Navigating the New Normal: Political Affinity and Multinationals’ Post‐Acquisition Performance

• DOI: http://doi.org/10.1111/joms.12545
• Author: Dinesh Hasija,Ru‐Shiun Liou,Alan Ellstrand
• Published date: 01 May 2020
• Date: 01 May 2020

© 2019 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

Navigating the New Normal: Political Affinity and

Multinationals’ Post-Acquisition Performance

Dinesh Hasijaa, Ru-Shiun Lioub and Alan Ellstrandc

aAugusta University; bThe University of Tampa; cUniversity of Arkansas

ABSTRACT The New Normal in the international business landscape reflects a world challenged

by economic volatility and political hostilities. This suggests increased political risk, even for

MNEs operating in developed markets. We use the legitimacy-based view of political risk to

examine how political affinity between host and home markets may contribute to an MNE’s

post-acquisition performance in a developed market. A high degree of political affinity signi-

fies aligned national interests thus reducing legitimacy concerns faced by MNEs during post-

acquisition integration. Based on cross-border M&A deals focused on U.S. targets completed by

MNEs representing 45 countries between 2004 and 2012, we find that MNEs from countries

with greater political affinity to the U.S. experience better post-acquisition performance. We

also investigate two country-level factors that intensify the threat to legitimacy; the MNEs’ home

market economic status and the presence of a financial crisis in the host market. Our findings

indicate that political affinity mitigates risk for MNEs originated from emerging economies

much more than for MNEs originated from developed economies, whereas a financial crisis

reduces the benefit of political affinity.

Keywords: AMNEs, crisis, cross-border mergers and acquisitions, EMNEs, multinational

corporations, political affinity

INTRODUCTION

In the last decade, the speed of g lobalization, reflected in financial and economic activ-

ity, has declined in developed markets (Witt, 2016). During the financial crisis of 2008,

worldwide foreign direct investment (FDI) flows decreased from $2.15 trillion U.S. dollars

in 2007 to $1.1 trillion U.S. dollars in 2009 (OECD, 2018). The New Normal in the in-

ternational business landscape reflects a world where cross-border transactions are chal-

lenged by economic volatility and political hostilities (El-Erian, 2010). Since the financial

Journal of Man agement Studi es 57:3 May 2020

doi:10. 1111/j om s. 12 54 5

Address for reprints: Ru-Shiun Liou, Assistant Professor of Management, John H. Sykes College of Business,

The University of Tampa, 401 W. Kennedy Blvd., Tampa, Florida 33606 (rliou@ut.edu)

570 D. Hasija et al.

© 2019 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

crisis, FDI has slowly recovered but it has struggled to return to the level it attained before

the financial crisis, increasing to a level of $1.71 trillion U.S. dollars by 2015 (OECD,

2018). This slow economic recovery has resulted in an outcry from voters in developed

markets demanding protection of national economic interests (Witt, 2016). The working

class in developed markets has long criticized large multinational corporations that out-

sourced jobs to take advantage of cheaper labor costs in developing economies (Bahler,

2016). Voters in developed markets showed support for political leaders who have taken a

strong stand against free trade policies, contributing to the Brexit outcome in the United

Kingdom as well as the new populist movement in the U.S.A. that resulted in the election

of President Donald Trump in 2016 (Witt, 2016).

Given the current political climate in which globalization is increasingly viewed un-

favourably among some key stakeholders in developed markets, MNEs are likely to

encounter increased political risk operating in these markets (International Monetary

Fund, 2018). Political risk includes political events and processes that can adversely affect

doing business (Alon and Herbert, 2009). Some MNEs’ cross-border acquisitions in de-

veloped markets have triggered negative public reactions and political responses in recent

years, especially when the MNE originates in a country which does not have a favour-

able political relationship with the host market. In the U.S.A., a series of Chinese fir ms’

acquisitions have raised major concerns among the public as well as members of the

U.S. Congress. For example, the Chinese real estate conglomerate, Dalian Wanda Group

bought AMC Theaters in 2012 and Legendary Entertainment in 2016, which resulted

in some political leaders expressing concerns about the potential use of these investments

to spread the Chinese government’s propaganda in the U.S.A. (Wong, 2016). On the

contrary, Bayer, a German firm, pursued an acquisition of the Monsanto Company in

the U.S.A. and was the object of close scrutiny on the basis of anti-trust concerns that

were raised by American farmers, but not on the grounds of national security (Kendall

and Bunge, 2018).

The traditional approach of evaluating political risk focuses on either MNEs’ bargain-

ing power over the host government in an emerging economy or the degree to which mar-

ket-supporting institutions protect foreign business in the host emerging market (Stevens

et al., 2016). MNEs acquiring targets in a developed market may not have an edge based on

advanced technology or product know-how when bargaining with the host government.

The institutional approach is also less relevant in this context since market-supporting in-

stitutions are less of a concern in a developed market than in emerging markets (Holburn

and Zelner, 2010; Sun et al., 2015). To address a significant gap in the literature, we pro-

pose using a legitimacy-based view (Stevens et al., 2016) to assess the extent of political

risk on MNEs’ cross-border acquisitions in developed markets. Operating in both host

and home institutional environments, MNEs are likely to face two significantly different

sets of legitimacy requirements, such as differences in formal business regulations and

informal societal norms (Scott, 1995). Political affinity, which refers to countries’ similar

stands in global affairs including critical international issues such as national security

and human rights, may play a key role in the success of MNE cross-border acquisi-

tions in developed markets (Gartzke, 1998, 2010). A higher level of political affinity that

aligns national interests between home and host countries may help MNEs address stake-

holders’ concerns for legitimacy in the host market by enhancing external stakeholders’