Keywords

1 The Background to This Volume

This volume of the AIB-UKI (Academy of International Business United Kingdom and Ireland Chapter) book series is derived from the 48th Annual Conference of AIB-UKI, organized jointly with the 8th Reading International Business Conference, held at the Henley Business School, University of Reading from 8th to 9th April 2022. It was the first post-pandemic AIB-UKI conference held in person since 2019. The conference maintained the tradition of the AIB-UKI conference to encourage a broad range of papers to the parallel sessions, and at the same time, the Reading tradition of open-ended debates and interactive plenary sessions. This volume is composed of a careful selection of articles from the conference.

The central theme of the conference was Contemporary Issues in International Business: Inequality, Geography, and Global Value Chains (GVCs). During the last decade, we have been observing growing economic uncertainties and many socio-cultural challenges, which may suggest the possibility of seeing the tail end of globalization. While many talk about the world’s grand challenges (e.g., climate changes, public health, inequality, poverty) affecting not only developing but also developed countries (Buckley et al., 2017; George et al., 2016), national governments tend to vary in how they respond to these challenges, and as a result, the world is faced with the absence of effective multilateral coordination but divergent regulatory institutions and geopolitical tensions. Societies have become increasingly intolerant to immigration, which in turn reduces people’s mobility. At the same time, populist movements advocating nationalism and economic protectionism have also gained influence, pushing back against global cooperation and key aspects of globalization trends of the past three decades (Meyer & Li, 2022; Rodríguez-Pose, 2020). In particular, the tensions resulting from the growing inequality within and between countries and individuals, coupled with a rapidly changing global business environment and many recent disruptions in the global economy, beg the important question about the role of multinational enterprises (MNEs).

The economic and social consequences of the COVID-19 pandemic have made even more obvious the growing inequality between geographical locations and individuals both within and across countries. More importantly, the overall impacts of inequality may be substantial over the medium-to-long term due to a slow and uneven recovery in many developing countries. Disparities in school learning losses during the pandemic period will also have long-lasting effects on inequality of opportunity and social mobility (Narayan et al., 2022). MNEs are key actors in globalization, not only through trade and investment but also as players and coordinators of GVCs. By both passive and active means, MNEs can influence the opportunities for workers and societies, both within their hierarchies and those of their suppliers and customers. However, it is often argued that MNEs are primarily responsible to their shareholders, and as such, social injustices are not always within this remit, despite the talk of corporate social responsibility and the United Nations’ Sustainable Development Goals (SDGs). MNE-coordinated GVCs face challenges in enforcing higher labor standards, working conditions, and environmental protection of contractual, lower-tier suppliers. In some instances, this has seen a return to internalization and a resultant increased vertical integration, which may have other side effects (Narula, 2019). MNE activities also play an important role in determining or reinforcing spatial inequalities. Global cities have become prominent locations for MNE investment, especially in knowledge-intensive activities. This has contributed to the process leading to a ‘winner-takes-all’ economic geography. It has been reported that MNEs can substitute local connections with international ones. This can exacerbate the local disconnectedness between the city and its surroundings. However, MNEs are also known for their potential contribution to local spawning by engaging with the local entrepreneurial ecosystem to create and renew local connectedness. The pandemic has severely hit many cities and urban-oriented systems. It could bring about a series of social changes in the structure and morphology of cities, suburbs, and metropolitan regions which might affect their attractiveness to MNEs. This has the potential to lead the way to the emergence of intermediate cities and contribute to reducing the inequality between cities and locations.

In the conference, we have discussed three related questions: first, can MNEs really play a role in reducing inequality, and if so, to what extent? Second, can MNEs help reduce inequalities between core and periphery or between cities and their surroundings? Third, can MNEs cascade sustainability compliance throughout their GVCs? These issues were debated in three Reading-style plenary sessions with stellar panel members, a diverse mix of senior and junior scholars from around the world.

1.1 Can MNEs Really Play a Role in Reducing Inequality, and if so, to What Extent?

For the first question,Footnote 1 our panelists argued that MNEs can play a critical role in reducing economic and social inequality in various ways. For example, MNEs may bring their firm-specific advantages and knowledge assets (e.g., technologies, best practices) that local firms can benefit from learning new knowledge and upgrading their capabilities. This in turn can lead to the upgrading of local workforce skills, wages, and eventually reduce inequality. It was also noted that, in some regions with weaker governments and institutions such as Africa, MNEs can contribute to the development of both formal and informal sectors, creating value together with local stakeholders, and eventually reducing inequality and improving social conditions. On the other hand, the discussion pointed out that MNEs have limited capabilities and incentives to address inequality. Indeed, MNEs seem to engage in strategies to be “good and socially responsible” companies to help reduce inequality, enforce human rights, or mitigate environmental damages, but their commitment and efforts to address these issues in the form of corporate social responsibility activities are insufficient or at least, not ambitious. MNEs are taking too much credit for doing so little, while examples of MNE misbehaviors abound, which are too often classified as merely ‘unintended’ consequences.

