Coping with Social Capital Investment by Local Firms: The Strategies of MNEs in China

Firms compete with each other not only with market-based competitiveness (e.g. technology, brand, scale, etc.) but also with social based ones. In emerging markets where multinational enterprises (MNEs) typically carry superior market-based competitive advantages, local firms may leverage their institutional embeddedness and invest in social capital to fight back. Taking a competitive rivalry perspective, we argue that social capital investment by local firms may effectively hurt MNE subsidiariesi¯ performance, especially when the resource profiles between the local firms and MNEs are overlapping. MNEs may cope with such competition based on social capital either by further differentiating their market-based competitiveness or by offsetting their disadvantages by also engaging in social capital investment in the host market. An empirical study based on four-year panel data of 29,789 foreign-invested firms in China provided support for these arguments.