The octopus that shrank: A historical analysis of how multinationals address policy and contractual uncertainty in a global value chain
Description
We analyze how the evolution of the broad institutional environment influences the verti- cal integration strategy of a multinational corporation (MNC) leading a global value chain (GVC). We develop a history-to-theory study based on the evolution of the banana GVC between 1899 and 1991. We argue that when a MNC's bargaining power vis-à-vis the host gov- ernment is strong, it will choose a governance structure that addresses contractual uncertainty. When the MNC's bargaining power declines because of changes in the institutional environment, it will prioritize a governance structure that protects its assets. We analyze the evolu- tion of MNC's bargaining power as a result of the inter- action of three levels of the institutional environment: global, home country, and host country.
Managerial Summary: Our study examines vertical integration decisions in a global value chain (GVC) throughout its historical evolution. Using historical sources, we show that when MNC managers perceive their bargaining power to be sufficient to protect them from hostile government actions in host countries, their main concern is that of governing their activities as effi- ciently as possible by amongst others vertically integrat- ing asset-specific transactions. When their bargaining