With the rise of globalisation, companies are increasingly emphasising expanding into emerging foreign markets to broaden their customer base and boost revenue. While expansion is essential, an overfocus on it could divert attention from local stakeholders and their ethical behaviours, resulting in consumer crises.
Therefore, a group of researchers decided to study the stakeholder environment in China and the need for multinational corporations (MNCs) to coevolve in response to the escalating consumer crises. In collaboration with Dr Lingli Luo (Zhejiang University) and Prof Xufei Ma (Chinese University of Hong Kong), Dr Zhao Meng and Prof Sam Park (Nanyang Technological University) penned the paper, “Attention‑Based Constraint to MNC Coevolution in China's Changing Stakeholder Environment”.
The paper explores how coevolution benefits MNCs as they react to consumer challenges and actively influence the environment by improving stakeholders’ ethical behaviour. Furthermore, the researchers suggest that the tension between expansion attention and stakeholder attention hinders MNCs from coevolving with the external environment. Above all, their research reveals an attention-based constraint against MNCs’ coevolution and proposes approaches to overcoming this obstacle.
“The changing stakeholder environment has an adverse effect on MNCs’ business growth in emerging markets. This is clear if you see the recurring consumer crises and media attacks against MNCs in China. Therefore, MNCs must adapt to this change and create a favourable environment for long-term growth. This is what we call a ‘coevolution strategy’.”, Dr Zhao explained the motivations behind his research.
Coevolution and Consumer Crises
Coevolution describes the mutual influence between MNCs and a product-and-service-related stakeholder environment. A stakeholder environment consists of employees, suppliers and dealers whose behaviour directly influences consumers’ experiences of products and services. On the other hand, consumer crises refer to unexpected, high-profile and disruptive events for a firm. These crises often arise due to ethical lapses by stakeholders, such as suppliers using hazardous materials in food products, financial fraud by dealers, false advertisements by local managers or mislabelling of products by under-trained staff.
In China, implementing consumer protection laws has promoted public knowledge of consumer rights and advanced consumer demand for rights protection. With consumer rights agencies and mass media aggressively disclosing firms’ misdeeds or ethical lapses, Chinese consumers increasingly assert and protect their rights.
For instance, in 2005, Heinz experienced a nationwide crisis when the authorities ordered the company to recall over 300,000 chilli sauce bottles that contained a cancer-causing food dye (Aljazeera, 2005). The firm’s local suppliers followed industry norms in distributing this food dye, even though it had been banned by regulations ten years ago. While the suppliers perceived the distribution as ethically acceptable, consumers believed otherwise, which caused a wave of return requests. This shows how firms must take precautions to improve stakeholders’ ethical behaviour rather than relying on public relations management approaches to resolve consumer crises.
Expansion Attention vs Stakeholder Attention
Achieving coevolution can be challenging for MNCs because some managers and decision-makers are more focused on either business expansion or the behaviour of their stakeholders. Expansion attention refers to a firm’s agenda to pursue local operations expansion and business growth, e.g., consumption behaviour, labour costs or suppliers’ delivery speed. On the other hand, stakeholder attention focuses on stakeholders’ social welfare and ethical needs, expectations and practices. Hence, attention-based constraint arises due to the tension between expansion attention and stakeholder attention.
“Through our research, we found a tension between MNCs’ attention to business expansion and their attention to the ethical behaviour of Chinese employees, suppliers, and dealers. Hence, we proposed three hypotheses to present a mediation effect of stakeholder attention on the relationship between expansion attention and consumer crisis risk”, remarked Prof Park.
Three hypotheses that present the effects of stakeholder attention on the relation
between expansion attention and consumer crisis risk
The first hypothesis states how expansion attention increases MNCs’ consumer crisis risk, as decision-makers are occupied with expansion plans and may be less attentive to stakeholders’ unethical behaviour. In contrast, the second hypothesis shows how the attention to improving stakeholders’ ethical behaviour reduces the consumer crisis risk, as MNCs spend more time caring for stakeholders’ needs and even addressing consumer complaints. However, expansion attention reduces stakeholder attention, as suggested in the third hypothesis, especially with MNCs pursuing rapid expansion.
