INTRODUCTION
In the international business field, liabilities of origin (LOR) is a term used to describe disadvantages of emerging economy-multinational enterprises (EE-MNEs) associated with their national origins (Bartlett & Ghoshal, Reference Bartlett and Ghoshal2000; Marano, Tashman, & Kostova, Reference Marano, Tashman and Kostova2017). Common sources of LOR include incapability of EE-MNEs due to less developed institutional and technological infrastructures in their home countries, and negative stereotypes about EE-MNEs’ countries of origin (Ramachandran & Pant, Reference Ramachandran and Pant2010).
A new LOR resulting from geopolitical conflict between China and the West poses a significant challenge to Chinese firms conducting business in Western countries. Geopolitical and ideological rivalries are not new, nor are the impacts of geopolitical environments on international business. However, this new LOR among Chinese firms is unprecedented in scale and complexity, due to the extensive nature of Chinese investments and the heterogeneity of Chinese businesses in their sensitivity to national security in Western countries. LOR must be extended to encompass this new phenomenon.
CHARACTERISTICS OF THE NEW LOR
The new LOR of Chinese firms has distinctive drivers, mechanisms, and conditions from LOR traditionally experienced by EE-MNEs. First, the new LOR is determined by geopolitical conflict between two countries and sensitivity of the business to national security.[Footnote 1] This is different from traditional LOR, which largely results from institutional distance between home and host countries. Instead of existing as a general condition for Chinese MNEs, the risk of this new LOR is more specific to some firms, including those from high-tech or critical resource industries, of state ownership, or involving technologies with military applications (Witt, Reference Witt2019). These Chinese firms’ operations in Western countries are more likely to be considered a threat to the host country's national security, whether the threat is actual, potential, or perceived.
Second, the mechanisms that give rise to the new LOR are more formal, explicit, and coercive. Governmental discrimination in a host country against the businesses of another country normally occur tacitly. Negative stereotypes about a foreign country also induce LOR through informal mechanisms. However, as geopolitical tensions between the West and China increase, Western host country's state has greater motivations and power to impose targeted measures on Chinse businesses. The Strategic Competition Act recently approved by the US Senate Foreign Relations Committee and a series of executive orders signed by former US President Donald Trump and current President Joe Biden are of this nature.
Finally, the conditions causing the new LOR are fluid. The new LOR originates from both structural trends and transient factors. Dynamics in domestic political environments and sentiments as prompted by changes in political leadership in China or Western countries may affect the new LOR. Boundaries between sensitive and non-sensitive technologies are blurred in many circumstances; the identification of foreign businesses as a threat to national security can be arbitrary. Additionally, mainstream political discourse regarding China in a host country is not necessarily shared in different sectors or among different stakeholders. Therefore, the extent to which a Chinese company faces the new LOR at a given point in time is uncertain, as is the firm's response.
RESPONDING TO THE NEW LOR
Numerous approaches to mitigating the adverse effects of traditional LOR have been suggested. Ramachandran and Pant (Reference Ramachandran and Pant2010) argue that EE-MNEs can catalyze favorable institutional changes or rebuild organizational identity to overcome LOR. EE-MNEs may improve their corporate social responsibility (CSR) reporting (Marano et al., Reference Marano, Tashman and Kostova2017) or form alliances with organizations with other national identities (Amankwah-Amoah & Debrah, Reference Amankwah-Amoah and Debrah2016) to enhance their legitimacy in the host market. In addition to firm-level initiatives, scholars have highlighted the importance of active support to MNEs from state agencies of their home countries (Kolk & Curran, Reference Kolk and Curran2017).
These approaches may be less effective in overcoming the new LOR of Chinese firms. Witt (Reference Witt2019) notes that Chinese governmental interventions using coercive power, as in the case of Meng Wanzhou, CFO of Huawei, reduced the legitimacy of both Huawei and other Chinese firms abroad. Further involvement from the Chinese government may amplify rather than lessen the effects of the new LOR. A legitimation strategy, such as increased CSR reporting, may not be sufficient either; it does not alter the fundamental factors underpinning the new LOR. It is difficult for Chinese subsidiaries to reconcile their dual identities in the context of the new LOR, given the more competitive relationship between home and host countries.
In two recent editorials (Witt, Reference Witt2019; Witt, Li, Välikangas, & Lewin, Reference Witt, Li, Välikangas and Lewin2021), possible responses of Chinese MNEs to the decoupling of China and the West have been explored. Chinese outward foreign direct investment (FDI) in Western countries, especially that for acquiring critical technologies or strategic assets based on a springboard strategy, is likely to be deterred (Witt, Reference Witt2019). New organizational forms may emerge among Chinese MNEs continuing to operate in Western countries. Witt et al. (Reference Witt, Li, Välikangas and Lewin2021: 8) outline two potential and seemingly contrasting organizational arrangements of MNEs in response, one featuring decentralization and localization, the other involving ‘stronger internalization of organizational activities’. Chinese MNEs may also engage with concealment strategies in hostile host countries through novel forms of ownership, such as compartmentalized business groups (Witt, Reference Witt2019). These organizational and strategic responses can all be viewed in terms of the new LOR.