1.2 Can MNEs Help Reduce Inequalities Between Core and Periphery or Between Cities and Their Surroundings?

Regarding the second question,Footnote 2 it was noted that MNEs can contribute to the local disconnectedness by creating ‘economic death zones’ beyond the catchment areas of large or global cities. Stated differently, global connectedness may disrupt local connectedness, as a result of two factors: (i) global orchestration of resources and markets, (ii) lack of sufficient local entrepreneurial eco-systems in the catchment areas of global cities (Lorenzen et al., 2020). Recently, we have also observed that large MNE headquarters location decisions can shape the landscape of major cities and subsequently increase inequality by pushing up the living costs and leading to increasingly gentrified cities. However, our panelists also discussed that a non-trivial share of MNE activities is attracted to non-core areas. Another recent trend has been the re-shoring or near-shoring of economic activities that have the potential to benefit peripheral areas. In short, MNE activities are attracted by different location characteristics (Castellani et al., 2022), and knowledge-intensive activities have increasingly concentrated in core areas, which in turn, may create tensions and increase inequality within and between countries and cities. This begs an important question about the role of institutions and policies in affecting MNE strategies and decisions, as well as the necessary conditions for lagging cities and locations to become more attractive for inward investment.

1.3 Can MNEs Cascade Sustainability Compliance Throughout Their GVCs?

Finally, regarding the third question,Footnote 3 the debate was focused on the conundrum of how MNEs can ensure cascading sustainability compliance along their GVCs. Today, MNEs face huge market and non-market pressures to promote sustainability from various stakeholder groups. However, many MNEs, even with the best intentions, struggle to ensure sustainability compliance with their suppliers. Our panelists mainly discussed whether MNEs have ‘what it takes’ to ensure cascading sustainability compliance throughout their GVCs and whether they are willing to do so. The discussion also touched on the internalization theory of cascading compliance, in other words, whether promoting sustainability in their GVCs will lead to more internalization or not. It was mentioned that MNEs have ‘new’ control and coordination mechanisms—which are not available in the market—that they can use to promote cascading compliance (e.g., digital technologies). Moreover, MNEs can develop a unique external governance capability to promote compliance in their GVCs. On the other side, our panelists also argued that the ‘carrots and sticks’ that MNEs face for promoting cascading compliance are not sufficient, while internalizing transactions that are currently external to the firm may prevent MNEs from investing in ‘efficient’ governance mechanisms. Indeed, implementing cascading compliance is usually too expensive and complex for MNEs (Soundararajan & Brammer, 2018).

Ultimately, in the present world where global disruptions are prevalent, globalization is being challenged, and MNEs are under increasing pressures to promote sustainability; both managers and policymakers will need to be smarter about decision-making, particularly concerning the interest of various stakeholders. Beyond the broader context of the panel discussions, this volume seeks to provide a number of important contributions to some of the most current debates in the international business (IB) research. A variety of contemporary issues and questions about inequality, geography, and GVCs are all put under the spotlight. In doing so, this book aims to provide a richer understanding of MNE activities and how they are being affected by the complex and dynamic environmental settings in which they operate.

2 Contributions to This Volume

2.1 Part I: Inequality and Institutions

Part I offers a collection of papers that investigate the intricate connection between globalization, MNEs, and inequalities, as well as the mediating role of different types of institutions at different levels. During the last four decades, the world has seen a sharp increase in within-country inequalities, that is no longer circumscribed to low- and middle-income countries. At the same time, the world has seen a rapid increase in globalization driven primarily by the cross-border activity of MNEs. Although some research has recently pointed out that MNEs can be a key source of increased inequalities in the host economies—either by direct or indirect action or by inaction—our understanding of the role of MNEs in affecting within-country inequality remains at a very early stage (Narula & van der Straaten, 2021). Moreover, the interaction of institutions at different levels plays a crucial role in determining the social, economic, and environmental outcomes of both market and non-market firm strategies. Part I comprises three chapters that address some compelling questions revolving around MNEs and inequalities, and the mediating role of institutions that, so far, have attracted limited attention in the IB literature.

