AIB 2014 Annual Meeting: How do MNEs overcome distrust and build legitimacy in host countries?

Jun 24, 2014

Foreign direct investment (FDI), particularly that from emerging markets such as China, has rocketed in recent years. Almost ten years ago Chinese outward investment was negligible, yet last year over $100 billion was invested. Yet with much distrust existing in the countries that are the beneficiaries of the investment, MNEs are increasingly looking to take action in order to get stakeholders onside.

Daniel Shapiro, Dean of the Beedie School of Business, chaired an engaging opening session at the Academy of International Business (AIB) 2014 Annual Meeting between a panel of experts from both academia and industry on the topic of how multi-national enterprises can overcome distrust and build legitimacy in their host countries.

The panel consisted of distinguished academics Marshall Meyer, University of Pennsylvania, Steve Globerman, Western Washington University, and Karl Savant, Columbia University. Meanwhile, the practitioner point of view in the discussion was represented by Wei Shao, National Practice Group Co-Leader for China at global law firm Dentons Canada.

Shao opened the session with an overview of Chinese investment in Canada since 2005, noting that China has invested some $42 billion in that period, the majority of which is concentrated in the energy sector, covering all ten provinces and two territories.

He revealed that in discussions with Chinese clients, they generally view Canada as being under strong influence from the USA, but that Canada is considered a safe country to invest in, particularly in the energy sector, with liquid natural gas likely to prove popular in the future.

Savant then offered his opinion on the issue, noting that though the panel discussion is supposed to concern MNEs from all countries, the reaction to Chinese outward investment has generated intense interest around the world and means that much of the focus on the issue concerns China.

State-owned enterprises (SOEs) and Chinese government policy dictate much of China’s outward investment, he commented, and in turn generate concerns in host countries, in particular, fear of unfair competition and the concern that Chinese SOEs pursue objectives that are not commercial, under instruction from their government.

In order to deal with these challenges, he noted that China has already taken steps by negotiating bilateral investment treaties with the US and Canada, and is in the process of doing so with the EU.

Meyer followed by discussing some of the difficulties Chinese firms have in operating within their own borders, citing the example of Chinese trucks hauling goods costing more than trucks in the US do for similar distances, despite wages in the US being far higher.

Problems such as this, caused by poor infrastructure, he said have caused domestic Chinese firms to develop their own domestic logistics platform, wherein they push manufacturing to the periphery and focus on design, logistics and distribution. By doing so they open up their business to investment, a phenomenon he labeled, “going out by going in”.

He cited an example of a Chinese company that assembled a database of the quality of water in Chinese homes, but instead of monetizing it for themselves, made it publicly available in order to create a market domestically. He then compared this with the hypothetical example of a Chinese organization going into another country and creating a database of water supplies, concluding that there would be a public outcry if this occurred.

Finally, Globerman posed the question as to why state control of outward investment is a big deal, claiming that he had yet to hear a good reason for this common conception. He said that SOEs attempting to enter a country merely provides the government with an excuse to delay or discourage that investment, and that SOEs often have to jump through more hoops than a domestic investor would.

Indeed, he pointed out that state-owned FDI often inflates the selling price of assets, which benefits the host country and can provide benefits for social issues in the host country. The only loser in that scenario is the foreign investor, which has to pay a price above market value for the investment.

In closing, Shapiro commented that the contextual issues suggest that more thought is required as to whether treaties or formal negotiations are sufficient to solve the issue of building legitimacy.

He also noted the specific issues that arise when investing in the natural resource industries, and the future of the Chinese economy. “As time goes on, and the Chinese economy matures and becomes driven by innovative products – which many people will see globally are designed to solve social problems – will any of these legitimacy issues simply disappear as we move to commercially viable products?” he concluded.

For more information on the AIB 2014 Annual Meeting, visit

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