Political risk, internal versus global value chain knowledge, and subsidiary operational integration

• Author: Yunah Song,Jeoung Yul Lee,Alfredo Jiménez,Young Soo Yang
• DOI: http://doi.org/10.1002/gsj.1377
• Published date: 01 August 2020
• Date: 01 August 2020

SPECIAL ISSUE ARTICLE

Political risk, internal versus global value chain

knowledge, and subsidiary operational

integration

Jeoung Yul Lee

1,2

| Alfredo Jiménez

3

| Young Soo Yang

4

|

Yunah Song

5

1

National Research Base of Intelligent Manufacturing Service, Chongqing Technology and Business University,

Chongqing, China

2

School of Business Management, Hongik University, Sejong, South Korea

3

Department of Management, Kedge Business School, Talence, France

4

Leeds University Business School, University of Leeds, Leeds, UK

5

Department of International Trade, College of Business, Chosun University, Gwangju, South Korea

Correspondence

Young Soo Yang, Leeds University

Business School, University of Leeds,

Leeds, UK.

Email: seoukore@hotmail.com

Abstract

Research summary: This study combines transaction

cost economics and network learning literature to

examine the moderating effect of knowledge from

internal versus external local supplier on subsidiary-

level intrafirm trade within multinational enterprises'

(MNEs) global value chain networks. We conceptualize

knowledge in a multidimensional way, disentangling it

into institutional knowledge in high-risk countries and

internationalization knowledge in all countries. Empiri-

cal results from 5,660 observations of 487 Korean MNEs

(1995–2013) show that MNEs' institutional knowledge

with external local suppliers in high-risk countries has

a stronger negative effect on the relationship between

political risk and subsidiaries' intrafirm trade integra-

tion than with internal suppliers. Internationalization

knowledge from external local suppliers in all countries

also has a stronger negative effect on the relationship

between political risk and subsidiaries' intrafirm trade

integration than with internal suppliers.

Received: 15 February 2018 Revised: 19 January 2020 Accepted: 22 January 2020

DOI: 10.1002/gsj.1377

444 © 2020 Strategic Management Society Global Strategy Journal. 2020;10:444–472.wileyonlinelibrary.com/journal/gsj

Managerial summary: A host country's political risk

is a critical consideration for multinational enterprises

(MNEs) when entering institutionally hazardous coun-

tries. This study shows how MNEs' strategies for opera-

tional integration of subsidiaries within global value

chain (GVC) networks respond to challenges of politi-

cal risk in host countries. We studied 5,660 observations

of 487 Korean MNEs (1995–2013) and found that MNE

capabilities to manage under institutionally hazardous

conditions can be developed through various types of

knowledge from internal versus external local sup-

pliers, and, consequently, operational integration in the

MNE GVC in high-risk countries is less needed. MNEs

need to acquire and expand new business opportunities

in host countries by accepting heterogeneity through

varying institutional and internationalization knowl-

edge and active partnership development based on their

GVC networks.

KEYWORDS

global value chain, institutional knowledge, internal versus external

local suppliers, internationalization knowledge, intrafirm trade

integration, political risk, South Korea

1|INTRODUCTION

When multinational enterprises (MNEs) enter foreign countries, political risk

1

in those overseas

territories constitutes one of the main reasons for these globalized organizations to be worried

about their subsidiaries' survival. Political turbulences, such as expropriation, nonfulfillment of

contracts, increasing taxes, and red tapes by host governments or other host authorities, repre-

sent some of the biggest threats that MNEs face when investing abroad (Jiménez, Luis-Rico, &

Benito-Osorio, 2014; Uhlenbruck, Rodriguez, Doh, & Eden, 2006). Because of these risks, MNEs

may decide to avoid or reduce investments in host countries where political risk is high. Yet,

MNEs enter these countries facing these institutional challenges when they can earn benefits,

such as potential market growth in host countries or synergies with other subsidiaries within

the global value chain (GVC) (Henisz, 2000; Kano, 2018; Lawton, Rajwani, & Doh, 2013). Along

this line, a unique study (Feinberg & Gupta, 2009) approached the link between political risk

and synergies with subsidiaries within the global trading network using a sample of U.S. MNEs'

subsidiaries located only in the region of Americas. Based on transaction cost economics (TCE),

Feinberg and Gupta (2009) argue that the higher the degree of political risk in a host country,

the larger the volume of intrafirm trade is within MNEs' global trading networks, thereby less-

ening the exposure to and dependence on their surroundings of perilous environmental

hazards.

LEE ET AL.445