MNEs may affect social and economic inequalities, either directly through their investment and divestment decisions or indirectly through linkages with the domestic sector in the host economy. In the first chapter of Part I, “Left Behind. Research on Foreign Divestment and Local Employees,” Nguyen takes stock on the literature on foreign divestment decisions—the closing or selling-off an active business unit in a host country—and local workers, while proposing avenues for further research around this topic. By means of a systematic review and meta-analysis of the literature, the author uncovers two main imbalances in the foreign divestment scholarly work. First, while the bulk of the empirical work on this matter has focused on divestment choices from the MNEs’ perspective, for example, exit costs and value creation, very little work has been undertaken to studying the relationship between MNEs divesting choices and local workers. Second, most of these papers address how local employees influence MNEs’ divesting decisions, while only a handful study the effects of divestment modes and processes on local employees’ social and economic outcomes. This seems to be a striking omission given that local employees, especially low-skill workers, will be disproportionally affected—for instance, decrease in earnings, job loss, reduced living standards, and truncated career development—by foreign divestment decisions, thus potentially increasing inequalities. After a thorough review of the state of the art, Nguyen offers rather thought-provoking lines for future research in both directions of the ‘foreign divestment-local employees’ nexus.

MNEs may impact social and economic inequality not only via their foreign direct investment (FDI) activities but also through the implementation of their corporate social responsibility (CSR) strategies. In the second chapter of Part I, “‘Universal’ CSR and Its Discontents in an Emerging Economy,” Brejnholt discusses how different institutional configurations have led Brazilian MNEs to increasingly apply universal CSR practices that disregard the local context in which they operate, and how this leads to different outcomes which may create different types of discontents. The author challenges the view that intended social and environmental outcomes of CSR are a result of ‘weaker’ domestic institutional quality, but rather they are a result of how different institutional prescriptions interact under different institutional arrangements. Drawing on 30 semi-structured interviews with relevant CSR stakeholders, the findings suggest continued concerns for CSR decoupling between policy and practice leading to unequal socioeconomic and environmental outcomes in local communities. The causes for such decoupling are found in institutional incongruences between community-oriented CSR engagement and the increased expectation for marketized forms of ‘universal’ CSR adoption—associated with global standards guided by financial priorities over social and environmental engagement. In addition, these incongruences tend to be enhanced by the lack of systematic enforcement and adequate oversight by the State, which effectively empowers a limited group of Brazilian MNEs rather than the public. Therefore, leaving CSR practice susceptible to ambiguous reporting and externalized responsibility (or irresponsibility) ultimately leads to rising unequal social, economic, and environmental outcomes in local communities.

Finally, MNEs may also have effects on vulnerable groups of the population through their corporate political activity (CPA) actions or inactions in response to institutional schisms. In the last chapter of Part I, “Using Non-market Strategies to Respond to Institutional Schisms: The Case of Florida House Bill 1557 and the Walt Disney Company,” Moore, Pacheco, Brandl, and Dau make an account on how the CPA actions or inactions of a well-established MNE like the Walt Disney Company, in response to an institutional schism, may affect international human rights agendas, for example, those related to equity, diversity, and inclusion (EDI). In particular, the authors analyze how Disney’s response to an institutional schism created by United States national policies (Constitution and Supreme Court precedents) and those developed by the state of Florida, that is, House Bill 1557 (also referred to as the ‘Don’t Say Gay’ bill) has the potential to actively contribute to promoting or hindering a public agenda for social change, such as the rights of the LGBTQIA+ community that has consistently suffered significant social marginalization. After facing considerable backlash from consumers and activists due to the company’s initial silence, Disney chose to transform the institutional environment in the state through explicit CPA for EDI. By using the Disney case study, the authors show how non-market strategies are vulnerable in the face of institutional schisms that create uncertainty and ambiguity in business environments, especially when they ensue from misalignment of national and subnational level institutions. Importantly, the discussion also highlights how firms’ actions have significant consequences on social outcomes and can either support or hinder their advancements.

