm and stakeholders as well as between the stakeholders independent of the firm. We incorporate information both on the strength of the relationship and its polarity (i.e., cooperation vs. conflict). Using the theoretical arguments developed above, we model the choice by an investor as to whether to form a new relationship or to seek to improve the cooperation or reduce the conflict in an existing relationship. The four key findings of this analysis are:

)     1) Ties to “weak” stakeholders (e.g., those with a high degree of conflictual relations) harm a firm’s ability to engender cooperation and reduce conflict with other stakeholders. This finding calls into question the present practice of firms that seek the most expeditious political connections without consideration of how that connection may be perceived by stakeholders in the broader political environment. By focusing on expeditious ties, firms may obtain short-term gains but also potentially significant and possibly irreversible long-term losses in stakeholder cooperation.

    2) While firms can reach out to stakeholders, subsequent cooperation is enhanced and conflict reduced only when stakeholders reciprocate. A firm initiated tie that is not reciprocated fails to improve cooperation or reduce conflict yet still entails a cost.

)     3) Information gathering is a critical component of an effective stakeholder engagement strategy. Without information on stakeholders, particularly in terms of their expectations, beliefs, biases, assumptions etc., firms are hamstrung in their efforts to increase cooperation or reduce conflict.

      4) Activities that involve deeper engagement with stakeholders such as data gathering, production (and other activities), and monitoring and evaluation, significantly increase cooperation. Undertaking such activities jointly with stakeholders, as opposed to independently, dramatically reduces the ratio of conflict to cooperation.

Subsequent analysis will link the degree to which managers follow these theoretically motivated prescriptions to the financial and operational performance of these mining companies.


At this early stage in our research program, these findings already make a strong argument that the social license to operate is operationalizable, empirically testable and strategically relevant. Investments in political and social capital can transform the production process in a manner that engenders stakeholder cooperation and reduces conflict thereby protecting and even creating shareholder value. Pursuing cooperation from and minimizing conflict with stakeholders is not just corporate social responsibility but enlightened self-interest. Such strategies include actions that alter the structure of the network of stakeholders and the relationships within it. In order to delve further into the nature of these relationships and the contingencies that influence their impact on financial and operational performance, however, we plan to undertake a number of additional studies in the coming two years.


We plan to complement the preliminary empirical analyses described above with case studies comparing actual engagement strategies and their effect on the evolution of stakeholder relations for some of the companies in our sample as well as some of the majors in the industry. We have tentative plans to visit sites in Botswana, Bulgaria, Ghana, Guinea, New Caledonia, Peru, Romania, Solomon Islands and Venezuela.


In subsequent empirical analyses, we will examine contingencies underlying these relationships between stakeholder cooperation and conflict and financial and operational performance. We plan to investigate the extent to which companies tailor their stakeholder engagement strategies to “fit” the macro-political context. For example, we expect profitable stakeholder engagement strategies to encompass fewer stakeholders in countries with centralized and hierarchical political authority, limited press freedom and strong restrictions on civil society. We also plan to consider tradeoffs that managers face in such environments between the optimal strategy today and those that best allow firms to survive political transitions and emerge with a new set of relationships and limited liabilities from past ties. We argue that strong and visible alliances with a relatively small number of influential players (i.e. a narrow focus of stakeholder engagement) are particularly risky in environments defined by high or increasing levels of polarization, where a change in the configuration of power (brought about by political competition, economic crisis, or social unrest) is likely to entail the marginalization of the former factions in power. By contrast, ties to a broader set of actors (e.g. both politicians in power and in the opposition) may be harder to defend in the short-run, but could prove critical when the balance of power shifts to a different political or social group.


We also plan to further investigate whether strategies by the company to reach out and develop cooperative working relationships with relevant stakeholders (that is, proactive engagement strategies) have a different impact on financial and operational performance than engagement efforts that come in reaction to criticism from stakeholders (that is, reactive engagement strategies). In the aftermath of periods in which stakeholders’ affect towards the investing company is clearly negative, additional investments in stakeholder engagement may be seen as reactive or manipulative and thus of limited value. We will examine whether companies with a strong record of proactive engagement strategies experience a smaller effect on financial valuation during periods of heightened stakeholder criticism than firms without much ex ante investment in stakeholder engagement.


I am also pursuing another major National Science Foundation grant together with Raymond E. Levitt (Department of Civil & Environmental Engineering, Stanford University) and W. Richard Scott (Department of Sociology, Stanford University) to examine the impact of stakeholder engagement strategies and project governance more broadly on the financial and operational performance of large scale infrastructure projects. This study hopes to test a theoretical framework that Levitt and I developed in a paper currently under review.[33] In that paper we lay out the conditions under which policymakers, project developers or managers should enhance relationships with counterparties using processes other than financial incentives and legal contracts including leveraging an existing or developing a sense of shared identity, demonstrating adherence to norms of distributive or procedural justice and engaging in framing efforts.


