Toward an Integrative Theory of the Multinational Firm

The theory of the multinational firm generally includes home country institutions, host country institutions, and firm characteristics (Rugman et al., 2011).  Special attention goes to issues such as relative bargaining power of firms and host country governments (Eden et al., 2005), the liability of foreignness (Zaheer and Mosakowski, 1997), and organizational politics within the firm including headquarters-subsidiary relationships (Becker-Ritterspach and Dörrenbächer, 2011; Blazejewski and Becker-Ritterspach, 2011).  The firm can be treated as socially embedded in multiple host countries (Heidenreich, 2012; Morgan, 2001; Meyer et al., 2011).  The footloose or decentered multinational firm, owing no effective allegiance to a home country, may be a special case in which the role of the home country is greatly reduced if not eliminated (Desai, 2009).  This theory treats the firm as a rent-seeking organization among varying institutions; it is a compound of economic, institutional, and organizational considerations.

A significant gap in this literature fails to integrate corporate social responsibility (CSR), the UN human rights regime, and the global anti-corruption regime into a more fully comprehensive theory of the multinational firm (Boatright, 2009). Those aspects are handled largely piecemeal.  For instance, it is difficult to see how a multinational can be socially embedded in a corrupt (and possibly dictatorial) host country without practicing bribery; opposing corruption either violates the assumptions of social embeddedness or divides a society into corrupt, neutral, and anti-corruption elements in some way.  This paper seeks to address this gap by investigating how a more fully integrated theory of the multinational firm might be formulated.  This abstract provides an initial sketch of the approach.

The multinational firm exports to a host country using, defined here conceptually, a four-dimensioned function: foreign direct investment (FDI), CSR, human rights (Hahn, 2012), and anti-corruption (see Rodriguez et al., 2006).  The host country imports from the multinational firm using these four dimensions (Figure 1 will provide a depiction in the full paper).  The ten principles of the UN Global Compact provide a benchmark definition for CSR (including employment rights and environmental protection), human rights, and anti-corruption.

For this paper’s approach, FDI is broadly defined to include foreign investment and management services and their effects on host country labor, product, and input markets.  The firm generates value creation and competitive advantage (beyond competitive outcomes) through rent-seeking exploitation of host country markets.  FDI must be positive if a firm decides to operate in a given host country.  The effect of FDI on the host country can range from negative to positive.

Given that a firm chooses to invest in a given host country, the firm’s CSR, human rights, and anti-corruption dimensions can vary from negative through zero to positive.  Negative is destructive of host country conditions including institutions (which can be formal and informal).  Zero is absence of firm export and host country import.  Positive means improvement of host country conditions including institutions.  These possibilities generate a considerable range of choices for multinational firms – as global, transnational, or multidomestic approaches – by host country.  Table 1 shows the extreme choices (all negative or all positive) of this considerable range.  Each negative shifts through zero to positive.  A firm, in a given host country, for instance might combine positive CSR with zero human rights and negative anti-corruption (being quite willing to bribe government officials while undertaking local community CSR activities and being neutral on human rights violations by a corrupt government).  The choice may well involve intrafirm organizational politics, lobbying of home and host governments, participation in and influence of international policy regimes, and other activities.  Scherer and Palazzo (2011) extend CSR to include firms’ duty to protect democratic institutions everywhere and provide some public goods in substitution for incapable governments in developing countries.

Table 1.  Range of Choices for Firms Investing in a Given Host Country

CSR	Human Rights	Anti-Corruption
negative	negative	negative
combinations in between extreme choices
positive	positive	positive

A multinational firm allocates available investment capital and management services across available host countries in order to maximize value creation and competitive advantage. The firm operates a portfolio of host countries.  Whether the firm attempts to minimize CSR, human rights, and anti-corruption efforts depends partly on international policy regimes defining those dimensions, the strategy and internal values of management, and the import practices of the host country.  Strategy and internal values may depend on whether the firm is headquartered in an advanced, emerging, or developing country.  Import practices may depend on whether the host is an advanced, emerging, or developing country.  A host country government seeks to attract a portfolio of multinational firms and decides on a tax policy in addition to admissions requirements (Jenkins and Newell, 2013). 

The proposed integrative theory of the multinational firm can be linked to issues of equality and inequality in both home and host countries as follows.  At home, corporate rent-seeking appears to be associated with increasing inequality of wealth and income.  (A necessary assumption is, however, that the bottom of the distribution is below acceptable standards – otherwise, inequality in distribution may be a complaint rather than a criticism.)  In host countries, absence of CSR (including employment and compensation) and human rights protection in combination with corruption likely increase inequality with rising FDI.  Tawney (1964, p. 54) argued that "the distribution of wealth [in societies] depends, not wholly, indeed, but largely on their institutions; and the character of their institutions is determined not by immutable economic laws but by the values, preferences, interests and ideals which rule at any given moment in a given society.”  There are both market and non-market institutions.  This argument should be complemented by theoretical consideration of competition among nations for FDI and the effects of government corruption and firm strategic choices.  “Institutions” may promote inequality, in either advanced or developing countries.  Corruption is arguably more pronounced in the latter.