Journal of International Business Studies (2014) 45, 842–861

© 2014 Academy of International Business All rights reserved 0047-2506

www.jibs.net

MNC strategy and social adaptation in

emerging markets

Meng Zhao1, Seung Ho Park2 Abstract

and Nan Zhou3
1
Moscow School of Management SKOLKOVO,
Moscow Region, Russia; 2China Europe
International Business School, Shanghai, China;
3
China Minsheng Bank, Beijing, China
Correspondence:
M Zhao, Moscow School of Management
SKOLKOVO, Institute for Emerging Market
Studies, Novaya ul. 100, Skolkovo village,
Odintsovsky District, Moscow Region, Russia.
Tel: (0086) 10-64981634;
Fax: (0086) 10-64981634-208
Emerging markets experience institutional and social changes over time that
present different stakeholder expectations for multinational corporations
(MNCs). MNCs are often accused of social misdeeds and experience public
crises during the changes, leaving questions on how they adapt to the local
social transition to sustain operations. Conventional adaptation strategies
put too much emphasis on maximizing economic returns by arbitraging
national differences and catering to local market and consumer characteristics.
The economic orientation may fail to address evolving and diverse stakeholder
expectations, easily leading to public crises. This study conceptualizes economic
adaptation and social adaptation as two sets of knowledge and capabilities
that would have equally important impacts on MNCs’ sustainable operations
in emerging markets. The empirical testing examines consumer rights-related
public crises experienced by 180 MNCs in China. The results suggest that MNCs’
social adaptation activities have significantly positive effects in mitigating
public crises while certain aspects of economic adaption, such as early entry into
China, reliance on local leadership, and speedy expansion of local employees,
lead to public crises. The significant interaction effects confirm that MNCs need
to follow a balanced approach, paying attention to both economic and social
components to avoid public crises and sustain growth in emerging markets.
Journal of International Business Studies (2014) 45, 842–861. doi:10.1057/jibs.2014.8

Keywords: multinational corporations (MNCs) and enterprises (MNEs); emerging mar-

kets/countries/economies; public crisis; stakeholder environment; social adaptation; event
history analysis

INTRODUCTION
Multinational corporations (MNCs) are often early adopters of social
activities and introduce the concept of corporate social responsibi-
lity (CSR) to local firms in emerging markets. While CSR was still
a new concept in China, MNCs already engaged in social auditing of
local suppliers (Zhou, 2006). In recent decades, however, MNCs have
not been able to avoid mounting stakeholder accusations regarding
various social issues including product quality flaws, environmental
pollution, or abusive labor. These accusations easily turn into public
crises that are unexpected, non-routine, and exposed to national
media, causing serious and long-lasting reputational and financial
damage. In 2011, ConocoPhillips was slow to admit the environ-
Received: 29 January 2013
Revised: 17 January 2014
mental damage by its oil leak in China’s Bohai Bay that resulted in
Accepted: 2 February 2014 massive media coverage and a US$191 million penalty (CNN, 2012).
Online publication date: 20 March 2014 Studies similarly show growing social challenges from employees,
 MNC strategy and social adaptation in emerging markets
consumers, and nonprofit organizations (NPOs) for
MNCs’ misdeeds in India, Russia and other emerging
markets (Auzan, 2001; Gimpelson, Kapeliushnikov,
& Lukiyanova, 2009; Kaptan, 2003).
What should MNCs do to sustain high perfor-
mance while effectively adapting to profound social
transition and dynamic stakeholder environments?
Traditional CSR and IB studies have not paid suffi-
cient attention to this issue beyond the “doing
good” aspect of MNC strategy (Meyer, 2004; Park &
Vanhonacker, 2007; Tan, 2009b). Wal-Mart has
been active with its CSR programs in China but has
not been able to avoid frequent product-related crises
often driven by managerial flaws and enhanced
government and social supervision. To address this
increasingly cognizant issue of MNC social adap-
tation, this study introduces a new perspective about
MNC strategies in emerging markets that considers
both social roles, that is, social adaption, and busi-
ness operations, that is, economic adaptation, in fast-
evolving stakeholder environments.
Strategic adaptation in traditional MNC studies,
such as national responsiveness (Bartlett & Ghoshal,
1998), arbitrage (Ghemawat, 2008), and localization
(Fryxell, Butler, & Choi, 2004), indicates approaches
to exploit opportunities, while lowering risks caused
by national differences. We propose a concept of
social adaptation that refers to MNCs’ strategically
meeting local stakeholders’ social expectations to
address the risk of stakeholder accusations in emer-
ging markets. Economic adaptation is defined as
MNC approaches to adjust pre-existing knowledge
and solutions in product development, marketing
mix, and human resource policies that would hold
direct operational implications in local conditions
(Harzing, 2000; Klein, 2002; London & Hart, 2004).
Typical economic adaptation would include modify-
ing products and marketing activities to meet local
demands (Ramarapu, Timmerman, & Ramarapu,
1999), selecting local employees over expatriates to
reduce costs (Fryxell et al., 2004), or relying on local
expertise to navigate the complex institutional envi-
ronment (Luo & Chen, 1997). There are many
theories of economic adaptation that explain the
level and form of adaptation to local market cha-
racteristics and political institutions (Bartlett &
Ghoshal, 1998; Buckley & Horn, 2009; Uhlenbruck,
Rodriguez, Doh, & Eden, 2006). These lines of work,
however, present little insight into issues related
to social adaption, such as the social and environ-
mental impacts of foreign direct investments
(FDI) and MNC activities in host countries (Meyer,
2004). Economic adaptation helps MNCs improve
Meng Zhao et al
843
short-term financial results, but it does not warrant
long-term growth unless it recognizes and responds
to evolving and higher levels of social expectations
from local stakeholders. While economic adaptation
and social adaptation are used to manage local
stakeholders, they have different priorities and
means in allocating internal effort and resources.
Economic adaptation focuses on conventional busi-
ness activities, such as product design, recruitment,
or marketing, but social adaptation addresses local
stakeholders’ expectations regarding MNCs’ social
roles and responsibilities in the host country.
This paper builds on studies of MNC strategies and
social performance to conceptualize three aspects of
economic adaptation as drivers of public crises in
China’s dynamic stakeholder environments. First,
MNCs’ early entrance into China to exploit inputs
and regulatory gaps between home and host coun-
tries is likely to breed organizational inertia that
causes them to be irresponsive to changes in social
interests and stakeholder expectations over time.
Second, leadership localization is likely to subject
MNCs to becoming accustomed to flawed local
practices. Lastly, fast expansion of local employees
could cause MNCs to lose control over the possible
misdeeds of subsidiary employees and local partners.
We argue that these factors work against MNCs’
efforts to adjust internal capabilities and systems to
monitor and address stakeholder changes over time,
and would hence give rise to MNCs’ public crises.
Social adaptation integrates and extends ideas
from the stakeholder theory and CSR literatures
(e.g., Freeman, 1984; Husted & Allen, 2006; Porter
& Kramer, 2006). This concept is related to but
departs from existing studies in several important
ways. It examines the MNC adaptation strategy in an
understudied context, that is, locally sourced public
crises in emerging markets, by integrating multiple
perspectives from the current literature. This context
provides new insights into CSR-related issues with
specific local relevance, which is difficult to achieve
by transposing foreign CSR values and practices.
Also, current studies on the relationship between
CSR and firm performance have paid little attention
to operational challenges as MNCs try to adapt
to changes in social expectations and stakeholder
environments. Unlike the traditional CSR literature,
social adaptation highlights the adaptive feature
of social activities and specifies how MNC public
crises are related to stakeholder dynamics and adap-
tation strategies. Another departure from the current
literature is the focus on host-country pressures on
MNC social activities. MNC subsidiaries are subject
Journal of International Business Studies
 MNC strategy and social adaptation in emerging markets
844
to home and host-country pressures (Kostova, Roth,
& Dacin, 2008), but prior studies mostly dealt
with home-country (and international) pressures
(Waddock, Bodwell, & Graves, 2002). While home-
country pressures have been shown to affect MNC
ethical behaviors (e.g., Christmann, 2004; Hartman,
Shaw, & Stevenson, 2003; Kolk & Van Tulder, 2004),
studies on host-country pressures are limited to
MNCs’ economic adaptation, such as entry strategy,
localization, and human resource management
(Meyer & Thein, 2014).
This study emphasizes that MNCs need to reassess
and adjust their social behaviors according to
stakeholder dynamics specific to local markets. It
extends the MNC and CSR literatures by using
a balanced approach to examine MNC adaptation
strategies that incorporates economic and social
pressures in conjunction with changes in stake-
holder environments in emerging markets. Social
adaptation reduces risks of public crises due to over-
emphasis on economic adaptation. The study shows
how strategic stakeholder management helps MNCs
avoid public crises and counterbalance negative
consequences of economic adaptation. The follow-
ing section describes how MNCs’ stakeholder rela-
tionships have changed over time in China. The
paper then conceptualizes and introduces hypo-
theses on the roles and impact of economic and
social adaption on MNCs’ public crises. The empi-
rical testing utilizes qualitative data from 180
MNCs operating in China. The paper concludes
with key findings, limitations, and future research
directions.
THE MNC–STAKEHOLDER RELATIONSHIP
IN CHINA
Emerging markets typically go through social transi-
tion, which indicates a phase of stakeholder growth
that features maturing regulatory systems, changing
social expectations of MNC roles and responsibil-
ities, and normalizing challenges from diverse grass-
roots actors (Zhao, Tan, & Park, 2013). Institutional
voids refer to a situation where the formal “rules of
the game” that normally enable and facilitate mar-
ket activities are absent or weak (Khanna & Palepu,
2010; North, 1990). Regulatory systems in emerging
markets are relatively unstable, inconsistent, and
arbitrarily enforced, unlike those in developed coun-
tries (Gupta & Wang, 2004). It is thus not rare to see
MNCs’ exploitation of loopholes in the regulatory
system at the expense of social and environmental
interests in emerging markets (Arnold, 2003). How-
ever, despite lasting institutional voids, stakeholder
Journal of International Business Studies
Meng Zhao et al
expectations evolve in accordance with economic
growth in emerging markets (Ramamurti, 2001).
Building on Chen et al. (2009), we introduce a
three-stage evolutionary model of stakeholder pres-
sures on MNCs and the resulting gaps in MNC
adaptation approaches.
In the embryo stage, foreign capital, technology,
and employment are the primary local expectations
of MNCs. MNCs interact mainly with government
agencies and firms, focus on exportation, and have
limited access to domestic markets and customers
(Chen, Newbury, & Park, 2009). Adaptation tensions
at this stage arise due to goal conflicts among MNCs,
their state-owned local partners, and the Chinese
government (Zeira & Newburry, 1999). MNCs often
leave social issues out of local strategy considerations
facing the underdeveloped regulation system, the
FDI orientation of local governments, and the weak
voice of grassroots stakeholders (Gladwin & Walter,
1980). The embryo stage in China lasted throughout
the 1980s to the early 1990s.
Following the embryo stage, China experienced
a growth stage that resulted in a steep increase in FDI
throughout the 1990s and early 2000s. During this
stage, the Chinese government further liberalized
regulatory and administrative hurdles to facilitate
MNCs’ market access and operation, in particular
regarding land use, foreign exchange, and taxation.
Local governments sometimes loosened the imple-
mentation of environmental regulations and labor
laws to attract foreign investments (Vanhonacker,
1997). MNCs began setting up fully owned subsi-
diaries and engaging in direct competition with
domestic firms in the mass market (Farrell, Gao, &
Orr, 2004). As they sold a larger share of products in
local markets, they became more exposed to local
consumers. There were a few early regulations on
social and environmental issues introduced during
the embryo and growth stages, such as the Consumer
Rights Protection Law (1993), Labor Law (1995), and
Environmental Protection Law (1989). However, these
regulations did not easily turn into stakeholder
challenges until the MNC–stakeholder interaction
further intensified and rights protection awareness
disseminated broadly. Local civil society organi-
zations were largely dormant during these periods
while limiting their initiatives to advocacy and
operational projects instead of making claims
against MNC misconduct. However, facilitated by
events like the global anti-sweatshop movement in
the 1990s, various local stakeholders began to recog-
nize problems in MNC approaches that primarily
target cost minimization and market expansion.
 MNC strategy and social adaptation in emerging markets Meng Zhao et al
845

