Political tension between the home and host countries of a multinational enterprise (MNE) can influence the firm’s strategies and even its survival. Based on a novel theoretical perspective and rigorous empirical analysis, HKUST’s Jiatao Li and co-researchers show how MNEs use patenting to signal their usefulness to the host country government in the face of bilateral political tension.

“Firms do not operate in a frictionless world,” the researchers begin. Increasingly volatile political relations pose particularly great challenges for the managers of multinational companies. Surprisingly, however, research to date has shed little light on how political tension influences MNEs’ strategy making.

“Most scholarly work has focused either on normal relationships or on extreme cases such as war,” the authors explain. “The current increasing volatility in international politics makes it more important to understand how multinational enterprises respond to political tension between host and home countries.”

Li and colleagues’ innovation was to hypothesize—and demonstrate—that one such response involves patenting. “The intuition was that patenting could potentially enhance an MNE’s legitimacy in the eyes of a host country government by signaling the firm’s willingness and ability to contribute to local innovation,” they explain.

Their empirical results supported this hypothesis. “Data on 437 large multinationals and interviews with senior managers of 20 foreign subsidiaries in China show that patenting local innovation does indeed help an investing firm signal its usefulness to the host country government,” the researchers report.

With bilateral political tension becoming the “new normal,” especially with the wave of de-globalization, these insights will help MNEs deal with political uncertainties and maintain effective operations. “While previous studies have identified other ways to respond to political risk or other crises,” conclude the researchers, “the findings here expand the toolbox for MNE managers that decide to stay despite deteriorating bilateral relations.”