Dealing with Trust Deficit and Liabilities of Foreignness in Host Countries: Chinese Multinational Enterprises in Australia

The case study method has proven to be an effective tool to generate and test theory but is subject to criticism for a lack of methodological rigor in the process of data collection and analysis (Thomas, 2004; Oesterle & Wolf, 2011; Wolf & Rosenberg, 2012). Therefore, this study took steps to establish trustworthiness following the procedures suggested by Cuervo-Cazurra et al. (2016), Nielsen et al. (2020), and Singh et al. (2021), such as data replication, contextual triangulation, data triangulation, and investigator triangulation. For example, adopting a multiple case design and a longitudinal approach enables us to achieve data replication across cases and time points (Cuervo-Cazurra et al., 2016). Our case MNEs located in different industries and locations, we visited each case MNE on more than one occasion, and interviewed key informants on several occasions each year, either face to face or by phone. By collecting data continuously, internal validity is enhanced, which enabled us to understand whether there were pattern changes overtime and identify recurrent models. The multiple case design and the longitudinal approach also helped us to build trustworthiness through contextual triangulation (Nielsen et al., 2020; Singh et al., 2021) by collecting data in different venues, times, and contexts, which broadened the applicability of the findings. To achieve data triangulation, establish internal consistency, and reduce single source bias, this study supplemented semi-structured interviews with panel discussions and documentary sources such as company intranet pages and online information (Cuervo-Cazurra et al., 2016). Our study also pursued investigator triangulation, at least two researchers with bilingual skills and different theoretical backgrounds participated in interviews and group discussions, and interpreted results together to expand insights (Yin, 2017).

Data were continuously collected through interviews and focus group discussions from 2012 to 2017. During interviews and focus group discussions, we asked participants to describe what being foreign meant for Chinese MNEs; the advantages and disadvantages for Chinese MNEs operating in the Australian market; the influence of Chinese identity and nationality; and how they addressed various liabilities of foreignness and the trust deficit issue, and so on. Extensive notes were taken during the interviews and focus group discussions. A total of 40 Chinese expatriates were interviewed including CEOs, general managers, board members, assistant managers, and heads of department. The profile of interviewees is summarized in Table 2.

We analysed data following the procedure recommended by Charmaz (2014). After creating a data repository (Miles & Huberman, 1994), the researchers organised and managed the data using the three stages of an evolutionary coding process: initial coding, focused coding, and theoretical coding (Charmaz, 2014). During initial coding, chunks of data such as phrases, sentences, and paragraphs important to the research questions were identified and labelled. After agreement was reached regarding such units of meaning, we moved to the focused coding stage to identify dominant concepts and categories to understand the relationships among the initial codes. In the theoretical coding stage, categories were combined into themes to capture theoretical connections, ideas, and implications. During the coding process, we conducted constant comparison analyses to gain understanding of patterns and relationships in the data (Charmaz, 2014; Yin, 2017). Through analysing the data, information was grouped into different categories and themes such as different coping strategies of Chinese MNEs. Table 3 offers examples of our data coding process.

Bridging strategy. In this study, a bridging strategy refers to that EMNEs act as intermediaries, facilitating mutual learning and understanding among stakeholders between host and home countries. Given the huge socioeconomic and cultural differences between China and Australia, case companies found that people in the two countries did not know much about each other. They gradually realized that unfamiliarity and misunderstanding constituted a major source of the trust deficit and liabilities of foreignness and felt obligated to address such issues. Our interviews found that bridging had been the most common strategy adopted by Chinese MNEs in Australia. All case firms emphasized the importance of mutual learning, aiming to achieve ‘two-way familiarization’ between MNEs and host country stakeholders (Pant & Ramachandran, 2012, p.226). On the one hand, expatriates tried to familiarize themselves with the local market, business practices, and institutional environment. On the other hand, headquarters sent potential expatriates to their Australian subsidiaries for training and accumulation of working and living experience abroad. A mine manager of CME2 explained the strategy as follows:

Chinese companies usually do not have enough experience of international investment … the major task for Chinese companies is to learn how to do business and to know the outside world.… that is why I always emphasize the training function of our investment.

