The nexus between firms and political actors is increasingly complex, particularly for foreign-owned firms operating in host countries. While corporate political connections can provide local knowledge and legitimacy, potentially transforming foreign-owned firms from “outsiders” to “insiders,” they entail substantial challenges and risks. This study aims to examine under what conditions foreign-owned firms opt to engage in political appointments relative to domestic firms.
Drawing on resource dependency theory (RDT) to question, and extend, the Liability of Outsidership (LoO), the study shows that the value of political appointments for foreign-owned firms varies with firm dependence on local markets and governments. Hypotheses are tested using firm-level data from the Business Environment and Enterprise Performance Survey, covering 22,388 firms across 41 countries, and employing various regression specifications.
Despite their presumed necessity to overcome the outsider status, foreign-owned firms are, overall, less likely than domestic-owned firms to make political appointments, due to–the authors explain– reputational concerns, heavier reliance on home markets, and expropriation risks. In fact, the severity of the outsider problem depends on how much a firm relies on host country resources and institutions. Political appointments turn advantageous for foreign entrants when they become highly dependent on host markets, operate in industries where informal practices (e.g. bribery) are prevalent, and when they operate within autocratic host political systems.
Political strategizing can be high commitment, risky and less than optimal for firms. By enhancing traditional LoO assumptions with the RDT logic, this study provides a nuanced explanation of variations in political strategies between foreign- and domestic-owned firms. The study highlights the need for careful managerial evaluation of the tradeoffs involved in high-commitment political strategies, particularly political appointments.
