Before moving abroad, businesses looking to go global should think about building their political connections at home, according to the results of a new study co-authored by CEIBS faculty. Titled “Diplomatic and Corporate Networks: Bridges to foreign locations,” the study explores how interactions between business networks and diplomatic relationships can impact where firms invest or locate abroad.

The study builds on network theory, which considers a business network to be like a series of pipes that facilitate the flow of information and resources from one member to another.  Pipes that run through firms, home governments, and host governments often carry valuable information on business opportunities in host markets. When diplomatic relations between two countries are good, their diplomats will be engaged with a variety of each other’s stakeholders and they become hubs that can facilitate cross-border interactions between people and organizations. The researchers found that firms with good ties to their home government are better able to plug into these diplomatic networks and leverage them to support their businesses abroad. Besides enabling them to tap into this information pipeline, good diplomatic connections with host governments help firms to reduce political risk and enhance the legitimacy of their foreign investment. The study also shows that when deciding where to invest or locate abroad, firms are influenced by the diplomatic ties of their home countries.    

The researchers looked at data from 1,432 overseas subsidiaries of 516 publicly listed companies in China established from 2003 to 2014 for their study. The sample subsidiaries are located in 56 countries, and the researchers controlled for the various host country factors that are likely to affect a firm’s location choice, including technology, natural resources, geographic distance, and bilateral relations (trade, investment treaties and free trade agreements). The study also includes observational research; one of the authors joined a visit by the Chinese Consul General to Hamburg that promoted Chinese investment in Germany, as well as a German Chamber of Commerce in China event that aimed to promote German companies in China.

While the study explored trends across all the countries in the sample, just looking at the number of Chinese firms invested in Germany versus Singapore provides a good illustration of the overall results. Germany has moderately good relations with China, and has about 7.8% of all foreign subsidiaries of Chinese firms. By comparison, China and Singapore have very good diplomatic relations, with very similar views on global issues, and Singapore has 10.4% of the foreign subsidiaries of Chinese firms.

Both policymakers and firms can learn from the findings. Home country policymakers can influence the business environment their firms face abroad. Through collaborative activities, they can develop trusting relationships with host country governments that will help open doors for firms from their country and give them an advantage over competitors from elsewhere. For globalizing firms there are a few things to consider. Those with government connections at home should reach out to their country’s diplomatic services to help facilitate their entry and investments abroad, and those who lack those connections should find ways to cultivate those ties. In addition firms may be able to leverage their political ties at home to lobby host countries to improve policies that will benefit them abroad.

The paper has been published by the Journal of International Business Studies. The CEIBS co-authors are Professor of Strategy and International Business Klaus Meyer; Vice President and Dean and Cathay Capital Chair in Accounting Professor Ding Yuan; and Associate Professor of Finance Zhang Hua; along with Professor Jing Li of the Beedie School of Business, Simon Fraser University.

Read the paper here.