China entered a mature stage in the early 2000s
that maintained a steady flow of FDI, while MNCs
were tightly integrated into local markets through the
localization of a full set of value-chain activities
(Chen et al., 2009; Luo, 2007). This period was
marked by extensive government promotion and
legislation on social and environmental issues. The
2006 amendment of the Company Law of the People’s
Republic of China formally incorporated a call for CSR.
CSR in China became officially recognized as part of
the national strategic objectives to build harmonious
society (Sina.com, 2008). Partly due to these top-
50
45
No. of Crisis Incidents
down initiatives, stakeholders such as consumers,
employees, and NPOs became acquainted with CSR
principles and encouraged by new regulations to
challenge firm misdeeds. As a consequence, MNCs
encountered an increasing number of public crises
since 2000 (see Figure 1). The new stakeholder dyna-
mics during this period reflect an enlarging gap
between MNCs’ conventional adaptation strategies
and rising local expectations of MNC social roles. The
growth of public crises in the 2000s could be due
to other factors, such as an increase in MNC activities
and related media coverage. However, this trend
illustrates a stakeholder environment where MNCs
face increasing pressures and their misdeeds become
more visible to the public. Table 1 summarizes the
evolutionary stages of the MNC–stakeholder relation-

40
35 ship in China.
30
25
20
15
MNC ADAPTATION AND PUBLIC CRISIS
10
5 Economic Adaptation and Public Crisis
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Economic adaptation takes various forms of firm
Figure 1 Growth of MNC public crises in China, 2000–2011.
activities and decisions along the whole sequence of
Note: Compiled by the authors. Includes public crises reported value-chain activities. However, this study focuses
by major mass media in the areas of consumer rights, labor on three critical processes of economic adaptation
rights, environment protection, government relations, firm rela- that would have direct implications on crisis risks.
tions, and perceived cultural discrimination. First, due to different stakeholder characteristics

Table 1 Evolution of MNC–stakeholder relationships in China

1980–early 1990s Early 1990s–early 2000s Early 2000s–present

Stakeholder Partnership and goal conflicts between
relationship MNCs and government agencies and
state-owned enterprises
Early legislation on social issues, weak
enforcement
Dormant grassroots stakeholders
Aggressive government facilitation
of FDI
Growing legislation on social issues,
weak enforcement
Direct competition with domestic
companies in the mass market.
Emerging grassroots NPO activities
limited to advocacy and operational
projects
Moderate government facilitation of
FDI
Extensive legislation on social issues,
enhanced enforcement
Localized value chain activities lead to
extensive relationship with various local
business partners
Well-informed and aggressive
consumers, employees and the general
public
Aggressive NPOs challenging MNC
misconduct

Stakeholder Capital, technology, and employment Increasing pressure to fulfill CSR while Explicit and strong pressure to fulfill CSR
expectation continuously satisfying the local needs in addition to conventional expectations
of FDI and technology transfer

Adaptation Primarily economic adaptation such as
strategy setting up a joint venture, conducting
local market research, and building
networks with governments and firm
partners
Emerging gaps between economic
adaptation and (grassroots and
governmental) stakeholders’
expectation on social and
environmental responsibilities
Enlarging gaps between economic
adaptation and rising social expectation
that leads to aggressive stakeholder
challenges. This situation calls for
coordination between economic and
social adaptation

