Caught in the crossfire: Dimensions of vulnerability and foreign multinationals' exit from war‐afflicted countries

• Author: Paul W. Beamish,Li Dai,Lorraine Eden
• DOI: http://doi.org/10.1002/smj.2599
• Date: 01 July 2017
• Published date: 01 July 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 1478–1498 (2017)

Published online EarlyView 30 November2016 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2599

Received 28 November 2015;Final revisionreceived 30 September 2016

CAUGHT IN THE CROSSFIRE: DIMENSIONS OF

VULNERABILITY AND FOREIGN MULTINATIONALS’

EXIT FROM WAR-AFFLICTED COUNTRIES

LI DAI,1,*LORRAINE EDEN,2and PAUL W. BEAMISH3

1Department of Management, College of Business, Loyola Marymount University,

Los Angeles, California, U.S.A.

2Department of Management, Mays Business School, Texas A&M University,

College Station, Texas, U.S.A.

3Ivey Business School, Western University, London, Ontario, Canada

Research summary: When war occurs in a country, some foreign multinational enterprises

(MNEs) stay on, while others ee. We argue that MNE responses to external threats depend on

the rm’s vulnerability,which we decompose into exposure (proximity to threat), at-risk resources

(potential for loss), and resilience (capacity for coping). We test the independent and interactive

effects of these dimensions using a geo-referenced sample of 1,162 MNE subsidiaries in 20

war-aficted countries between 1987 and 2006. Wend that highly valuable resources can become

liabilities when exposed to harm, and the best way to cope with external threats may be to exit.

Our ndings extend the resource-basedview and real options theory by demonstrating the bounded

value of resources and options in the face of environmental contingencies.

Managerial summary: A recent survey of multinational enterprise (MNE) executives revealed

that 30 percent of the respondents believed that their rms were exposed to collateral damage

from war, with more than 90 percent expecting risks to rise. Yet, 25 percent of the executives

indicated that their rms had no continuity plan. Our study of MNEs in war-aficted countries

highlights the costs of not having a response strategy in place. We nd that, in war zones,

otherwise highly valuable locations and resourcescan become sources of vulnerability that prompt

early withdrawal from a host country. Our work further highlights the value of real options

thinking— where structuralsolutions such as building redundancy into a portfolio of options may

exist in advance of problems—for navigating hostile environments. Copyright © 2016 John Wiley

& Sons, Ltd.

INTRODUCTION

The overseas operations of multinational enter-

prises (MNEs) are increasingly exposed to war. The

number of violent wars worldwide, for example,

rose from 176 in 2013 to 223 in 2015 (HIIK, 2013,

Keywords: foreign exit; vulnerability; real options;

resilience; political risk

*Correspondence to: Li Dai, Department of Management,

College of Business, Loyola Marymount University, 1 LMU

Drive, MS 8385, Los Angeles, CA 90045-2659, U.S.A.

E-mail: li.dai@lmu.edu

Copyright © 2016 John Wiley & Sons, Ltd.

2015). MNE investments in least developed coun-

tries, many of which are aficted by war, increased

from $0.6 billion in 1990 to $23.2 billion in 2014

(UNCTAD, 2015). Despite the growing salience of

war for MNEs, why and how they respond to out-

breaks of war in host countries has received little

attention in the eld of management.

As high-consequence events, wars represent a

signicant political risk for MNEs, but are often

treated as low probability and low potential-for-loss

events (EIU, 2007). For example, during Libya’s

2012 civil war, the rm Cinnabon chose to stay

Caught in the Crossre: MNE Vulnerability and Foreign Exit 1479

despite the bloodshed (Bloomberg, 2012). In 2013,

amid killings by militants in Algeria, foreign MNEs

tightened security, but none left the country (Krauss

and Reed, 2013).