In the cross-cultural context, unlearning was also adopted by Chinese MNEs. Unlearning refers to the process of intentionally discarding some assumptions, beliefs, habits, routines, and knowledge (Tsang & Zahra, 2008). Given various country and cultural differences, Chinese MNEs usually had some routines that did not fit the host country market. Simultaneously, after working and living in the host country for some time, expatriates realized that some assumptions and beliefs they hold about the host country market were not accurate or even misleading. Our findings found that Chinese MNEs had recognized that some of their beliefs about the Australian market were not correct and some of their managerial practices were not effective. Therefore, most case MNEs and respondents had gradually abandoned such understandings and practices. As the Office manager in MNE3 explained:

After working and living in Australia for several years, the management team realize that some of our beliefs formed in China about Australia, about the Australian culture, employees, and workplace are not accurate and need to be updated.

Apart from improving their knowledge of Australia culture and society, Chinese MNEs actively created opportunities to help Australian stakeholders have a better understanding of Chinese culture and companies. All case MNEs arranged training programs at headquarters for Australian managers, aiming to improve mutual understanding and reduce misunderstanding. At the same time, all case MNEs suggested that the current cross-cultural training needed to be improved. Traditional cross-cultural training and international business studies have always emphasized cultural differences, psychic distance, and institutional distance but downplay cultural and country similarities unless discussing investment destinations and entry modes. In our fieldwork, interviewees believed that it was not helpful for MNEs to overemphasize cultural and country differences, especially not helpful for emerging economy MNEs since they were eager to bridge the two cultures. As the CEO of CME6 said:

When I was trained as a potential expatriate at a university before I came to Australia, lecturers always discussed differences between China and Australia. Books and online information are also focus on country and cultural differences. Therefore, in the first two years I worked here as an expatriate manager, I found that the company and Chinese managers were constrained by such knowledge of cultural differences. I was even afraid of associating with local people for fear of making mistakes. … Our management team realized this and decided to change the situation since we found that cross-cultural differences are secondary, similarities are primary, human nature is alike. … Emphasizing differences may hamper cross-cultural interactions and make our company and expatriates look more like outsiders.

Bridging strategy emphasizes that MNEs as a mutual learning bridge of multicultural understanding and interactions, and cross-cultural training should pay attention to both sociocultural differences and similarities of host and home countries. All interviewees believed that such a strategy was helpful for obtaining local legitimacy and acceptance. A bridging strategy is more likely to be effective when the trust deficit manifests in the form of a neutral state without mistrust and distrust. In such a scenario, mutual learning is more likely to occur, and a two-way familiarization may foster positive expectations about Chinese MNEs’ trustworthiness among local stakeholders. We therefore posit the following proposition:

Embeddedness strategy. In this study, an embeddedness strategy is defined as the proactive measures taken by an MNE to maintain its dedication and support to local stakeholders amidst the dynamic ups and downs of the economy. As discussed earlier, Chinese MNEs suffer from trust deficit and multiple liabilities of foreignness, which generates tremendous pressure on them. Our interview findings revealed that realizing the existence of a trust deficit could drastically shape MNE behaviours, leading them to pursue trust building and social license first, not efficiency. All the case MNEs told the researchers that building high levels of trust in the host country is the top priority for them, even if doing so might seriously sacrifice profits. For example, in order to build a reputation as responsible investors, Chinese companies decided not to retreat in difficult times. By doing so they wanted to demonstrate trustworthiness and build high trust among local stakeholders. As the CEO of CME5 explained:

Due to changes of the market, our companies in Australia have not been doing well in recent years. A local manager tells me one day that in such a situation private companies in Western countries usually declare bankruptcy and come back when the market gets better. But our headquarters has decided to keep all employees and not to shut down operations. We want to demonstrate that we are a responsible company and concern the needs of local communities.… Chinese investors are not a foreign exploiter.

A mine manager of CME5 expressed the same idea:

Although all our companies in Australia are losing money in recent years since the price slump, we do not lay off any local employees. Time will tell that Chinese MNEs are not selfish and mercenary.… Chinese companies are trustworthy in difficult times.

Due to the trust deficit suffered by EMNEs, Chinese MNEs have tried to repeatedly offer objective evidence to reassure local stakeholders (Pant & Ramachandran, 2012). However, achieving legitimacy and building high levels of trust in a host country might require years of efforts. Nevertheless, proactive strategies adopted by EMNEs will contribute to mitigating liabilities of foreignness and trust deficit. This line of thinking leads to the following proposition:

Improvement strategy. An improvement strategy in this study refers to MNEs making continuous efforts to reduce doubt and skepticism about their trustworthiness among local stakeholders, aiming to meet the high expectations regarding their responsible performance. Interviewees of this study reported that they indeed felt great pressure from the perceived mistrust when operating abroad. For example, they know that the internationalization process of Chinese MNEs is often subject to negative media coverage in Western countries (Fang & Chimenson, 2017). They also know that Chinese state-owned enterprises invested in industrialized markets often attract much debate and controversy in these countries (Cuervo-Cazurra et al., 2014). As a result, some local stakeholders are in doubt about the intention and trustworthiness of Chinese firms and interact with Chinese MNEs with a mistrustful and questioning mindset. Since MNEs usually have higher visibility in host markets and a higher exposure to various forms of monitoring than local firms (Kostova & Zaheer, 1999), when operating in Australia, Chinese MNEs had pay greater attention to their conduct and made greater efforts to establish and maintain a positive company image, aiming to dispel the suspicion over the trustworthiness of Chinese firms among some local stakeholders. As CEO of CME1 explained:

We know the negative media coverage of Chinese companies and understand that some media are waiting for our mistakes. Therefore, we emphasize time and again in meetings that CME1 must rigorously comply with local laws and regulations and follow the highest standard in labor and environment protection.… Establishing a positive company image is our top priority, even if doing so is very costly.

As state-owned MNEs, interviewees believed that expatriates and their companies represented the image of their home country. Therefore, they had paid greater attention to the corporate reputation and behaviour. Apart from actively contributed to local communities through corporate social responsibility programs, they quickly localized key company positions to ensure a good relationship with local trade unions and the media. As the manager of CME3 explained:

In China, if a firm is not a listed company and does not encounter a crisis, there is no need for it to deal with the media. Its major relationship with the media is to advertise its products. … Since the land in China is state-owned and government dominates the major decision-making process, companies only need a good relationship with local governments. There is no need for them to work directly with local communities. However, when operating in Australia, everything has changed. Since we do not encounter such issues in China, we do not know what to do in the beginning and make some mistakes…. Now we know timely and transparent communication with the media and local communities is very important.

A board member of CME5 also stated that:

Companies in China do not have experience in dealing with trade unions since the management-union relationship in China is quite different from that in Australia. … To enhance our capability to deal with local affairs, we have now localized all positions in which we lack local experience, including human resource management, safety management, public relations, and environment protection.

The interviewees of CME2 and CME3 also made similar observations that their companies had changed the way of doing business in Australia and operated in the same way as local firms. The quick localization of key positions in the early stage of operation made the subsidiaries less alien and hence reduced the negative foreignness effects and mistrust. The quick localization under pressure also enabled them to manage the relationship with local trade unions, the media, and communities effectively, improved the relationships, and reduced cross-cultural missteps. The mainstream literature on international business usually views liabilities of foreignness and challenging institutional environments as barriers and disadvantages for international business. The findings of this study showed that challenging institutional environments with mistrust are not always bad things, they might push MNEs to continuously improve their behaviour and capabilities in order to reduce mistrust and succeed in challenging institutional environments. Such findings lead to the following proposition:

Low dependency strategy. A low dependence strategy in this study refers to a passive decoupling approach adopted by an MNE to minimize their interactions with local stakeholders to reduce the negative impact of a challenging low-trust institutional environment. Our interviews showed that some Chinese MNEs had tried to reduce interaction with local stakeholders to reduce the impact of negative foreignness effects. A manager of CME6 stated that:

We know that Chinese companies are not welcomed and trusted by some local stakeholders. … To avoid trouble, we have adopted some strategies such as not recruiting too many local staff since we do not have experience to manage local employees and deal with trade unions. If a task can be done in China, we do it in China, it is much cheaper and simple; if the task cannot be done in China, we outsource it to local contractors in that case. … However, they were effective strategies in the beginning when we were still small, they are not helpful for business growth. … We need effective strategies to build trust and do business in an unfavourable environment.

The low dependence strategy was usually adopted by some small Chinese MNEs in their early internationalization stage when they felt that distrust was high and mutual trust was low. Interview findings showed that most interviewees were not like such a strategy and viewed it as a short-term expedient approach before achieving high levels of trust in the host market.

Redefining market strategy. As discussed earlier, according to the SSD perspective, in this hierarchical global market, MNEs and products of the leading country group tend to enjoy a reputational premium in late industrializing economies. Similarly, companies of emerging economies that invest in leading economies may in turn benefit from the dominance effect in developing country markets through obtaining brand names and other resources. In other words, investment by EMNEs in industrialized economies can help those companies reduce the liability of emergingness and the trust deficit issue when they invest in other third-party countries through their foreign subsidiaries. As the Manager of CME2 noted:

Although our company is viewed as a Chinese MNE in Australia, it is viewed as an Australian company in other economies when we invest in those countries and our products are viewed as Australian products…. Even if CME2 invests in China, it is viewed as a foreign company and is eligible to enjoy favourable foreign investment policies.