To test these hypotheses, the researchers sampled firms from a list of Fortune Global 500 corporations and their foreign direct investments in China in 2012. The final dataset includes 68 MNCs from 13 countries, covering their operations and consumer crises in China from 2000 to 2013.
The findings show that the effect of expansion attention on consumer crises is positive and significant, thus affirming Hypothesis 1. In support of Hypothesis 2, the regression coefficient is negative and significant, and it is found that stakeholder attention decreases the risk of crisis by about 81.5%. Furthermore, the direct effect of expansion attention on stakeholder attention is negative and significant, supporting Hypothesis 3. Therefore, the analysis suggests that stakeholder attention partially mediates the relation between expansion attention and the occurrence of consumer crises.
Strategies To Overcome Attention-Based Constraint in MNCs
The researchers proposed several approaches for MNCs to overcome the attention-based constraint against coevolution. First, firms can strengthen their resources by paying continual attention to stakeholders’ social welfare and behaviour. This will allow them to renew physical materials (e.g., by providing devices to upgrade supplier capability), and improve social relations (e.g., by developing new policies to govern the supplier relationship). Ultimately, this will reduce the consumer crisis risk and reshape the ethical environment to foster operational sustainability.
Next, the researchers propose that MNCs should reconcile expansion attention and stakeholder attention to allow them to coevolve. Firms need to allocate sufficient attention to local stakeholders’ ethical behaviour without overstretching managers’ bandwidths. For instance, different managers can attend to distinct stakeholders, allowing firms to explore the risks and opportunities of a wide range of stakeholder behaviour.
Lastly, the research supports that matching the focus of attention with environmental change is crucial for MNCs’ foreign operations. However, simply increasing the level of attention does not necessarily mitigate, and may even worsen, a firm’s risk of facing ethical challenges in China. Therefore, MNCs must keep their attention compatible and coevolve with the stakeholder environment.
“Our research shows that matching the focus of attention with the stakeholder environment change is also important for MNCs to achieve operational sustainability in foreign markets. Moreover, we hope for firms to release managers’ bandwidth through the division of labour and integrating stakeholder engagement as a critical factor in the performance of foreign subsidiaries”, said Dr Zhao, reflecting on the implications of his research.
Note: This research paper was published by the Journal of Business Ethics (Springer Link), on 11 May 2023.
Aljazeera (2005, March 7). Heinz recalls cancer-causing products.
Dr. Zhao Meng is a senior lecturer at the Nanyang Business School, Nanyang Technological University, and a senior research fellow at the Nanyang Center for Emerging Markets. His research examines how individuals and organizations manage the relationship between their business-oriented and socially-oriented values and goals. He primarily focuses on contexts of firms’ social crises and stakeholder management in emerging markets and social enterprises in Asian countries. His publications have appeared in the Journal of International Business Studies, Journal of Business Ethics, Business Horizons, Stanford Social Innovation Review, Journal of Social Entrepreneurship, Journal of Asian Public Policy, Financial Times, etc.
Prof Sam Park is the President's Chair and Professor in Strategy and International Business, and also the Director of the Nanyang Center for Emerging Markets. His recent research focuses on sustained high-performance organizations, emerging market multinationals, and growth strategies for multinational and local companies in emerging markets. His research appeared in leading management journals, including Academy of Management Journal, Academy of Management Review, Strategic Management Journal, Management Science, Journal of International Business Studies, Sloan Management Review, Organization Science, and Journal of Business Venturing, among others, that are broadly cited in the areas of strategic alliances, joint ventures, China management, and emerging market strategies.
This research paper is a joint work with Dr Lingli Luo (Zhejiang University) and Prof Xufei Ma (Chinese University of Hong Kong).