The Duck of Minerva

The Multinational Firm and Geopolitics: Europe, Russian Energy, and Power

4 February 2016

This is a guest post by Rawi Abdelal, Joseph C. Wilson Professor of Business Administration at Harvard Business School, as part of the Duck of Minerva’s Symposium on Structural Power and the Study of Business. This post draws on ideas developed at greater length in Abdelal’s article found here. Links to other posts in the symposium can be found here.

Multinational firms produce many of the geopolitical outcomes in which political scientists are interested. It is such a pity, then, that political scientists know so little about multinational firms. In this paper I put forward a theoretical framework for understanding the role of multinational firms in both markets and the international system.

Firms and states are bound in two intertwined systems. Firms compose markets; the international political system comprises states. Firms adapt to geopolitical environments. They flourish or founder in institutional contexts created by states. Yet firms do not merely respond to the international system. Firms reshape the system in profound, sometimes surprising ways. As goods and capital cross borders, beyond the institutions of any single state, multinational firms manage risk and uncertainty in ways that affect markets and the very geopolitical system in which those markets are embedded.

Thus we need a new theory of the multinational firm. Scholars of international relations tend to imagine, implicitly or explicitly, firms as unitary automatons that respond to changes in political and economic parameters in predictable ways. Or, that managers react, but, evidently, do not think, interpret, or believe. Scholars of the firm, in contrast, acknowledge these organizations’ complexity and agency. These management scholars tend, unfortunately, to over-simplify the state. A more robust understanding of the role of multinational firms in geopolitics can resolve this unsatisfactory state of affairs.

In so doing we can enhance the scholarly literature on the power of business in politics. Firms exert power over government policies through strategic action, as well as through seemingly automatic processes. This same literature has, however, taken an unnecessarily restrictive view of politics and adopted an overly materialist theory of power. Policies are about much more than government policies. Not all political outcomes result from policy choices. The decisions of and relationships among firms lead to geopolitical results with consequences for political economy even when there is no identifiable policy choice made by a government. This power over political outcomes, moreover, inheres in social facts of the economy: firms’ interpretations of and relationships with one another.

The gas pipelines that link Russia and Europe present myriad examples of how firms choose strategies that are informed by their relationships with other firms. For four decades European energy firms did business with the Soviet gas ministry and Gazprom, its corporate successor, uneventfully—first across the Iron Curtain, through the collapse of the Soviet Union, and then as both Russia and Europe remade themselves and their institutions—by relying on innovative contract structures and longstanding corporate relationships. In this paper I also explore how the European-Russian gas trade reveals the influence of multinational firms on geopolitics. If you think that this story was all about states and diplomats, you would be mistaken.

I conclude that multinational firms can be analytically interpreted simultaneously as agents and sets of relations embedded in both national institutions and networks of firms. The relationships among these firms influence, often decisively, how they behave. A coherent understanding of those relationships requires that scholars recognize firms as organizations with histories, local cultures, worldviews, and trust and mistrust that ebb and flow over time. Although multinational firms seek profits, the uncertainty that pervades their decision-making requires them to make sense of the world even as they continuously remake the markets in which they operate. This understanding of inter-firm relations has broad applicability to the study of politics.