Why firms need to invest resources to build internal political capabilities.
Geopolitical uncertainty has become an existential threat to multinational enterprises (MNEs) across industries, a shared challenge faced by business leaders around the world. Constantly dominating global media headlines, political and regulatory barriers have heightened anxiety among multinationals, eliciting a sense of panic and powerlessness.
For example, Chinese firms have found themselves in the crosshairs of the US-China geopolitical confrontations, leading to significant disruptions in market performance and global supply chains. A recent US congressional bill aimed at forcing ByteDance to sell TikTok to a non-Chinese owner has placed its $16 billion business at risk of disappearing from the US market. This development comes at a pivotal moment, as ByteDance is poised to surpass Meta, the owner of TikTok’s major US competitor, Facebook, as the world’s largest social media company. Similarly Temu, the Chinese online marketplace platform which is challenging Amazon’s dominance in e-commerce, is under the spotlight not only in the US but also in the UK, Germany and Australia.
Political disruptions to business deals are not restricted to Chinese companies. In the UK, regulation prohibiting foreign state ownership of newspapers was introduced following the Abu Dhabi backed bid to buy The Daily Telegraph. And in the US, President Joe Biden has declared his opposition to the acquisition deal proposed by Japan’s Nippon Steel to purchase US Steel. Furthermore, the mounting pressures for multinationals to de-couple and de-risk global supply chains adds to the complexity. What were once nightmares have now become a harsh reality – no industry or firm can escape political influence anymore.
Navigating geopolitical risks has become the ultimate test for multinationals across borders and industries. As politics and businesses have become intertwined, it is imperative for multinationals to build corporate political capabilities – the ability to manage multiple political markets simultaneously and mitigate geopolitical risks effectively.
How to build political capabilities to navigate geopolitical uncertainties.
Despite extensive research on corporate political strategies, fewer studies have explored the capability-building processes. Political resources help firms access political information, influence decision makers, and enhance bargaining power. By leveraging both internal and external political resources, firms can shape favourable political environments and effectively navigate hostile political environments.
I investigated how Chinese firms navigated the political challenge of national security concerns in overseas markets, with a particular focus on the UK and the US. From 2019 to 2023, I conducted interviews with managers from 16 Chinese firms, totalling over 100 interviews. I developed in-depth cases studies on prominent Chinese MNEs across a range of sectors, including telecoms, high tech, renewable energy, and infrastructure.
From this research, I found that firms originating from the same home-country environment can develop distinct political capabilities during their internationalisation processes. These corporate political capabilities are shaped by their relationships with the Chinese government, particularly influenced by factors such as ownership types and the strategic importance of their respective industrial sectors.
First, drawing on a comparative case study of two telecoms firms, Huawei and ZTE, I found that ownership affects firms’ incentives to build political capabilities. While Huawei launched high-profile public campaigns and conducted active political lobbying, ZTE kept a low profile and avoided media and public exposure. My research suggested that the heterogeneity of these two firms’ political capabilities was shaped by their varied relationships with the Chinese government. Particularly, it was easier for ZTE, in comparison to Huawei, to access government support in the early years due to its state ownership.
Second, I found that the level of strategic importance of the industry determines the degree to which the Chinese government intervenes in firms’ overseas corporate political activities.
I conducted multiple case studies and categorised firms into the four categories shown in this table.
- Two state-owned enterprises (SOEs), China General Nuclear Power Group (CGN) and Beijing Construction Engineering Group (BCEG), were operating in the infrastructure industry in the UK market around the same period. CGN’s civilian nuclear power industry is of more strategic value for the Chinese government than BCEG’s commercial construction sector.
- Two privately-owned enterprises (POEs), Tencent and DJI, operating in the high-tech industry, faced the same tech ban in the US. Despite their private ownership, Tencent’s social media sector is of more strategic value for the Chinese government than DJI’s commercial drone sector.
My research shows that on the one side, firms operating in strategic sectors can receive more political support from the Chinese government. For example, the Chinese government helped CGN negotiate the nuclear power plant deals in the UK, whereas BCEG managed residential and commercial construction projects with the UK partners on its own.
