Once bitten twice shy? Experience managing violent conflict risk and MNC subsidiary‐level investment and expansion

• Date: 01 March 2017
• Author: Chang Hoon Oh,Jennifer Oetzel
• DOI: http://doi.org/10.1002/smj.2498
• Published date: 01 March 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 714–731 (2017)

Published online EarlyView 1 March 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2498

Received 13 May 2014;Final revision received2 November 2015

ONCE BITTEN TWICE SHY? EXPERIENCE MANAGING

VIOLENT CONFLICT RISK AND MNC

SUBSIDIARY-LEVEL INVESTMENT AND EXPANSION

CHANG HOON OH1,2and JENNIFER OETZEL3*

1Beedie School of Business, Simon Fraser University, Vancouver, Canada

2Korea University Business School, Korea University, Seoul, Korea

3Kogod School of Business, American University, Washington, District of Columbia,

U.S.A.

Research summary: Researchers have increasingly emphasized the need to better understand

how context affects the value of experiential learning. We address this gap by investigating

when corporate-level experience can be leveraged across borders and when experience needs

to be country-specic to be valuable. We test our hypotheses using a unique multi-source

panel dataset of 379 large MNCs from 29 home countries and their subsidiaries in 117 host

countries over a 10-year period, 1999– 2008. In contrast to prior research, we nd that the

ability of a rm to leverage its experience with political risk across borders is limited by the

type of risk involved. Experience with nonstate violent conicts may be transferrable, but only

country-specic experience appears to yield measureable benets for conicts involving the host

country government.

Managerial summary: Violent conicts not only increase social unrest but also impose added

costs of doing business. Formanagers who nd themselves in the midst of violent conicts or who

wish to survive and potentially gain a competitive advantage in operating in such challenging

environments, is it possible to learn to manage such a seemingly “unmanageable” problem? In

contrast to studies that have examined other types of political risk, we nd that the ability of a

rm to leverage its experience with violent conictrisk across borders is limited. Specically, only

country-specic experiential knowledge about how the host government prepares and manages

such conictrisks yields measureable economic benets for MNCs and their subsidiaries operating

in countries during conict. Copyright © 2016 John Wiley & Sons, Ltd.

INTRODUCTION

On any given week a review of the The Economist

or any other major newspaper reveals the challenge

posed by violent conict around the world. Accord-

ing to the Council on Foreign Relations (2013),

armed conict and its aftermath affect nearly every

Keywords: experiential learning violent conict; polit-

ical risk; corporate-level knowledge; country-specic

knowledge

*Correspondence to: Jennifer Oetzel. Kogod School of Business,

American University, 4400 Massachusetts, Ave., NW, Washing-

ton, D.C. 20016. E-mail: oetzelj@american.edu

Copyright © 2016 John Wiley & Sons, Ltd.

aspect of society, including the privatesector. While

addressing such intractable problems is not usu-

ally part of management education, the challenge

posed by violent conict requires a greater under-

standing of how to manage a rm and its opera-

tions during periods of unrest— whether the unrest

is in Baltimore, Maryland, in the United States or in

Cairo, Egypt.

For managers who nd themselves in the midst

of such conict or who wish not only to survive

but potentially to gain a competitive advantage

in operating in such environments, is it possible

to learn to manage a seemingly “unmanageable”

Once Bitten Twice Shy 715

problem? According to Telefónica, the Spanish

telecommunications rm, the answer is yes.

Ms. Elena Valderrabano, Director of Corporate

Identity and Sustainability at Telefónica, has said

that the company’s efforts to address violent con-

ict in countries where they operate are critically

important to the rm’s ability to operate and expand

internationally (Valderrabano,2015). Scholars have

found that it is possible for managers and their rms

to learn from a variety of infrequent and even rare

events (Lampel, Shamsie, and Shapira, 2009). In

some cases, such experiential learning can be trans-

ferred across borders while in others there are limits

on the transfer capacity of experiential learning

(Delios and Henisz, 2003; Luo and Peng, 1999).

Here, we adopt the denition that experiential

learning is the acquisition of knowledge that

“transpires in the organization as it performs its

task” (Argote and Miron-Spektor, 2011: 1124).

Experiential learning is argued to be an important

intangible rm-specic asset that enables the

multinational corporation (MNC) to expand to and

successfully compete in other countries (Buckley

and Casson, 1981). One source of tension in

the literature is around the limits of experiential

learning. On the one hand, companies operating

abroad gain a variety of different experiences in

the course of their operations, some of which are

transferable to other markets. They gain knowledge

of the host country, its institutions, culture, and

ways of doing business (e.g., Holburn and Zelner,

2010; Perkins, 2014). On the other hand, there

may be limits on the ability of a rm to leverage

experiential knowledge in other countries.

To the extent that there is a high degree of

variability in the cultural and institutional envi-

ronments of the countries in which the MNC has

operated, prior experience may not be valuable in

a new country context (Barkema, Bell, and Pen-

nings, 1996; Kostova and Roth, 2002). In that

case, not all knowledge may be transferable across

countries and subsidiaries (dened here as wholly

owned entities of a MNC). Local knowledge— or

country-specic knowledge— may be necessary.

Wide variance in governance quality across coun-

tries is likely to increase the value and complexity

of country-specic knowledge.

We attempt to contribute to the literature at

the nexus of international strategy and experiential

learning by investigating the question: when can

risk management experience be leveraged across

different markets and when does that experience

have to be country-specic to be valuable? To

examine when and whether certain risks have

country-specic characteristics that require spe-

cialized, location-specic knowledge or not, we

chose to study violent conict risk. Examples

of violent conict are war, revolution, rebellion,

and terrorism. Conicts are the ideal phenomenon

for our research purposes because they are con-

sidered to have both a general cause (i.e., an

enabling environment)— such as a weak institu-

tional environment, corruption, poverty, income

inequality, among others—and a particular cause

or triggering event that is potentially context- and

conict-specic (Davies, 1996: 896).

Another value in studying conict risks is that

they are often seen as issues that are “unmanage-

able” for business. If managers assume that it is

not possible to learn from certain events or man-

age conict risk effectively, no learning will take

place (Lampel et al., 2009). When rm survival and

protability are threatened, some rms will develop

innovative strategies to surmount the challenges

they face. Other rms will die out. Firms that adapt

to new risks and challenges, though, can survive and

even gain a competitive advantage.

Research on political risk, and country risk more

broadly, tells us that, all else being equal, risk deters

new entry and new investment by foreign rms

(Delios and Henisz, 2003; Feinberg and Gupta,

2009: 381). Given these arguably well-established

ndings, researchers are increasingly focused on

whether and under what conditions rms can gain

experience advantages from operating in countries

with high levels of political risk and when such

experience may be leveraged into new markets

(Oetzel and Oh, 2014). Since much of the research

on political risk has focused on policy uncertainty

and contract efcacy,we also seek to test the bound-

ary conditions of existing theory by examining other

types of political risks.

VIOLENT CONFLICT AS THE FOCUS

OF EXPERIENTIAL LEARNING

Violent conict is dened here as the organized

and sustained use of physical force that results in

injury or death to persons and/or damage or destruc-

tion to property (Oetzel and Getz, 2012). It may

include war, revolution, rebellion, insurgency, and

sustained campaigns of violence or terrorism, but

not petty crime. Conicts are generally categorized

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 714–731 (2017)

DOI: 10.1002/smj