Therefore, if this study were to focus only on the Australian market, the foreign status of Chinese MNEs in Australia might be found bring no benefits to those MNEs. However, if the international market is considered, some benefits of foreignness can be identified. As the assistant manager of CME3 explained:

Australia is an industrialized economy, its brand names and products enjoy a very good reputation in China and other countries. If CME3 is successful, our parent company will expand investment into other local industries such as food businesses. I know that some Chinese companies invest in Australia but sell their products produced here in China and they are very successful.

Our fieldwork findings revealed that the dominance effect had pushed many Chinese MNEs operating in Australia to shift their target market from Australia to China (e.g., CME1, CME5, and CME6) to address the unfavorable local institutional environment with high distrust in Chinese investment. Such a strategy created a unique phenomenon: the objective of many Chinese companies’ overseas investment is not to compete in the host country or the international market, but to gain comparative advantages in the Chinese market and consequently compete successfully in the home country. This is a strategy of going global for domestic dominance. Companies benefited from the dominance effect through acquiring quality resources in Australia and enjoying market premium in the domestic market. In so doing, Chinese MNEs can transform the trust deficit in Australia into a trust surplus in China. The manager of CME2 explained the strategy:

There are many reasons that we choose to focus on the Chinese market. Acquiring an Australian company means that you get some resources such as brand names but does not mean that you also secure the local market. In fact, if we have good products, it is easy for us to find enough buyers in China. Although we do not know much about the Australian market, we know our Chinese market which is huge enough…. Meanwhile, Australian products have a good reputation in China. Investing in Australia to obtain high-quality resources will make our company stronger and attractive in the Chinese market.

A manager of CME3 also expressed similar views:

Given the negative media coverage and stereotypes, it is sometimes not easy to market Chinese products in Australia. It is enough for our company just to focus on the Chinese market. This makes our life much easier. Investing in Australia to obtain quality products and then market them in China can achieve synergy – combining the Australian advantages with a large Chinese market.

For Chinese MNEs, investing in Australia helped them obtain a favorable foreignness status in other markets including China where foreign investment is welcomed, yielding indirect benefits from foreignness effects and mitigating the trust deficit suffered in industrialized markets. Such findings lead to the following proposition:

Low profile strategy. A low profile strategy refers to an approach employed by MNEs to avoid attracting unnecessary attention and scrutiny by diluting their foreign identity in host countries. This study found that all case Chinese MNEs had tended to keep a low profile in the Australian market. Even if Chinese investors had 100% ownership, they did not emphasize that the firm was a Chinese company. No websites of the case companies emphasized that they were a foreign-funded enterprise. This can be viewed as a tactic adopted by EMNEs to reduce the visibility of their foreign identity in a mistrustful institutional environment lacking trust. As a manager of CME5 commented:

In China, you find that foreign-funded firms employ every opportunity to emphasize that they are a wholly foreign owned company or an international joint venture. They do so because they know that they are welcomed and their foreign identity even enable them to claim a price premium. When we know Chinese investment in industrialized countries often attracts debate and controversy, it is impossible for us to highlight that we are Chinese companies in a suspicious market.

The assistant manager of CME3 commented that she did not think this was an effective strategy, “This cannot help foreign investors become more attractive in local communities.” Nevertheless, a low profile strategy can help EMNEs to reduce the exposure to risk such as a consumer boycott through reducing public visibility in a mistrustful institutional environment . Therefore, we propose the following:

Figure 2 illustrates the different forms of trust deficit and a potential strategy that can be adopted by EMNEs to address it. It is worth noting that, differing from the conventional wisdom that one strategy can only be applied in one situation, we assumed that some strategies can be used to address different forms of trust deficit. For example, the improvement strategy and the embeddedness strategy can be used to address all forms of trust deficit. Our fieldwork found that some Chinese MNEs (e.g., CME1 and CME6) adopted all the strategies of bridging, improvement, and embeddedness.

This study makes several theoretical contributions to the literature. First, given that there is no systematic research on trust deficit in the field of international business, this study conceptualizes trust deficit as a family of concepts based on the literature (Bertsou, 2019; Cho, 2006; Lewicki et al., 1998) and highlights that trust deficit manifests in various forms including low trust, a neutral state (without trust, mistrust, or distrust), mistrust, and distrust. By doing so, this study offers an analysing framework for future studies on trust deficit and enables us to obtain a more nuanced and comprehensive understanding of it. Future studies can employ this typology to examine relationships with trust deficit.

