Political connections, the Liability of foreignness, and legitimacy: A business historical analysis of multinationals’ strategies in Chile

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Research Summary: We conduct a historical analysis of the multinational corporations’ strategy of creating con- nections with a host country’s elite as a way of legitimiz- ing its operations in contexts characterized by long-term political, social, and economic changes. We argue that the success or failure of these strategies depends on (a) the perceived legitimacy of these connections among a host country’s society during times of change and (b) the capability of the multinational’s political connec- tions to shield it from challenges arising when the host country’s social structure is undergoing deep transforma- tions. We outline and follow a business historical approach that combines the theoretical frameworks of international business, strategy, organizational theory, and political science to analyze multinationals operating in Chile’s energy and telecommunications sectors from 1932 to 1973.

Managerial Summary: Western multinationals face hard challenges when trying to legitimize their operations vis- à-vis the host country’s societies in emerging and under- developed countries. One strategy developed by multina- tionals to neutralize potential challenges to their legitimacy has been to establish connections with influen- tial members of the host country’s elites. We study how this strategy fares in host countries that are undergoing dramatic political and economic changes. We first argue that overtly maintaining open connections with an elite that is viewed as a relic of an illegitimate past can become a liability. And, second, that highly visible con- nections are more likely to become a liability in times of political and social change than less visible ones. We illustrate our arguments with a historical study of the