2.2 Part II: Geography

In the age of the new economy, the boundary of world business has been undergoing challenging and dynamic changes significantly influencing FDI activities. Part II of the volume, therefore, includes three thought-provoking studies that aim to address some critical questions regarding the value-creating role of FDI and what influence the FDI outflows and inflows. In particular, rooted in the political institutions literature and economic geography and based on multiple levels of analysis, Part II combines contextualized insights into some topical and timely issues of FDI, which are crucial but have remained understudied. The efforts to address these FDI questions can lead to both economic and social consequences. Part II comprises one conceptual paper studying China as the home country context and two empirical studies using EU regions as the host country context. Taken together, the three chapters included in Part II can not only advance the field but also hold the potential to enlighten a community of MNE managers and policymakers.

The first chapter of Part II is entitled, “Political Risk and Location Choice of Chinese SMEs.” In this chapter, Chen, Giroud, and Rygh bring to the fore an important yet under-explained research question: the association between host country political risk and the location choice of Chinese small and medium-sized enterprises (SMEs). This research question is intriguing and relevant in that FDI by Chinese SMEs has increased significantly in the past two decades. However, little scholarly attention has been paid to the location choices of these SMEs given the particular role of host country political risk. To address this question, the authors contrast and compare multiple political institutions approach lenses such as OLI paradigm, institutional economics, and organizational institutionalism, while accounting for both China and the host country institutional factors. The key message from this chapter is that what seems to have applied to large Chinese MNEs, for example, being less sensitive to host country political risks, might not be necessarily applicable to Chinese SMEs. Meaningful theoretical adaptations are therefore needed in order to better explain the outward FDI pattern of Chinese SMEs. In addition, this chapter suggested some fruitful avenues for future research. Given the increased geopolitical tensions, China’s “One Belt One Road” initiative and its “Go Global” initiative, this conceptual piece is very topical.

The second chapter of Part II is entitled, “FDI in Balkan Countries: The Role of EU Accession on FDI Attraction.” In this chapter, Benfratello, Ambrosio, Sangrigoli, and Scabbia investigate the link between EU accession and the positive gains in FDI into Balkan countries. To that end, the authors take a sub-regional perspective and use a comprehensive set of factors to single out the country-of-origin heterogeneity. These factors include market size, openness to trade, wages and governance, and different forms of co-location between the new investment and those previously located in the same host country. Based on 9185 greenfield FDIs locating in 8 Balkan countries from 84 origin countries worldwide over the 2003–2019 period, the authors found that EU accession is associated with positive gains in FDI. The findings, however, appeared to be driven by European investors, while non-EU MNEs do not seem to be affected by the EU membership of potential destinations. This undertaking, which is among the first to investigate FDI issues in Balkan countries, is well-motivated. This is because FDI inflows are generally positively associated with unemployment reduction, infrastructure development, and managerial and technological advancement in the recipient country contexts while Balkan countries have long suffered from political and ethnic conflicts, thus receiving lower FDI inflows.

The final chapter of Part II is entitled, “Innovative Foreign Direct Investments and the Knowledge Sources for Green and Digital Inventions: A Patent-Based Analysis.” Grounded in the economic geography literature, Bello, Castellani, Damioli, Marin, and Montresor highlight the important role of FDI inflows and outflows in knowledge exchange and transfer with respect to green and digital technologies for European countries. More specifically, the authors explore directly whether knowledge exchange that is beneficial to green and digital technology development will occur due to the linkage between two locations established by FDI. Based on a gravity model, this chapter provides interesting empirical evidence such that FDI inflows, in the form of either greenfield FDIs or cross-border M&As, into EU metropolitan and NUTS (nomenclature of territorial units for statistics) 3 regions did enable EU territories to access knowledge developed in the home countries of the MNEs that enter these EU territories while FDI outflows from these EU territories did not achieve significant reverse knowledge transfer. The authors also find that the positive relationship between FDI inflows and the knowledge base of green and digital technologies appears to be stronger in the case of digital technologies and when it is driven by more recent EU patent activities. Combined, the findings reveal the important pipeline role of MNEs carrying out innovative activities in the EU in enabling EU regions to get access to sources of knowledge abroad. Considering the current COVID-19 disruptions, soaring costs of energy, and accelerated digitalization trend, the research question is very timely.

2.3 Part III: Global Value Chains

Part III offers a collection of chapters which delve into the complex phenomenon of GVCs, focusing on the geographical location of value chain activities, the distribution of “value” across countries, the impact of GVC participation on environmental issues, and the role of GVCs on resilience. GVCs have been investigated by different but related disciplines and analyzed from different levels, namely macro, meso, and micro. The three chapters in this part investigate the topic with a multidisciplinary approach, combining insights from IB, international economics, economic geography and regional science, and offer new evidence at different levels of analysis.