Second, differing from the mainstream research focusing on a single strategic response of MNEs to the institutional environment of host countries (Lu et al., 2022), this study identifies and defines a set of strategies adopted by EMNEs to address institutional environments with trust deficit and multiple liabilities of foreignness, enriching and advancing our understanding of the dynamic interactions between MNEs and host country institutional environments.

Third, our study makes a substantial contribution by generating a set of complementary propositions for future research, derived from our fieldwork findings and guided by our novel trust deficit framework. These propositions present an integrated overview of EMNEs’ strategic interactions with challenging institutional environments, highlighting various potential strategies in different institutional environments as illustrated in Fig. 2. These propositions can serve as a roadmap for future investigations into EMNE behavior, suggesting new avenues for research that could reveal new insights into how EMNEs manage liabilities of foreignness and trust deficit in host countries. Together, they sketch out a more nuanced and dynamic picture of EMNEs’ interactions with host country institutional environments, thereby filling critical gaps in the literature.

Fourth, this study examined liabilities of foreignness and trust deficit from the perspective of the global political economy, which is important, especially in this increasingly politicized global environment (Saittakari et al., 2023). Moreover, differing from the mainstream literature which has limited its attention within the host country market when examining liabilities of foreignness, this study goes beyond country borders to understand how EMNEs address challenging institutional environments with trust deficit through shifting their target markets globally to leverage the dominance effect. By so doing, this study addresses some challenging questions unanswered in the literature, for example, when foreignness is a liability, when it is an advantage, and how to translate the liability of foreignness into an advantage of foreignness.

Our study also has some significant practical implications for MNEs, expatriates, cross-cultural educators, and international business. First, introducing the SSD framework into international business can help MNEs, especially EMNEs, have a better understanding of the potential challenges in a host country and develop coping strategies from a global perspective. The pre-entry analysis of the local investment environment should not just focus on the system and societal effects, but also take into account the dominance effect. Understanding customers’ perceived relevant positions of the host and home countries in the global economy can help MNEs develop effective strategic responses to institutional environments.

Second, our research findings are particularly important for EMNEs investing in leading economies. For example, given that Chinese MNEs tend to suffer from multiple liabilities and trust deficit in leading economies, before entering such a market, they should proceed carefully and have a good understanding of the local institutional environment, not just focusing on economic feasibility analyses. When entering an acquisition abroad, Chinese MNEs usually seek to be the dominant equity holder or have 100% ownership. However, given that Chinese investors tend to suffer from multiple liabilities of foreignness, they might need to rethink their entry modes, and reduce liabilities through pursuing a minority stake and joint venture arrangements. This study can help EMNEs learn how to address challenging institutional environments using the identified strategies.

Third, our research findings also have implications for Chinese expatriates. Given that they tend to lack international experience, this study can help them understand how to analyse and handle unfavorable institutional environments. Fourth, this study can help improve cross-cultural training of MNEs. The findings remind cross-cultural educators that cross-cultural training should discuss both country and cultural differences and similarities. Focusing only on cultural distinctions might contribute to psychological alienation and cultural divide. Overemphasizing cultural differences is undesirable and detrimental to cross-cultural interactions.

This study has explored a timely topic with significant implications for international business. In recent years, populism is rife, anti-globalization is on the rise, and geopolitical conflicts have been increasingly fierce. There is a concern that the world may return to the era of polarization and confrontation, and the environment for international business will be ever more deteriorating. In these troubled turbulent times, how MNEs develop effective coping strategies to manage adverse institutional environments is even more important.

This research is not without limitations. One major limitation is that only Chinese expatriates were interviewed. Future studies could improve upon this research design by interviewing local managers, frontline workers, government agencies, and local communities to enrich and triangulate findings. Moreover, incorporating both EMNEs and developed economy MNEs into one comparative study to compare their strategies and behavior can be more appropriate for theory testing and building. Future research could use such comparative study designs to deepen our understanding of interactions between MNEs and institutional environments, or adopt the mixed method approach to benefit from both qualitative and quantitative techniques and achieve method triangulation (Nielsen et al., 2020). In conclusion, understanding interactions between MNEs and local institutional environments is important for international business. Since research on this topic is still in the early stage, many questions remain unanswered. We call for more studies to help MNEs effectively manage various favourable or unfavourable investment environments so as to survive and succeed.