Journal of International Business Studies

 MNC strategy and social adaptation in emerging markets
846
in different development stages of a local social
environment, early entrants may develop an irre-
sponsive stakeholder management style and face
inertia over time to adapt to environmental change.
An MNC’s decision to take advantage of low host-
country input and regulatory costs in earlier time-
frames when stakeholder voices were weak could
breed an irresponsive stakeholder management
style. This may subject the firm to crisis risks during
subsequent stakeholder growth. Meanwhile, new
entrants are informed of prior MNC crises and enjoy
adaptation flexibility to design their China opera-
tions from scratch to address growing CSR concerns.
We argue that attending to changes in the stake-
holder environment over a long time period could
reveal a double-edged outcome for first movers.
On the one hand, early entrants have gone a long
way to accumulate knowledge about local markets
(Barkema, Bell, & Pennings, 1996; Kogut & Zander,
1993). Studies show that early movers in a given
product sector enjoy enduring advantages over late
entrants (De Castro & Chrisman, 1995; Robinson,
Fornell, & Sullivan, 1992). In China, experienced
MNC managers learn about how to navigate a busi-
ness environment that is hardly transparent and
predictable. They become competent network
players, while inexperienced MNC managers gener-
ally lag behind local competitors in managing busi-
ness and political relationships (Williamson & Zeng,
2004). Early entrants in China enjoy higher market
shares and profitability than followers (Pan, Li, &
Tse, 1999). On the other hand, it has been reported
that early entrants exploit low input and regulatory
costs of developing countries by adopting a pollu-
tion-haven strategy (e.g., Walter, 1982; Zarsky, 1999)
and/or flawed labor practices (Arnold & Bowie, 2003;
Palley, 2002). Given poor regulation enforcement,
weak stakeholder challenges, and sometimes col-
luded interests with local governments, early entrant
MNCs can enjoy the economic benefits of sub-stan-
dard social behavior without worrying about adapt-
ing to changing stakeholder awareness and actions.
MNCs exploit the institutional gaps between home
and host countries, such as using child labor in
India, defaulting employee insurance in Russia, or
applying lower product guarantee standards in
China. Doing so indicates economically sensible
adaptation in the context of low illegal costs and
high illegal benefits.
Strong self-discipline and investing in relation-
ships with grassroots stakeholders (e.g., consumers,
employees, environmentalists) in a country’s earlier
development stages compromises MNCs’ short-term
Journal of International Business Studies
Meng Zhao et al
economic prospects compared with domestic or
foreign competitors that submit to flawed business
practices. Hence, early entrants generally risk devel-
oping a management style that is irresponsive to
stakeholders’ social and environmental concerns.
If this management style is ingrained in organiza-
tional structures and practices over time, it could
generate inertia that hinders firms from adapting to
subsequent social change (Powell & DiMaggio,
1991). MNCs may find it costly to restructure their
operations to scan and take timely actions in
response to changes in stakeholder expectations.
Such inertia often leads to experience misapplica-
tion that MNCs transfer their early experiences of
stakeholder interaction to a substantively dissimilar
stakeholder environment (Zeng, Shenkar, Lee, &
Song, 2013). When stakeholder dynamics change,
socially controversial but previously unchallenged
MNC activities are more likely to cause a public crisis
than before. In contrast, latecomers tend to be less
likely to encounter public crises because they can be
well informed of their peer companies’ crises and
prepare for changing local stakeholder dynamics.
This leads to the following hypothesis.
Hypothesis 1: MNCs that entered China at an
early stage of stakeholder development are more
likely to encounter public crises.
The second process indicates that relying on local
leadership may blunt MNCs’ cultural sensitivity to
problematic local practices that are at odds with their
global ethical standards. A popular economic adapta-
tion approach is to replace expatriate managers with
local ones (Law, Song, Wong, & Chen, 2009; Porter,
1989), particularly when MNCs face fierce competi-
tion from local firms that have a deeper understand-
ing of local markets (Luo, 2007). A domestically born
and raised person often not only has good knowl-
edge about the market (Williamson & Zeng, 2004),
but also possesses interpersonal connections that are
important competitive resources in emerging mar-
kets (Bjorkman, Lasserre, & Ching, 1997; Peng &
Luo, 2000). Local leaders tend to be knowledgeable
about how to deal with local stakeholders that can be
helpful to prevent stakeholder challenges. However,
we argue that local leaders’ insider knowledge may
not translate into a capability to strategically manage
stakeholders’ social expectations and lower the risk of
public crises.
We differentiate two types of local knowledge
related to addressing local stakeholder’s economic
demands and their social expectations. The first
type concerns knowledge about local stakeholders’
 MNC strategy and social adaptation in emerging markets
characteristics and demands (consumer tastes, labor
market, supplier capabilities, government officials’
styles etc.) that have a direct impact on the forma-
tion and accomplishment of business transactions
(Ghemawat, 2007). The second type of knowledge
involves how local stakeholders perceive and chal-
lenge ethical aspects (i.e., consumer rights, labor
rights, environmental performance, cultural discri-
mination, competition fairness etc.) of business and
how to handle these expectations and challenges.
These two lines of knowledge are not mutually
exclusive, but they have distinct implications. For
instance, developing products and services that cater
to local consumer tastes may also contain elements
of active protection of consumer rights. In other
cases, however, MNC managers face isomorphic
pressures to adopt local business practices at odds
with global (and sometimes local) ethical standards
to handle institutionally distant host environments.
Spicer, Dunfee, and Bailey (2004) noted that Amer-
ican expatriates in Russia tend to be accustomed to
the wage-arrear practice that was prevalent during
the 1990s. Donaldson and Dunfee (1999) showed
that MNCs in India may need to follow the local
practice of promising a job to an employee’s child in
line with Indian clan and family values, although it
contradicts Western egalitarian and anti-nepotism
principles. Tan (2009a) showed that MNC managers
have used the Chinese guanxi tradition to justify
bribery practices.
Relying on local knowledge that is not aligned
with local social expectations could drive a public
crisis. This assumption is rooted in the perceived
convergence of the local understanding and expec-
tations of business ethics with global ones. For
example, when Chinese consumers expect MNCs to
consistently apply their home-country business
practices in China, MNCs received intense protests
since they were content with local regulations that
are lower than global standards (Zhao et al., 2013).
This transition in emerging markets tends to be
underestimated considering the seemingly prevalent
and ingrained flawed business practices and the
path-dependent differences of what business ethics
mean across countries (e.g., Ekaterinoslavskii, 1992).
We contend that the stakeholder environment
change demonstrates the international convergence
of social expectations. In particular, subsidiaries with
local heads are likely to face crisis risks for two
reasons. First, since knowledge about social expecta-
tions matters more for stakeholder challenges on
ethical issues than knowledge about local markets,
local leaders may not enjoy an advantage over
Meng Zhao et al
847
foreign expatriates in avoiding crisis risk. Second,
managers from developed countries are culture
carriers who are more likely to be exposed to and
internalize global ethical standards than developing
country managers (Edström & Galbraith, 1977).
Spencer and Gomez (2011) found that MNC subsi-
diaries with Ghanaian managing directors viewed
corruption to be less of an obstacle than subsidiaries
with home-country managing directors. Local leader-
ship is deeply embedded in the local business culture
and accordingly identifies less with the cultures and
norms of parent companies. This explains why
many MNCs rely on expatriates to pass knowledge
and values of the parent firm to local employees
(Gamble, 2000). We therefore suggest that local
leaders are more likely to follow questionable local
practices at the expense of global ethical standards.
Hence, we develop the following hypothesis:
Hypothesis 2: MNCs with a local country head
are more likely to encounter public crises in China
than MNCs with a foreign country head.
The third issue concerns rapid operational expan-
sion that may overstretch managerial capabilities
related to controlling subsidiary and local partner
behaviors. Utilizing the low-cost benefit of hiring
local employees is a common adaptation strategy in
emerging markets (Ghemawat, 2008). However,
operational expansion based on a fast increase in
local employees risks leaving local activities under
weak controls that may partly account for misdeeds
that compromise stakeholder interests. The Wal-
Mart crisis in China was largely due to an aggressive
business expansion that led to substantively shor-
tened employee training, declined service quality,
and lax supplier management, causing frequent
consumer complaints and negative media reports.
Local expansion is a strategy that needs to be
well planned and communicated by top manage-
ment (Fryxell et al., 2004). Previous studies show
that investing abroad at a rapid pace could disrupt
organizational learning and harm firm performance.
Vermeulen and Barkema (2002) found that subsi-
diaries contribute less to a firm’s profitability when
they expand fast abroad because top management
is likely to devote suboptimal time and attention to
local business operations under fast growth. Fast
growing MNCs stumble over cognitive limitations
that constrain their capability to monitor and evalu-
ate foreign activities and fully assimilate them with
global standards, which boosts the chance of
business misdeeds (Simon, 1959). Tan (2009a: 185)
stated that some MNCs in China tend to “grant
Journal of International Business Studies
 MNC strategy and social adaptation in emerging markets
848
substantial autonomy to subsidiaries and contracted
manufactures soon after the establishment of a con-
tractor relationship, only to abandon them without
commitment once faced with publicized scandals
or evidence of ethical violations”. Such MNCs may
fail to provide supervision, training, and guidance
for local subsidiaries and contractors to effectively
implement ethical codes of conduct (Tan, 2009a).
They are vulnerable to public crises in a market
environment that features growing information
transparency and social responsibility awareness.
The occurrence of a misdeed, and ultimately a public
crisis is likely to be positively related to the speed of
operational expansion.
Hypothesis 3: MNCs with faster expansion of
local employees in China are more likely to
encounter public crises.
Social Adaptation and Public Crisis
Social adaptation draws on several lines of research
on stakeholder management and CSR strategies.
A critical implication in stakeholder theory is that
firms may benefit financially from attending to their
stakeholders’ concerns (Barnett, 2007; Freeman,
1984; Orlitzky, Schmidt, & Rynes, 2003). Empirical
evidence supports the value of continuously invest-
ing in stakeholder relationships, showing that firms
building the capacity for stakeholder influence thro-
ugh sustained engagement in CSR can help their
financial performance (Barnett & Salomon, 2012).
Developing trust with various stakeholders also
reduces the negative impact of stakeholder dynamics
on business operations (Wicks, Berman, & Jones,
1999). This implies that MNCs need to actively
manage sustained trust-based stakeholder relation-
ships instead of reactive crisis management or anec-
dotal public relations management to address
stakeholder challenges.
Unlike the conventional approach of categorizing
stakeholders based on their relationships with the
business operation (Clarkson, 1995; Freeman, 1984),
social adaptation prioritizes them according to the
likelihood of becoming a challenger to a business.
A definitive component of social adaptation thus
concerns targeting potential challengers or crisis
makers. On the basis of our qualitative assessment,
potential challengers can be categorized into four
groups, that is, regulatory and government agencies
that penalize MNC misdeeds, informal supervisors
(i.e., NPOs and mass media) that monitor, expose,
and protest MNC misdeeds, potential victims (i.e.,
employees, consumers, and community residents)
Journal of International Business Studies
Meng Zhao et al
who are directly affected by the business operation
and often initiators of the public crisis, and standard
setters and field builders (i.e., business associations
and third-party raters) that can discredit and margin-
alize MNCs. In general, social adaptation highlights
that salient stakeholders are those with the power,
legitimacy, and urgency to damage MNCs’ financial
and reputational performance (Mitchell et al., 1997).
Another key element of social adaptation is
CSR localization as part of MNCs’ social and envi-
ronmental management. Following Bartlett and
Ghoshal’s (1998) typology of MNC strategies, stu-
dies suggest that the ideal form of CSR management
approach is to both centrally manage and localize
CSR according to the national context. Donaldson
and Dunfee (1999) emphasize the advantage of trans-
national CSR management that retains local identity
while acknowledging common values across indivi-
dual communities. Although large MNCs have man-
aged CSR globally, it is still new for many MNCs to
tailor CSR to a specific host country. This could be
explained by two points. On the one hand, MNCs
tend to replicate their existing product and market-
based strategy (i.e., multi-domestic, transnational,
global) in their CSR management (Husted & Allen,
2006). This implies that it is often institutional
pressure, not strategic analysis of local social issues
and stakeholders, which guides decision making
on CSR. On the other hand, MNCs have their
own home-based “administrative heritage” and pre-
disposition toward CSR interpretations (Bartlett &
Ghoshal, 1998, 2000). This home-based view, how-
ever, may not be effective in addressing host-country
realities.
CSR localization considers the need to adapt to the
local context to develop effective social activities.
While CSR localization focuses on social problems
with local priorities, social adaptation addresses
stakeholder concerns that could potentially impact
the business operation. Stakeholder concerns are
likely to cause financial and reputational damage if
a firm does not possess necessary adaptive capabi-
lities, such as acquiring knowledge of stakeholder
expectations, monitoring stakeholder feedback, and
generating appropriate behaviors to reduce the
sources of stakeholder challenges. Social adaptation
differs from CSR localization in the strategic nature
of stakeholder management, which also distin-
guishes it from corporate citizenship and philan-
thropic activities.
Social adaptation is also rooted in the strategic CSR
(SCSR) literature. Porter and Kramer (2006) suggest
that firms can act as corporate citizens, value chain
 MNC strategy and social adaptation in emerging markets Meng Zhao et al
849