THE CASE OF CHINESE BUSINESSES IN AUSTRALIA
The diplomatic relations between China and Australia have recently worsened. A series of events have underpinned this process, including the introduction of new foreign interference laws in Australia, the Australian government's banning of Huawei from 5G mobile infrastructure, and Australia's push for a global inquiry into the origins of COVID-19. Since 2020, China has introduced various restrictions on Australian goods imports, such as coal, lobsters, timber, red meat, wine, and barley.
High levels of economic complementarity exist between the two countries, one a manufacturing powerhouse and the other a major exporter of resource commodities. In Australia, the ratios of bilateral trade with China and Chinese FDI stocks to its GDP are highest among members of the Five Eyes, an intelligence alliance that is considered a core network of countries in the West against China. The economic connections between Australia and China create a profound dilemma for Chinese businesses in Australia, and vice vera.
Recent measures introduced by the Australian government have directly caused new challenges for Chinese investments in Australia. The Australian government has blocked several high-profile Chinese investment proposals on national security grounds in recent years. As part of the most significant reforms to Australia's foreign investment review framework in more than 20 years,[Footnote 2] the Australian government has implemented a new national security test for foreign investments, including those involved in or connected with critical infrastructure assets, telecommunications, defense or national intelligence communities, or their supply chains. This new law is widely viewed as targeting Chinese investments.
Changing perceptions among the public in Australia have also contributed to the emergence of the new LOR of Chinese businesses. According to independent national surveys,[Footnote 3] Australians’ trust that China will act responsibly has declined from 52% in 2018 to 23% in 2020. Whereas Australians viewed China as the ‘best friend in Asia’ in 2016, in 2020, a majority of the population (94%) believed that Australia needs to find other markets to reduce its economic dependence on China.
Many Chinese businesses responded to this new LOR with divestment, or reduction of their commitments to this foreign market. According to data from the Ministry of Commerce of China, the FDI from China to Australia declined from US$ 4,186 million in 2016 to US$ 2,086 million in 2019, reflecting a 50% decrease over those four years. This decline resulted from a decrease in Chinese investors’ interests in the Australian market and restrictions imposed by the Australian government. The approval of Australia's Foreign Investment Review Board of Chinese investments dropped by 84% in 2019 from 2016. Investments from Chinese state-owned enterprises (SOEs) have decreased much more rapidly than those from private firms. In 2016, SOEs accounted for 51% of Chinese ODI in Australia; this dropped to 16% in 2019 (KPMG & University of Sydney, various years).
Nevertheless, bilateral trade between the two countries continues to grow. From 2016 to 2020, Australia's imports from and exports to China increased by 42% and 78%, respectively. As the new LOR of Chinese firms outweighs advantages associated with FDI, some may have shifted from equity modes to non-equity modes to engage with the Australian market.
When the new LOR is affordable or the exit barriers are high, Chinese MNEs maintain their presence in Western countries. Our preliminary analysis of a sample of 47 Chinese companies listed in the Australian Securities Exchange (ASX)[Footnote 4] suggests some firms have adopted tactics in response to the new LOR. First, five Chinese ASX-listed firms have recently changed their company names, from those reflecting a strong Chinese identity to less identifiable names in terms of their Chinese backgrounds. Second, the occurrences of the words China, Chinese, or Sino in annual reports of 26 companies decreased from 2017–2020 compared with 2013–2016 (17 companies increased their use of these terms).[Footnote 5] Third, the proportion of Chinese nationals in senior management positions increased in 22 companies from 2017–2020, compared with 2013–2016. Chinese nationals in these positions decreased in 10 other companies and the proportion remains the same or the trend is unclear in the remaining 15 companies.
These preliminary findings suggest that the new LOR may have prompted some Chinese companies in Australia to adopt concealment tactics combined with tightened management control. This seems to be a hybrid approach drawing on both localization and internalization strategies as suggested by Witt et al. (Reference Witt, Li, Välikangas and Lewin2021). The downplaying of connections with China may improve the image of companies as ‘local’ firms. The appointment of more Chinese nationals in senior management positions may be designed to mitigate increased transaction costs associated with the new LOR. These measures are incremental; they require adjustments only within existing structures (Witt, et al. Reference Witt, Li, Välikangas and Lewin2021). Their effectiveness is yet to be determined.
CONCLUSION
MNEs’ national identity is less relevant under globalization. By contrast, in global decoupling, Chinese MNEs’ activities will be increasingly viewed in Western host countries from the perspective of their country of origin. Chinese MNEs may consider various strategies to mitigate the effects of the new LOR. They may develop and maintain clear boundaries between geopolitically sensitive and non-sensitive businesses, focus on areas in foreign markets with low degrees of geopolitical sensitivity, leverage the diverse interests in host countries, and avoid the Chinese government's direct involvement in international business.
MNEs are subject to the effects of their geopolitical environments but are also an important force in shaping them. Scholars have argued that economic connections can help prevent wars between nations. Although this notion is still to be tested, MNEs should play a positive role in reducing interstate conflicts through their responsible international business activities.
