Recent research investigates the strategic responses of local firms to inward foreign direct investment (FDI) in emerging markets. While prior studies highlight FDI’s potential to enhance local firms’ productivity and innovation through knowledge spillovers, this new study delves into how local firms should strategically navigate the competitive pressures posed by foreign firms. Published in the Global Strategy Journal, the study underscores the importance of local firms adopting a balanced approach by integrating both market and nonmarket strategies to maximise benefits, as more than just political connections are needed.

Inward FDI refers to when a company acquires or establishes operations in a foreign country, bringing opportunities and challenges to local firms. On the one hand, local firms can benefit from knowledge transfers and technological advancements brought by foreign firms. On the other hand, they face intensified competition in their domestic markets. To address these dual challenges, local firms are advised to deploy market strategies to enhance marketplace competitiveness alongside nonmarket strategies that influence the regulatory and public opinion environments.

Meitong Dong from The University of Hong Kong, Pengcheng Ma from Renmin University of China, and Lin Cui from the Australian National University explored the dynamics between foreign firms, local firms, and the local government. Drawing on resource dependence theory, the researchers argue that the impact of inward FDI on local firms’ reliance on government resources follows a U-shaped curve. Initially, low to moderate levels of inward FDI can reduce local firms’ dependence on political connections by providing alternative resources. However, as FDI levels increase, the competitive threats outweigh the benefits, prompting local firms to strengthen their political ties to level the playing field.

The study focused on China, an exemplar of an emerging economy and a major destination for FDI, using a dataset spanning 2009 to 2017 encompassing 1,463 Chinese listed firms. The researchers analysed variables such as FDI inflows, local firms’ political connections, governmental R&D funding, institutional development, and market diversification to gauge how resource similarities between foreign firms and the government influence local firms’ strategic responses.

The findings revealed a nuanced relationship where the similarity of resources provided by foreign firms and the government significantly influenced local firms’ adoption of nonmarket strategies, particularly political connections. When resources from FDI and the government were similar, local firms were more inclined to leverage political ties to counterbalance competitive pressures. This highlights the strategic importance of effectively aligning market and nonmarket strategies amidst growing FDI.

The authors emphasised that local firms in emerging markets cannot rely solely on governmental support to mitigate the competitive impacts of FDI. Instead, they advocate for a dual-pronged approach where firms integrate market competitiveness with strategic nonmarket actions. Understanding the complementarity between resources from FDI and governmental support is crucial for local firms seeking to optimise their strategic responses.

The study underscores the strategic imperative for local firms to adopt a holistic approach when confronted with increasing inward FDI. By blending market-driven competitiveness with astute nonmarket strategies, local firms can better navigate the competitive landscape and harness the potential benefits of foreign investment while safeguarding their market positions. This research contributes valuable insights into how firms in emerging markets can effectively manage the complexities of globalisation and foreign competition.

More information: Meitong Dong et al, Inward FDI and local firms’ political connections in emerging markets: Evidence from China, Global Strategy Journal. DOI: 10.1007/s00394-023-03123-x

Journal information: Global Strategy Journal Provided by Strategic Management Society