reformers, or SCSR players to create social values and

Developing social activities based on

Product/service adjustment, human

appropriate behavior to reduce the

challengers’ social expectations on
Acquiring knowledge of potential
business expertise; incorporating
competitive benefits by leveraging their competen-

Identifying and addressing local

social elements into value chain

cies. Social adaptation also has an important stra-

source of their concerns and

discontent and generating
tegic implication for MNCs to handle stakeholder

the firm, monitoring their

challenges during social transition in emerging mar-

social need priorities

resource localization
kets. This implication goes beyond incorporating

Sample strategy
social components into products and services in
pursuit of competitive advantage (Porter & Kramer,

challenges
and so on

activities
2006, 2011). Social adaptation is similar to SCSR in
terms of serving the business by selectively engaging
with stakeholders and social issues, but it has a
particular purpose to reduce stakeholder challenges.

firm outputs and may cause

Broad range of social actors

interested social problems,

needs can be addressed in

Strong: social interests are Social actors whose social
not necessarily related to
Social adaptation lowers the risk of public crises by

a manner that serves the

that affect that business

potential challengers on
Stakeholder component

Strong: social interests are Social actors involved in

managing negative externalities on potential cha-

Strong: social interests are Social actors who are

llengers or their negative perception of the firm.
Besides SCSR’s business enhancement, social adap-

the business

public crises
tation thus uses CSR to diminish the negative con-

operation

business
sequences of MNCs’ economic adaptation.
Building on the above discussion, we define social
adaption as MNCs’ strategically meeting local stake-

Weak: social interests not

holders’ social expectations to address the risk of

important, but are also

important, but are also

necessarily on agenda
stakeholder accusations. Social adaptation has four

the primary concern

means to serve the

means to serve the

Social component

features. First, it is a proactive and manageable tool

to address potential stakeholder challenges so that
MNCs adapt to the social transition of emerging

business

the risk of stakeholder accusations expectations to avoid crises business

markets and achieve sustainable business opera-
tions. Second, social adaptation is oriented toward
the stakeholders who are potential challengers to the
effectiveness of local social
business by appropriating

business. They can turn genuine or perceived MNC

local stakeholders’ social

business while creating

business by addressing
Weak: maximizing the
Economic component

misdeeds into a public crisis that causes financial

national differences
Strong: serving the

Incorporating social components Strong: serving the

Strong: serving the

and reputational damage. Third, social adaptation is
voluntary in nature and thus does not involve legal
social values

compliance behaviors. Fourth, social adaptation

activities

reduces businesses’ negative social and environmen-

tal externalities on potential challengers or their
negative perceptions of the firm. Table 2 distin-
Adjusting pre-existing knowledge

guishes social adaptation and related concepts in

and solutions to respond to local

MNC and CSR studies along the economic, social,

regulatory systems and so on
conditions such as customer

to developing products and

Developing social activities

and stakeholder elements. On the basis of the

Social adaptation and related concepts

local stakeholders’ social

preferences, labor costs,

services in pursuit of the

according to local social

expectations to address
competitive advantage

above elements, we suggest that social adaptation

Strategically meeting

lowers the probability of public crises, and therefore

hypothesize:
need priorities

Hypothesis 4: Social adaptation lowers the likeli-

Definition

hood of MNCs encountering public crises in China.