On the other side, strategic firms’ overseas behaviours are likely to be closely monitored by the home-country government. For example, Tencent was cautious about how the Chinese government perceived its overseas behaviours and aligned its global strategy with Chinese foreign policy. By contrast, DJI gradually built its overseas political capabilities and actively engaged with local political stakeholders to buffer political shocks during the US-China trade and tech war.
I found that a high level of strategic importance can restrict firms’ ability to formulate and implement their political strategies in the host country, as seen in the case of Bytedance’s handling of the TikTok ban. If one examines China’ regulations on the exporting of advanced algorithms closely, one will quickly understand that ByteDance is in no position to sell TikTok to US buyers. ByteDance cannot afford to lose its company base and the Chinese market.
Based on my research, below are three counter-intuitive facts in corporate political capabilities:
1. The purpose of capability building is not to solve present issues but to prepare for the next political crisis.
External shocks and crises trigger multinationals to develop political capabilities. However, my research indicates that this reactive approach is frequently insufficient, as it may occur too late to effectively address emerging political challenges. Short-term, speculative political lobbying activities can sometime lead to unintended consequences or even backfire. Therefore, business leaders must change their mindsets to be pre-emptive, patient, and long-term oriented.
Trust building in business-government relations is a gradual and resource-intensive process, as demonstrated in my case studies. Firms invest years or even decades in cultivating and sustaining networks to establish political and social connections in host countries. It is crucial for firms to steadily accumulate internal political resources over time and adapt their organisational structures to changing political environments.
2. Corporate political capability is not corporate diplomacy.
Corporate diplomacy, a revitalised concept in international business, emphasises the necessity for firms to deploy ‘corporate diplomats’ to navigate the nonmarket environment, particularly in foreign markets. However, despite firms’ genuine intention to focus on business objectives, the term ‘corporate diplomacy’ carries a distinct meaning in international politics. Policymakers, whether in the home country or the host country, view any diplomacy as a tool to advance broader national interests or specific political agendas of their respective governments.
Based on my research, firms should refrain from explicitly labelling their political activities as corporate diplomacy, especially in interactions with host governments. This helps prevent potential misinterpretations that could imply representation of the home government’s political interests. In some cases, firms may naturally engage in activities resembling corporate diplomacy if their commercial goals align with their home government’s political agenda. However, such associations can blur perceptions of firms’ independence and impartiality.
3. Stop political lobbying, when you are most anxious!
In the face of escalating geopolitical tensions, business leaders are nervous when their firms are targeted by the host country’s hostile actions. However, firms should avoid wasting money and resources on excessive or unnecessary lobbying efforts driven by panic or fear. Rushed or anxious political lobbying may not only fail to achieve the desired outcomes but could also damage the firm’s reputation or relationships with key stakeholders in the long run.
It is crucial for firms to approach political lobbying with a calm and strategic mindset, rather than reacting impulsively to alleviate short-term anxiety. Take the TikTok ban for example. Regardless of President Biden’s decision, the bill will take months to come into effect, with possible lawsuits further delaying its enforcement. Therefore, ByteDance is advised against heavy spending on political lobbying in Washington DC, except for essential regulatory and legal procedures. With potential policy changes after the November US elections, the company can then resume its lobbying activities.
My research offers practical guidance for multinationals in navigating geopolitical challenges through capability building. Given the increasing geopolitical uncertainties, it is vital to cultivate internal political capabilities to understand complex political environments, anticipate policy changes, and strategically influence decision-making processes.
My research offers practical guidance for multinationals in navigating geopolitical challenges through capability building. For newly emerged multinationals like PDD (Temu’s parent company) and Shein, underestimating the impact of geopolitical factors on their overseas operations may jeopardise their global strategies, as they gain greater market share outside of China. Therefore, given the increasing geopolitical uncertainties, it is crucial for multinationals to cultivate internal political capabilities to understand complex political environments, anticipate policy changes, and strategically influence decision-making processes.
Background
This article draws on Zhibo’s doctoral research conducted at Saïd Business School, which was recognised as a finalist for the Academy of International Business Best Dissertation Prize in 2023. Expanding upon the insights from her dissertation, Zhibo’s book, In the Crosshairs: How Chinese Firms Handle the Political Challenge of National Security Concerns, is coming in 2025.