I plan to incorporate some of the insights from the mining and infrastructure project sectors into a managerially oriented book project on Corporate Diplomacy: From First Contact to Relationship that offers insight into best practice processes for engaging with external stakeholders drawing from these mining and construction firms, their peers in the oil & gas and sustainable tourism industries as well as from development (e.g., World Bank) and military counterinsurgency. Successful organizations in each of these sectors demonstrate parallels in the extent to which they work to change mindsets within their organization to look to external stakeholders as key inputs into the production process over the long-term; undertake due diligence that identifies key stakeholders, their interests, strengths, linkages and behavioral drivers; integrate this information into strategic planning, risk management and other internal systems so as to allocate resources to stakeholder engagement initiatives with the highest potential payoff to the firm; interact with these stakeholders in a manner than enhances understanding, fairness, clarity and the ability to resolve inevitable disputes; and convey information so as to reinforce trust and reputation as well as insuring compliance, accountability and progress. In addition to the mining and infrastructure field work listed above, I am also working directly with the Alila, Melia International and Four Seasons hotel chains. This book project build upon three recently published managerially oriented papers.[34]


In addition to reaching out to practitioners with the insights from this segment of my research, I am also working to impact and engage research on coalition politics, negotiations and business school administration. I develop a formal decision process framework for managers facing multi-stakeholder coalition games. This framework augments the dynamic expected utility models of Bruce Bueno de Mesquita by incorporating social networks. Specifically, I allow stakeholder preferences to be influenced by peers (i.e., social preferences) and stakeholder power to be influenced by structural position (i.e., network centrality).[35] A follow-on project seeks to augment this initial model with insights from strategic communications so as to enrich the strategy space of the focal actor. A final published paper in this stream, applies these insights on political and social influence strategies to the case of business schools as organizations in the aftermath of the financial crisis.[36] The analysis constructs a paired historical narrative of economic policymaking and business school reform over 125 years to integrate a number of critiques against business school research and pedagogy and, more importantly, to chart a political strategy forward that fulfills the promise of progressive management laid out by Joseph Wharton when he founded the first modern business school in 1881.




The same question that I asked in my interviews in New Zealand fifteen years ago remains at the heart of my research agenda today: “When should private investors believe in a policy innovation or institutional change implemented by political actors?” My early research focused on one dimension of the political environment (i.e., checks and balances in national political institutions). I developed a quantitative index to measure that construct and demonstrated its importance in predicting country- and firm-level economic outcomes. I extended that initial research question in several directions by considering heterogeneity in the population of firms in their response to the political environment and other facets of that political environment (i.e., domestic and foreign pressures on political actors to change existing policies).


Building upon this work, I have begun to directly tackle the question that motivated me all along and that I believe will dominate my research for the next fifteen years: “When private investors feel the potential returns to operating in an uncertain policy environment justify the risks, what can they do to win the hearts and minds of external stakeholders, win and maintain the social license to operate thereby generating sustainable supranormal returns for shareholders?” To date I have demonstrated a powerful business case for sophisticated stakeholder engagement, amassed a unique dataset on the dynamic evolution of multinational corporation’s stakeholder networks that is the focus of five ongoing co-authored empirical papers, am in the process of submitting a follow-on grant to extend this analysis intro infrastructure project management and begun work on a practitioner-oriented book laying out best practices in “Corporate Diplomacy” based on two years of field and secondary research in five sectors.


In addressing these questions, I will continue to draw insights from economics, political science, and sociology as appropriate but will remain an interdisciplinary scholar of the field of international business. While I hope that my research increasingly contributes to development economics, international political economy, social movement theory and neo-institutional theory as well as the fields of corporate social responsibility, sustainability and public affairs, my primary audience is and will remain scholars and practitioners who seek to explain and enhance the performance of the foreign investment decisions of multinational firms by better assessing and influencing the political and social environment in which they operate.

[1] Merchant International Group. 1999. The Intelligence Gap. London.

[2] Barth, J. R., Hall, T. W., Kurtzman, J., Wei, S.-J., & Yago, G. 2001. The Opacity Index: PriceWaterhouseCoopers Report.

[9] I use political hazards, defined as the inverse of political constraints, in my firm-level research to maintain consistency with the political risk management literature.

[30] Henisz, W. J. 2011. Concentrations of Domestic Political and Foreign Economic Power and the Provision of Public Goods.

[31] Jandhyala, S., Henisz, W. J., & Edward, M. 2011. Three Waves of BITs: The Global Diffusion of Foreign Investment Policy. Journal of Conflict Resolution, Forthcoming.

[33] Henisz, W. J. & Levitt, R. E. 2011. Regulative, Normative and Cognitive Institutional Supports for Relational Contracting in Infrastructure Projects.

[34] Henisz, W. J. 2009b. Network-Based Strategies and Competencies for Political and Social Risk Management.In Kleindorfer, Paul R. & Yoram Wind, (Eds.), Network-based Strategies and Competencies. Upper Saddle River, NJ: Wharton School Publishing, Henisz, W. J. 2011c. Mitigating Policy Risk in Global Projects.In Scott, W. Richard, Raymond E. Levitt, & Ryan J. Orr, (Eds.), Global Projects: Institutional and Political Challenges. New York: Cambridge University Press, Henisz, W. J. & Zelner, B. A. 2010. The Hidden Risks in Emerging Markets. Harvard Business Review(April): 88-95.

[35] Henisz, W. J. 2011. Preferences, Structure and Influence: The Engineering of Consent.