Abstract

In our research paper that analyzes the links between companies and politics in unstable regions, we find that most companies only invest abroad if they can benefit from supranationalagreements, or bilateral investment treaties (BITs), while a handful deliberately choose to operate in countries where their investments are much more at risk. Our researchers were also able to prove, for the first time, that when two countries establish a BIT, an increase in cross-border investments is the direct result. Meanwhile, companies that have a great deal of influence in, or that cultivate strong political ties with, the country in which they invest have no need of a BIT. They thus choose environments where they do not have as much competition. Pierre Dussauge, Joao Albino-Pimentel and J. Myles Shaver, Firm non-market capabilities and the effect of supranational institutional safeguards on the location choice of international investments, Strategic Management Journal, oct. 2018, vol. 39, n° 10, pp 2770-2793.

Three questions for Pierre Dussauge, professor of strategy and business policy at HEC

How did you choose such a specific topic?

One of my Brazilian students, Joao Albino-Pimentel, wrote his thesis on this subject. While serving on the staff of the Brazilian embassy in China, he was involved with economic issues and became interested in corporate political connections. He drew on his own experience. As for me, my work focused on international business, so we combined our competencies. Most studies focus on the risks of corporate investment in certain countries. No research had been done on the political ties companies establish with various governments.

What method did you use?

This is a statistical study. We asked ourselves the question “How do companies choose the countries where they will make foreign investments?” By examining 3,669 investments by 793 manufacturing enterprises in 11 different countries, we observed the omnipresence of bilateral investment treaties. There was still the endogeneity question: a chicken-egg issue. It was hard to determine which came first, the BITs or the investments themselves. We also discovered through our research that “pioneer” companies investing in risky countries tend to rely on various forms of political influence, for example by appointing former government leaders to their executive boards or management teams. Companies without access to political support have no other recourse but BITs. What made this study complex was the difficulty of identifying members of executive boards or management teams who cultivate political connections.

What is the precise function of these famous BITs?

BITs are like bodyguards. They are systems that allow a company that believes it has not received fair and equitable treatment to file a claim outside the country where it has invested in order to obtain compensation. Suez, for example, made major investments in water distribution in Argentina. Each time the company made a claim against someone who had not paid a bill, the government blocked the claim to avoid social unrest. Thanks to BITs, companies can file claims with arbitration institutions. Ultimately, bilateral investment treaties tie the hands of the host country’s government.

Pierre Dussauge (H.78)
With a doctorate in management , he is a professor of strategy and business policy at HEC. He has published extensively on strategic management, and his research interests focus on strategies of corporate alliances. He is also a consultant to the management teams of Mars, Fiat and Air France, among others.

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