We further argue that social adaptation counter-
balances the impact of economic adaptation on the
(local responsiveness/
Economic adaptation

occurrence of public crises. MNCs could deve-

CSR: localized CSR

Social adaptation

lop initiatives and mechanisms to monitor and

manage certain stakeholders’ dissatisfaction that
localization)

CSR: SCSR

may raise criticism and cause a crisis. If so, they

Concept
Table 2

become effective at detecting subtle changes in the

local social context and acknowledge gaps between

Journal of International Business Studies

 MNC strategy and social adaptation in emerging markets
850
environmental changes and internal organizational
systems and capabilities. Although the initiatives
and mechanisms of social adaption do not guarantee
that MNCs execute organizational changes and local
policies, they can trigger related processes to fill gaps
and improve a company’s fit with new social envi-
ronments. We thus argue that social adaptation
moderates the impact of economic adaption on the
risk of public crises.
As noted earlier, MNCs that entered China at an
early development stage tend not be sensitive to new
social and stakeholder environments, and they may
develop internal inertia working against operational
changes. Strategic execution of social adaption
would lead them to be more attentive to stakeholder
feedbacks and dissatisfaction. It allows a process to
internalize new social expectations and demands,
which lowers the risk of public crises.
Similarly, MNCs with deliberate social adaptation
develop specific criteria to align subsidiary top man-
ager’s social values and behavioral modes with global
standards. Social adaptation may lead companies
to consider the commitment and ability to conduct
strategic stakeholder management in addition to local
resourcefulness and knowledge when recruiting and
evaluating local leaders. This improves a local leader’s
value identification with home-country standards,
making them more responsive to social issues and
new stakeholder environments and helping them
avoid questionable local business practices.
Finally, MNCs that are sensitive to local stake-
holder dynamics would allocate resources to closely
supervise local subsidiary and supplier activities
during fast business expansion. Social adaptation
requires extensive staff training to assure ‘buy-in’
from all employees on desired values and associated
processes. It is possible that such training becomes
less effective when an MNC grows too fast or goes
through high employee turnover, seriously under-
mining the social adaptation strategy. However, in
general, we argue that MNCs’ social adaptation
strategies would help them lower the risk of public
crises during high growth periods by installing
the right processes and systems to address social
challenges. Overall, based on the prior arguments,
we hypothesize:
Hypothesis 5: Social adaptation lowers the impact
of MNCs’ early entry on the occurrence of public
crises.
Hypothesis 6: Social adaptation lowers the
impact of MNCs’ local country head on the occur-
rence of public crises.
Journal of International Business Studies
Meng Zhao et al
Social adaptation
H4
H5
Economic adaptation
H1
Timing of starting
local operation
H6
Public crisis
H2
Local leadership regarding
consumer rights
H7
Local employee
H3
expansion
Figure 2 Conceptual model.
Note: Solid lines indicate a relationship of strengthening. Dotted
lines indicate a relationship of weakening.
Hypothesis 7: ocial adaptation lowers the
impact of MNCs’ fast local expansion on the
occurrence of public crises.
Figure 2 summarizes the hypotheses.
METHODS
Sample and Data
We created a data set to track foreign MNCs’ con-
sumer-related public crises and their firm-level infor-
mation in China during 2000–2009. We chose
sample companies by combining a list of the top
1000 global companies (both private and listed)
in 2010 according to total sales from Bloomberg
and the Database of Industrial Firms in China (DIF).
The purpose was to build a representative data set
of foreign MNCs that are large enough to invite the
scrutiny of the general public and mass media
and have publicly accessible financial information
for their China operations (Roberts, 1992). DIF is
an annual industrial firm census conducted by
China’s National Bureau of Statistics (NBS). The
census data include all manufacturing enterprises
except small, often family run, businesses at the
village level. The database contains domestic com-
panies and MNC subsidiaries’ key financial indica-
tors as well as demographic information, such as
the manager’s name, the year of establishment, and
the number of employees. The total number of
enterprises ranged from 403,775 to 450,233 across
our study years. NBS reports that the accuracy
of reported information – and financial data in
particular – has been carefully checked. NBS uses a
logic-testing method that links related variables
 MNC strategy and social adaptation in emerging markets
together to identify illogical data, and a historical
method that tracks an enterprise’s historical data
(Park, Li, & Tse, 2006). We used the top 1000 com-
panies screened from Bloomberg to identify a group
of the largest MNCs and then checked DIF to find
out which companies have operational subsidiaries
in China.
After combining the two data sets, we found that
180 industrial enterprises out of the top 1000 com-
panies have available financial and other organi-
zational information for their China operations for
2000–2009. These 180 companies have operational
subsidiaries (fully owned entity or joint venture) in
China that sell products in local markets and employ
local people to manufacture goods. They are not
representative offices that function as public rela-
tions agencies. Therefore our sample companies are
subject to the scrutiny of local stakeholders on issues
including quality flaws, labeling fraud, marketing
fraud, and other managerial misdeeds that affect
consumer interests. The final sample includes 180
MNCs and 1219 firm-year observations.
This paper focuses on consumer-related public
crises for several reasons. First, they account for the
majority of public crises encountered by foreign
MNCs in China between 2000 and 2009. The 180
sample companies encountered 100 public crises in
six broad areas including consumer rights, labor
rights, environment protection, government rela-
tions, firm relations, and perceived cultural discrimi-
nation; 61 of these are violations of consumer rights.
Focusing on this single major crisis area allows us to
avoid crisis-level variation that could be attributed
to factors beyond economic and social adaptation.
Second, consumer rights tend to be related to MNCs’
local management problems, such as internal code
violations, supplier misdeeds, or marketing fraud.
These issues are typically associated with MNCs’
economic expansion and can be addressed by stra-
tegic stakeholder management. Third, the increase
of consumer-related crises is not unique to China,
with a similar trend observed in India and Russia.
For example, a rarely seen Russian court decision
to punish a large MNC to protect a customer right
occurred in 2006 (Zakon.kz, 2006), followed by
several accusations against McDonalds in 2009 and
2011. In India, the Center for Science and Environ-
ment, a Delhi-based green NGO, initiated landmark
nationwide consumer protests against Coca-Cola
and Pepsi in 2003 (CNN, 2003). Studying how eco-
nomic and social adaptation influences consumer-
related crises thus allows reasonable generalizability
outside the Chinese context.
Meng Zhao et al
851
Measurement
Public crisis
We developed a dummy variable based on a content
analysis to indicate the presence of a public crisis in a
particular year. We coded the following features of
an event to identify if it counts as a consumer-related
public crisis. (1) What is the challenge (critique,
protest, lawsuit etc.) about? A challenge must con-
cern consumer issues including product quality,
safety, and design problems; product delivery pro-
blems (service quality, contract formulation, post-
sales etc.); marketing problems (labeling, advertise-
ment etc.); and other managerial problems, such as
violations of a store’s food storage policy which may
lead to a potential quality problem. (2) Who are the
challengers? The challenge can come from affected
consumers or a third party, such as government
agencies or NPOs. (3) How is the event reported?
The challenge must be reported through formal
public media (official or private) rather than infor-
mal channels, such as the bulletin board, blog, and
other social media channels. A challenge may initi-
ally appear on an informal channel and then be
subsequently reported by formal media. (4) What is
the damage? A challenge must cause damage to
business performance and/or reputation. Informa-
tion about damages can be found in a firm’s res-
ponses, such as compensation or product recall; an
external party’s actions, such as government penali-
zation or court conviction; or a third party’s estima-
tion of financial losses.
We relied on the Chinese media to identify MNC
crises. International media is avoided for several
reasons. First, one definitive feature of an MNC
public crisis in this paper is that the misdeeds need
to be intensively reported by local media. Second, we
tried to use foreign media (including Forbes, Fortune,
Business Week, The Wall Street Journal, The New York
Times, and The Economist) in Factiva to search for
crises, but could not find related articles for most
crises we found in Chinese media. Third, foreign
media articles usually did not have elaborate and
continuous reports on MNC crises in China, while
local media did. We recognize the limitation of press
freedom in China regarding government inter-
ference in what can be reported. This issue might
affect the reliability of Chinese media information.
However, the Chinese media has been actively
reporting on MNC crises and scandals in recent years
and we did not notice clear press restrictions on
doing this. Moreover, although press freedom might
partly explain why some misdeeds were exposed or
Journal of International Business Studies
 MNC strategy and social adaptation in emerging markets Meng Zhao et al
852