Since much of our understanding about rm

strategies in war zones is gleaned from aggregate

statistics or anecdotes, we know little about what

explains MNEs’ idiosyncratic responses. Our study

helps to explain why some foreign MNEs stay on

while others leave when war breaks out in a host

country. We contend that exit rates depend on rm

vulnerability, which we characterize in terms of

three dimensions: exposure (the extent to which an

external threat is experienced proximally), at-risk

resources (the value of an MNE’s global portfolio

in the host country that would be extremely hard

to replace if damaged), and resilience (capacity for

coping with harm). We test our arguments for each

dimension and their interactive effects using a geo-

referenced data set for 1,162 MNE subsidiaries

in 20 war-aficted countries between 1987

and 2006.

Management scholars have traditionally viewed

wars and other political violence through the lens

of political risk (Kobrin, 1979). Our timely anal-

ysis revisits a fundamental question for theory on

political risk: What makes some MNEs more vul-

nerable to political risk than others? By devel-

oping and testing an integrative framework for

explaining rm vulnerability to external threats, we

offer powerful evidence that within-country loca-

tion is a critical aspect of strategy in extreme set-

tings. In addition, we demonstrate how real options

thinking— structuring redundancy into a portfo-

lio of options and acquiring experience in simi-

lar contexts— can turn environmental uncertainty

into a source of value as opposed to loss (Trige-

orgis and Reuer, 2016). Our work also extends the

resource-based view by revealing important contin-

gencies among the dimensions of vulnerability and

by challenging the traditional appeal of exception-

ally valuable resources.

BACKGROUND, THEORY, AND

HYPOTHESES

War in the host country and foreign MNE

vulnerability

War is “a contested incompatibility where the use

of armed force between two parties, of which at

least one is the government of a state, results in

at least 25 battle-related deaths in one calendar

year” (Uppsala, 2015). We focus on war because,

unlike terrorism or organized crime, its impact on

rms is direct (Li, 2006). Also, while other types

of political violence are by necessity unpredictable,

war is typically subject to norms and conventions

(Czinkota et al., 2010), making it more amenable to

anticipation and subsequent strategizing.

The literature on MNE-war linkages is largely

normative, with a focus on rm complicity

(Guidolin and La Ferrara, 2007), ethical dilemmas

(Jamali and Mirshak, 2010; Kolk and Lenfant,

2010), and political behavior (Getz and Oetzel,

2009). The emphasis on rm outcomes is more

recent. Drifeld, Jones, and Crotty (2013) looked

at why rms enter war-aficted countries, noting

rm size and ownership structure, along with

industry and location, as important determinants.

Oetzel and Getz (2012) examined MNE responses

to war, showing that MNEs collaborate with local

entities to manage violence, depending on the

type of stakeholder pressure faced. Dai, Eden,

and Beamish (2013) applied a geographical lens

to examine MNE exposure in war zones, nding

survival to be contingent on where and with whom

subsidiaries are located.

In this article, we develop a theory of MNE

responses to war that centers on the concept of

vulnerability. In studies of natural disasters, vul-

nerability is used to gauge one’s ability to endure

events such as earthquakes and hurricanes (Gal-

lopin, 2006). Broadly dened as the potential for

loss, vulnerability reects susceptibility to damage

that makes it hard for one to preserve its structure

and achieve its goals (Adger, 2000). Vulnerability

typically depends on three factors: one’s proximity

to a threat, what it has at risk, and its ability to resist

the threat’s impact. For example, an entity’s vulner-

ability to an earthquake is contingent on its distance

from the epicenter, its likely losses due to the earth-

quake, and its emergency preparedness.

We apply the same logic to our analysis, arguing

that the vulnerability of MNEs to war depends on

their (1) exposure (proximity to the war), (2) at-risk

resources (potential for loss from the war), and (3)

resilience (ability to withstand stressors related to

the war). Given that “the impact of most political

events varies from rm to rm and from project

to project” (Kobrin, 1982: 40), we expect the three

vulnerability dimensions to exert unique impacts on

rms.

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1478–1498 (2017)

DOI: 10.1002/smj