The nasty face of the liability of foreignness: MNCs and rent extraction

Abstract

Purpose This study aims to clarify the factors that act as a buffer to rent extraction from multi-national corporations (MNCs) in exchange relationships with the host country’s political actors. Design/methodology/approach This study proposes a conceptual model of the factors that determine rent extraction by host country political actors from MNCs. The model identifies the sources of power the MNC can use to alleviate the power imbalance relative to the political actor to decrease rent extraction. Additionally, it identifies the factors that constrain the power-advantaged political actor, thus moderating the relationship between power imbalance and rent extraction. Findings This conceptual paper’s propositions remain for future empirical validation. Originality/value This study integrates insights from the international business literature and resource dependence theory (RDT) to identify the determinants of firm-specific rent extraction risk for MNCs. First, the model sheds light on the heterogeneity among MNCs in their susceptibility to rent extraction and their ability to manage their liability of foreignness in the host country. Second, by integrating the horizontal and vertical distribution of power in the political environment to analyze the power-dependence relationship between the MNC and host country political actors, the framework addresses a shortcoming of RDT and accounts for the dynamics of the external environment for MNCs managing their dependencies. This study also provides a basis for discussing the rent extraction MNCs face worldwide and lays the foundation for future empirical works.