Table 3 Structure of consumer-related MNC public crises in China by entry stage

Entry stage Entry before Entry during Entry after

1991 1991–2000 2000

Percentage of total sample MNCs 32 52 16

Percentage of crisisa 52 48 0
Number of MNCs encountering a crisis 15 16 0
Number of industries encountering a crisis (Bloomberg Industry Group) 9 11 0
Number of home countries for MNCs encountering a crisis 5 5 0
Average total revenue in China for MNCs encountering a crisis (million USD) 1,243.95 3,244.93 N/A
Average total assets in China for MNCs encountering a crisis (million USD) 829.01 1,552.31 N/A
Average number of employees in China for MNCs encountering a crisis (thousand) 7.60 8.53 N/A
a
Crises in this table took place during 2000–2009.

concealed, this would not compromise our ability to
study the effects of adaptation strategies on reported
crises.
We collected crisis information for each MNC
from three sources of media articles: (1) the news-
paper article database of Factiva; (2) articles via
Google and Baidu (the major Chinese search
engine); and (3) local databases about MNC scandals
(people.com.cn and sina.com.cn). People.com.cn
is a major official online news content provider
in China. Its special section on MNC scandals has
full-time staff members collecting news articles
from electronic media throughout the country every
day. We cross-checked the information using a simi-
lar scandal section on sina.com.cn, another major
Chinese news content provider. Organizational
documents and external reports were used as com-
plementary materials.
Two Chinese graduate students searched for each
of the 2010 top 1000 MNCs in the above news
sources. They attended a training session in which
they used the coding criteria to do a pilot analysis of
10 companies. We then discussed and dealt with
discrepancies. Each student then worked on differ-
ent parts of the sample independently. They went
through 2814 articles in total to understand and
identify public crises. After each student finished
his/her own part, he/she exchanged companies and
rechecked the results and evidence found by the
other student. Ultimately, there were disagreements
on only five events. As a result, we found 61 unique
consumer-related public crises for the 180 sample
companies during 2000–2009. Note that these crises
were encountered by industrial enterprises. We also
checked service industry companies like Wal-Mart
and Carrefour. We did not include these companies
in the data set because their organizational and
financial information in China was not publically
available during the study period. Table 3 describes
the structure of crisis incidents by MNC entry stage.
Subsidiary age
Following existing research on FDI timing (Luo,
1998; Tse, Pan, & Au, 1997), we used a continuous
construct, namely the number of years since an
MNC set up its first operational subsidiary in China,
to distinguish MNCs that entered China in an earlier
or a later stage in a continuous manner. We con-
firmed the subsidiary age by looking through the
Bloomberg database, organizational websites, and
media articles.
Local leadership
We adopted a strict criterion to create a dummy
variable indicating whether an MNC has a Chinese
head in charge of local operations. A Chinese head
must have been born, received college or higher-
level education, and spent basically his or her entire
career in mainland China. Those people who were
born and received education in mainland China but
spent most of their time working overseas are not
counted as local leaders. This criterion ensures that
a person is more exposed to the Chinese business
environment and less exposed to developed country
business environments than foreign managers.
We checked the background of MNCs’ China coun-
try heads for each year. Information sources
included media articles, organizational websites,
annual reports, and the Bloomberg database.
Speed of operational expansion
We used the growth rate of employees as a proxy for
MNCs’ local expansion. To control for the period of
expansion, we used the average growth rate for
5 years prior to the observation year. However, this
substantively reduced the number of observations.

Journal of International Business Studies

 MNC strategy and social adaptation in emerging markets
We thus created a variable that replaces missing
observations with periods of 4 years. Then for
further missing observations we filled in the rate of
the 3-year period, then 2 years, and 1 year prior to
the current year. This allows us to account for the
delayed effect of employee growth and address the
observation issue.
Social adaptation
We developed a dummy variable to indicate whether
or not an MNC engaged in social adaptation acti-
vities in the consumer rights area. Most empirical
research measures corporate social performance
using single secondary indicators, such as environ-
mental, health, and safety investments, third-party
audits or awards, or the KLD index (Mattingly &
Berman, 2006; Peloza, 2009). This is the same
in studies on stakeholder management strategies
(Barnett & Salomon, 2012; Frooman & Murrell, 2005)
with a few exceptions looking into the qualitative
activities of stakeholder engagement (e.g., Jamali,
2008). Secondary indicators are unable to capture
social adaptation activities. Social adaptation fea-
tures intensive stakeholder engagement that targets
selected stakeholder groups to address a potential
crisis risk. It enables a firm to build close and ongoing
knowledge about local stakeholder expectations
and discontent, and therefore generates appro-
priate behaviors to reduce the source of stakeholder
accusations.
We conducted a content analysis of a firm’s con-
sumer-related activities and organizational mechan-
isms available in social reports, media articles, firm
official websites, and specialized CSR websites, such
as www.chinacsrmap.org and www.csr-china.net.
This content analysis codifies qualitative informa-
tion collected from various sources to derive quanti-
tative variables (Abbott & Monsen, 1979). It took
two steps to identify social adaptation activities.
First, according to our definition, social adaptation
activities in the consumer rights area should involve
the features of targeting consumers, being voluntary
in nature, and having a clear impact on reducing
the business’ negative externalities on consumers or
reducing the consumers’ negative perceptions of the
firm. Social adaptation to local consumers involves
investing in understanding and responding to how
consumers perceive and expect the firm to protect
their rights in addition to what products consumers
want to buy. Sample activities include developing
a mechanism to actively engage with potentially
challenging stakeholders, studying their concerns,
and efficiently handling their complaints. Typical
Meng Zhao et al
853
activities meeting these criteria include projects and
organizational mechanisms that are purposefully
developed to monitor and solve consumer com-
plaints and avoiding product and management pro-
blems that would lead to consumer issues. Second,
when reports and websites were not available, we
developed a set of keywords to search and code
media articles. The keywords included three parts
describing the company name, the stakeholder type,
and the activity nature. We then used the combi-
nation of these keywords to search for articles that
describe firm activities that fit with our definition of
social adaptation.
The social adaptation variable is time-varying.
We tried to find out whether or not an MNC had
conducted social adaptation activities (e.g., regular
investigations that monitor consumer complaints
and strengthened post-sale services to handle these
complaints) in each year. We assume that, consider-
ing that these activities are important initiatives
to deal with consumers, there is little chance that
an MNC would not mention them in documents
(e.g., official websites, CSR reports, annual reports,
media articles) talking about their relationships with
consumers. Given the lasting and regular nature of
such activities/mechanisms as part of the organi-
zational system, our strategy is to decide when they
first put such activities/mechanisms in place.
Control variables
We used return on assets (ROA) and the natural
logarithm transformation of total revenues of local
MNC operations to measure firm performance and
firm size, respectively. It has been reported that
profitable and large companies are more likely to
be scrutinized by external interest groups (Kostova &
Zaheer, 1999). ROA is a widely adopted measure
in both CSR literature and strategy management
to indicate firm performance (Barnett & Salomon,
2012). Parent firm size may also influence the
chance of crisis occurrence considering that large
MNCs tend to attract more public and NGO atten-
tion. But the correlation between parent firm size
and subsidiary size is high (r = 0.76) and increases
the average variance inflation factor (VIF) score
from 4.49 to over 10.65. We therefore chose not to
include parent firm size as a control variable.
Social adaptation concerns strategic stakeholder
management that differs from general CSR activities.
We included several variables to control for general
CSR activities’ impact on crisis occurrence. We
first controlled for an MNC’s extent of CSR dis-
closure. This is measured by the number of channels
Journal of International Business Studies
 MNC strategy and social adaptation in emerging markets Meng Zhao et al
854

