Samsung, Apple, Volkswagen and KFC were all the focus of critical reports last year by Chinese media that highlighted quality, safety or warranty issues with their products for Chinese consumers. Though many peg this rise in MNC public crises to an anti-corruption push by China’s new leadership, according to a new research study co-authored by CEIBS Professor of Strategy Sam (Seung Ho) Park, this increase in MNC public crises in China actually began to climb in 2000, as China began to enter the “Mature Market” stage of development.

It was in part their own observations of the growing number of public crises encountered by MNCs that led Prof. Park and his co-authors to explore what changes in MNC-stakeholder relationships may have led to these crises in emerging markets, and how MNCs can address these changes to reduce the risk of one occurring. For their study, the co-authors looked at consumer-related public crises faced by 180 MNCs in China between 2000 and 2009, as these made up the majority of public crises MNCs met with during this period. Their results show that MNCs who entered China in earlier years, relied on a Chinese country head, or had rapid employee expansion are more likely to encounter a public crisis.

There are several reasons for this, according to their findings. MNCs that entered China in the early years of Reform and Opening Up arrived to find a business environment with poor regulatory enforcement, weak stakeholder challenges, and where local governments, eager to attract foreign investment, sometimes loosened implementation of environmental regulations and labour laws for their benefit. As the environment matured, the MNCs failed to adapt their strategies to keep pace, either because they failed to recognize the changes or because of organizational inertia or both. In some cases, MNCs failed to anticipate that Chinese consumers had gotten more knowledgeable and sophisticated and expected to receive the same level of quality and service they were providing to consumers in their home country. In other cases, rapid operational expansion overstretched management capabilities. A spike in the number of new local hires coupled with weak training and monitoring controls caused issues for some that resulted in frequent consumer complaints and negative media reports.

"This is a serious reality for multinational companies in China,” says Prof. Park. “Their sustained profitable growth is not warranted unless they learn to adapt to social changes.”

Prof. Park and his co-authors suggest that MNCs in developing countries should adopt a balanced economic-social orientation that can enable them to manage stakeholder challenges as those emerging markets mature. These MNCs need to practice social adaptation by updating their organizational structure in foreign subsidiaries as those markets evolve, and their activities there expand. They also need human resource policies that select and promote local leaders committed to local stakeholders’ social expectations and a staff training system to facilitate employees’ internalization of the values and processes associated with social adaptation.

The results of the study appear in the paper titled “MNC Strategy and Social Adaptation in Emerging Markets” which is co-authored by Professor Park along with Meng Zhao of Moscow School of Management SKOLKOVO and Nan Zhou of China Minsheng Bank. It will be published in the Journal of International Business Studies.

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