The Effect of Sociopolitical Legitimacy on Foreign Firm Political Strategy

Abstract

This paper investigates how the perceived legitimacy of foreign firms in the eyes of host-country stakeholders determines their host-country political strategies. Building on international business research, we propose that home-country political systems influence host-country legitimacy assessments of foreign firms. In turn, a foreign firm’s sociopolitical legitimacy, driven in part by home-country characteristics, will influence whether it lobbies through in-house lobbyists or outsources the activity to lobbying firms to maximize the effectiveness of its political activities. Using a novel instrumental variable approach for identification and a panel dataset of lobbying activities of foreign firms in the United States, the results support our arguments that a foreign MNE is less likely to use in-house lobbyists if its legitimacy is negatively impacted by home-country characteristics. Our study contributes to the international business and nonmarket strategy literatures.

Keywords: Sociopolitical legitimacy, political strategy, nonmarket strategy

JEL Classification: M10