(i.e., report, official website, and mass media) through

1.00
0.04
10
which a firm has released information about acti-
vities in consumer rights, labor rights, environment

1.00
0.21
0.04
9
protection, and community contribution. Second,
we checked an MNC’s CSR diversity in regards to

1.00
0.21
0.23
−0.04
the number of social areas the firm has engaged.

8
Finally, we looked at an MNC’s CSR reputation in
China indicated by the firm’s receiving an influential

1.00
0.23
0.27
0.26
0.21
7
Chinese CSR award or being ranked in the leader
group of a major Chinese CSR index. The awards and

1.00
0.25
−0.10
0.01
−0.02
−0.05
rankings we considered include Top 100 CSR

6
Companies by Chinese Academy of Social Sciences,
CSR Index Top 20 by Shanghai National Account

1.00
0.04
0.21
0.16
0.03
0.12
0.08
5
Institute, Hurun Ranking of Top 50 CSR Companies,
Chinese CSR Annual Conference Award, Most

1.00
−0.07
0.00
0.04
0.04
−0.02
0.01
0.00
Socially Responsible Company Award, and Golden

4
Bees CSR Award.
MNCs focusing on exports may have relatively

1.00
−0.03
−0.02
0.02
−0.11
−0.06
−0.10
0.02
0.01
little engagement with local consumers, and might

3
be less likely to incur consumer challenges. We
therefore controlled for export orientation using the

1.00
0.05
−0.01
0.16
0.01
0.22
0.25
0.04
0.24
−0.09
2
proportion of revenues that come from exports.
Finally, our models also include a set of country-of-

1.00
0.07
−0.03
0.00
−0.02
0.01
0.12
0.04
0.01
0.01
0.00
origin and industry dummies in case they might 1
systematically influence entry timing, reliance on
local employees, or the chance of inviting consumer
Maximum

complaints. We adopted the Bloomberg Industry 38.00

10.25

18.96
1.00

1.00

1.00
0.95

3.00
3.00
1.00
1.00
Group category that is similar to the third level of

N = 1219; Correlations with an absolute value > 0.10 are significant at 0.001 level (two-tailed).
the North American Industry Classification System.
Minimum

ANALYSES AND RESULTS

0.00
0.00
0.00
−0.88
0.00
−0.57
8.91
0.00
0.00
0.00
0.00
We adopted an event history analysis to test the
hypotheses that examine the effect of each indepen-
dent variable on the hazards of public crisis (Allison,
Standard deviation

1984). Since a public crisis can happen at any time,

we used the continuous-time method instead of the
0.18
7.18
0.32
0.80
0.46
0.14
1.92
0.70
0.85
0.22
0.34

discrete-time method that allows a finite set of

Descriptive statistics and correlation matrixa

values for the event time. The exponential model

(no dependence of the hazard rate on time) of
maximum likelihood estimation is applied for para-
metric regression models. The exponential hazard
13.74

14.42
0.03

0.11
0.33
0.30
0.09

1.93
1.00
0.05
0.28
Mean

and survivor functions are:

hðt Þ ¼ λ
Occurrence of public crisis

Speed of local expansion

Sðt Þ ¼ expð - λtÞ

Chinese country head

Log of total revenue

Social adaptation

where λ = exp(xj β), xj is a vector of covariates, and β

Export intensity
Subsidiary age

CSR disclosure
CSR diversity

is a vector of regression coefficients.

CSR award

Table 4 presents descriptive statistics and correla-

Variables

tions. The highest correlation among the vari-

ROA

ables is 0.27. We calculated VIFs for all variables to

Table 4

test multicollinearity. The VIF for the log of reve-

1
2
3
4
5
6
7
8
9
10
11

nue is larger than 10 in all models, which could

a

Journal of International Business Studies

 MNC strategy and social adaptation in emerging markets Meng Zhao et al
855

Table 5 ML estimates of event history models of the occurrence of MNC public crisesa
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7
(Hypothesis 1) (Hypothesis 2) (Hypothesis 3) (Hypothesis 4) (Hypotheses 1–4) (Hypotheses 5–7)

Independent variables
Subsidiary age 0.32*** 0.31*** 0.44***
(0.09) (0.07) (0.08)
Chinese country head 4.47*** 6.17*** 8.37***
(1.28) (1.75) (2.27)
Employee growth rate 1.58*** 1.65*** 2.33***
(0.25) (0.25) (0.33)
Social adaptation −1.98* −2.28* −1.71*
(0.84) (0.94) (0.78)
Subsidiary age * social −.45***
adaptation
(0.11)
Chinese country head −2.51
* social adaptation
(2.37)
Employee growth rate 3.99***
* social adaptation
(0.92)
Control variables
ROA −5.98+ −3.22 −8.34** −6.22* −6.06+ −5.43+ −5.36+
(3.45) (3.17) (3.18) (2.78) (3.44) (2.94) (3.07)
Log of total revenue 2.31*** 2.07*** 2.54*** 2.16*** 2.63*** 2.34*** 2.05***
(0.31) (0.32) (0.32) (0.28) (0.34) (0.28) (0.30)
CSR disclosure 0.71 −1.08 0.84 0.45 0.92 −0.04 −0.65
(0.60) (0.95) (0.59) (0.56) (0.61) (0.66) (0.64)
CSR diversity −1.22** −1.03* −1.48*** −0.97* −1.10+ −1.09** −0.40
(0.41) (0.47) (0.41) (0.41) (0.47) (0.43) (0.51)
CSR award 0.79 0.06 0.27 0.69 0.57 −1.51 −1.63
(1.29) (1.35) (1.28) (1.28) (1.27) (1.37) (1.94)
Export intensity −2.19 −0.96 −2.54+ −1.73 −1.84 −0.59 0.24
(1.42) (1.73) (1.43) (1.37) (1.54) (1.67) (1.86)
Industry dummies Included Included Included Included Included Included Included
Country dummies Included Included Included Included Included Included Included
Constant −56.54 −51.58 −59.55 −48.27 −62.00 −54.53 −50.02
(33.91) (55.91) (43.52) (53.82) (55.89) (56.42) (52.54)
LR χ2 139.85 156.30 148.86 156.43 146.55 193.74 216.34
Log likelihood 4.57 12.80 9.08 12.86 7.92 31.51 42.82
Average VIF 4.51 4.66 4.48 4.47 4.50 4.5 4.49
Model significance 0.000 0.000 0.000 0.000 0.000 0.000 0.000
a
Standard deviations are in parentheses.
Note: N = 1219; ***p < .001; **p < .01; *p < .05; +p < .10; two-tailed tests,