In the first chapter of Part III, “Assessing Value Capture in GVCs: Conceptual Issues and Evidence at the Country Level,” Coveri, Paglialunga, and Zanfei investigate the geographical distribution of value chain activities between advanced and emerging economies by providing new empirical evidence on the “smile curve”, a well-established concept in IB and international economics, where empirical evidence is still limited. Their study aims to overcome some of the data limitations of previous empirical studies on measuring the specialization of countries across GVC functions. More specifically, they use micro-level inward FDI data from the fDi Markets database, with global coverage during the period 2003–2018. The advantage of this dataset is that it distinguishes the specific functions involved in the FDI events, as it reports the value chain function for each FDI project (e.g., research and development, manufacturing, etc.). Their analysis is then developed in two parts. First, they measure the “functional specialization in FDI” of the country computing an FDI-based specialization index for the different stages of the value chain (i.e., upstream, production, and downstream). Findings show that advanced economies are more specialized in intangible and knowledge-intensive upstream and downstream activities, while low- and middle-income economies are more specialized in production activities. Second, their analysis continues with a focus on the economic returns of such FDI-based specialization. In detail, they find that a higher specialization in production functions is associated with a lower amount of value captured from GVC participation, measured with the domestic value added embodied in exports. These findings shed new light on the international division of labor and the distribution of activities, hence value along the value chain between advanced and emerging economies.

The second chapter of Part III, “The Relationship Between Global Value Chains, Green Technologies, and Air Pollution. Initial Evidence for EU Regions” by Colozza and Pietrobelli, discusses the role of GVC participation in green patents and air pollution at the regional level in Europe. GVCs may facilitate the diffusion of knowledge, including “green” (environment-related) knowledge, and contribute to the adoption and production of “green” technologies. In turn, green technologies can have an impact on reducing emissions of air pollutants. Furthermore, GVC participation could reduce air pollutant emissions, but the “pollution haven” argument must be included in the whole picture: GVC participation can ultimately have a negative impact on emissions, because polluting activities might be offshored in other regions rather than those participating in GVCs. This chapter contributes to the literature by offering evidence on the above relationships, focusing on NUTS-2 regions in Europe. More in detail, the analysis is carried out in two stages. First, the relationship between GVC participation and green technologies in EU regions is assessed, and the results show a positive correlation between participation and green patents. In the second part of the analysis, they investigate the effect of green patents and GVC participation on the level of air pollution per capita. Preliminary evidence suggests that lower pollution levels are present in regions with a higher number of environment-related patents. Moreover, the data show an interesting negative correlation between GVC participation and air pollution, suggesting that regions with greater GVC participation have lower levels of emissions. However, the analysis highlights the importance of taking into account the “pollution haven” hypothesis, and one way to control the dependence of regions on productions offshored in other territories is through backward participation.

In the last chapter of Part III, “Global Value Chain Resilience and Reshoring During Covid-19: Challenges in a Post-Covid World,” Marvasi provides a collection of empirical evidence on GVCs and resilience during the COVID-19 disruptions, moving from an aggregate country-level to a micro-level perspective, by looking at the response of Italian companies to COVID-19 shocks. Starting with a country-level picture, evidence shows a dual role of GVC participation during the pandemic, acting as a transmission channel of shock during the first wave of the pandemic, but contributing to a relatively stronger resilience phase in the second wave. This correlation between resilience and GVC participation is confirmed also in the analysis of sectoral data. The pandemic has dramatically affected all service industries, less internationally tradable and more sensitive to face-to-face interactions. However, a strong heterogeneity appears even among manufacturing industries, where industries less involved in GVC are hit more seriously. Moving toward a firm-level focus, the chapter shows that larger and more internationalized firms are more resilient and suffer less from COVID-19 shocks, based on the evidence provided by the World Bank Enterprise Survey. When looking at the GVC angle, data from the Business Outlook Survey on industrial and service firms in Italy by the Bank of Italy support the idea of the sticky nature of GVCs, with a slight sign of regionalization in terms of the location of both production facilities and suppliers. The chapter concludes by discussing some key factors playing a role in the future of GVCs. Diversification of suppliers and regionalization of GVCs can reduce the exposure to shocks driven by interconnectedness, but at the risk of higher costs and reduced efficiency. The nature of the shock can also affect companies’ decisions, as the impact and the response to temporary and permanent shocks can be very different.