cause a multicollinearity problem (Neter, Kutner,
Nachtsheim, & Wasserman, 1996). Dropping this
variable reduces the average VIF from around 4.50 to
2.20 in all models. However, given the well-estab-
lished implication of subsidiary size on a firm’s
public scrutiny, the variable remains in the models
for the sake of theoretical rigor (O’Brien, 2007).
Moreover, there are no surprising results whether
the variable is excluded or not.
Table 5 presents the results of the event history
analysis. Model 1 is the baseline model that includes
only control variables. In Models 2, 3, and 4, we,
respectively, added MNC subsidiary age, Chinese
country head, and the growth rate of local employ-
ees. We found that MNCs that entered China in
earlier years, relied on a Chinese country head, or
had rapid employee expansion are more likely to
encounter a public crisis, which supports Hypoth-
eses 1, 2, and 3. Model 5 shows that conducting
social adaptation reduces the chance of encounter-
ing a public crisis as proposed in Hypothesis 4.
Model 6 includes all independent variables, produ-
cing consistent results with the prior models, and
further confirming Hypotheses 1 to 4.
Model 7 tests the interaction effects between eco-
nomic adaptation and social adaptation. It shows
that the interaction between social adaptation and
MNC subsidiary age is negative and significant
(b = −0.45, p < 0.001) (see Figure 3). The slope of the
dotted line is much smaller than that of the solid

Journal of International Business Studies

 MNC strategy and social adaptation in emerging markets
856
Predict hazard
rate
.04
.03
.02
.01
0 scrutiny (Kostova & Zaheer, 1999), it explains that
-.01
0 10 20 30
Length of local operation
Without social adaptation With social adaptation
Figure 3 The interaction effect of social adaptation and MNC
subsidiary age on public crisis.
line, meaning that the positive impact of the length
of operation on crisis probability is much smaller for
firms with social adaptation than for firms without
social adaptation. Figure 3 supports Hypothesis 5
that social adaptation lowers the impact of early
entry on crisis occurrence. However, the interaction
between local head and social adaptation is negative
but not significant (b = −2.51, p > 0.10). The interac-
tion between employee growth and social adapta-
tion is significant, but the direction is opposite to
our prediction (b = 3.99, p < 0.001). These results
leave Hypotheses 6 and 7 unsupported.
The assertive finding on Hypothesis 5 suggests
early entrants need to adjust their strategies and
actively adapt to local stakeholders’ social expecta-
tions to avoid crisis risk. The result on Hypothesis 6
shows that relying on local heads is related to
misdeed occurrence regardless of social adaptation
activities. This implies that effective social adapta-
tion requires the support of organizational systems,
for example, human resource policies, to select and
promote local leaders who are committed to mana-
ging local stakeholders’ social expectations. When a
subsidiary values local managers’ insider knowledge
too much over their social adaptation capability and
commitment to develop systems for social adap-
tation, existing stakeholder-oriented activities may
become less effective at lowering crisis risk. We
reason that the unsupported result for Hypothesis 7
relates to the staff training that effective social
adaptation requires to make sure employees buy in
to associated values and processes. When an enter-
prise grows fast with employee recruiting, training
may become less effective, seriously undermining
the effect of social adaptation on employee buy-in.
Journal of International Business Studies
Meng Zhao et al
This suggests that a firm needs to coordinate its
expansion agenda with its social adaptation capabil-
ity to avoid crisis risk.
As for control variables, ROA is negative and signi-
ficant in some models, suggesting that firms with
worse performance are more likely to encounter
public crises. While this seems to contradict the exist-
ing understanding that high performance invites
firms with low performance might risk pursuing
performance at the expense of efforts to improve
40 stakeholder relationships. Firm size has a significant
influence, suggesting that MNCs are more likely
to encounter public crises as their local operations
get bigger. This is in line with the size–scrutiny
relationship found in existing studies (Rehbein,
Waddock, & Graves, 2004). CSR disclosure and CSR
award are not significant, which differentiates social
adaptation from CSR activities that may enhance the
general reputation of a firm, but are not as relevant
to stakeholder interests. The significant effect of CSR
diversity shows that MNCs tend to be more likely to
avoid crises when they pay attention to a broad
range of stakeholder interests.
DISCUSSION
This paper extends the conventional economic view
of MNC strategy by developing a phased and stake-
holder-oriented perspective of MNC adaptation in
emerging markets. The study is motivated by both
the empirical observation of growing public crises
encountered by foreign MNCs in emerging markets
and a research gap in IB and CSR studies that
have not paid much attention to this phenomenon.
The main research questions concern what changes
in MNC–stakeholder relationships have led to public
crises and how MNCs can address these changes to
reduce crisis risk.
China has entered a relatively mature stage of
economic development in the new century in terms
of FDI and MNC penetration in the mass market.
MNCs face intensifying competition and a broad
range of stakeholders with heightened and diverse
interests and expectations while they are occupied
with economic gains from institutional voids and
local conditions, even at the expense of global CSR
standards. This is a typical phenomenon in transi-
tion economies where MNCs deepen their enga-
gement in local markets, new regulations emerge
and enforcing them becomes more effective, and
civil society actions increase. This social transition
complicates MNC adaptation, which has a primary
focus on taking advantage of national differences
 MNC strategy and social adaptation in emerging markets
to maximize financial performance. Most studies
on MNC strategies in emerging markets emphasize
overcoming the lack of Western-style business
and institutional environments. However, as MNCs
further penetrate into the mass market, incurring
exposure to a wide range of stakeholders, they may
fail to recognize the increasing risk of social transi-
tion where institutional voids meet stakeholder
growth. This accounts for why MNCs run into public
crises and possibly suffer from financial and reputa-
tional losses. Our findings support that MNC stra-
tegies need to adopt a balanced economic–social
orientation to manage stakeholder challenges dur-
ing social transition.
This paper recognizes the complexity in sources
and substance of public crises in transition eco-
nomies that differ from those in dynamic civil
societies in the West. Public crises in China arise
from MNCs’ conflicts with various stakeholders
including consumers, environmentalists, and gov-
ernments. Given the pervasive presence of the party
system, China still does not have a civil society that
is largely independent of the government and law
enforcement agencies. Thus studying public crises as
an organizational outcome of social transition with-
out separating among sources of conflicts seems to
be appropriate for the Chinese context.
The social dimension of MNC adaptation has
received disproportionate attention compared with
economic adaptation strategies in academic research
and business practices. The paper draws on MNC
strategy, stakeholder theory, and CSR studies to
develop a balanced perspective between economic
and social adaptation. Economic adaptation deals
with traditional business and operational activities
to address local differences, while social adaptation
refers to MNCs’ strategic and proactive behaviors
to respond to stakeholders’ social expectations and
avoid public risks. This new conceptualization
departs from traditional CSR studies by focusing on
locally sourced public crises and local relevance of
MNCs’ CSR values and practices, adaptive features
of MNCs’ social activities to evolving stakeholder
dynamics, and host-country pressures on MNC
social activities.
The empirical results confirm limitations of eco-
nomic adaptation and the significant role of social
adaptation in managing potential risks of public
crises. The findings offer support for the main effects
of three aspects of economic adaptation. That is,
MNCs that entered China in early years when
stakeholder voices and actions were weak are more
likely to encounter consumer-related public crises
Meng Zhao et al
857
in the new stakeholder environment. Early entrants
may enjoy first-mover advantages, but face higher
social risks during subsequent social transition. In
addition, relying on a local country head and seek-
ing a rapid expansion of local operations also con-
tribute to public crises. This does not imply that
these localization activities are wrong strategies.
Instead, despite potential economic gains, they may
hinder MNCs’ adaptation to social changes, which
justifies the importance of social adaptation.
The interaction results between social adaptation
and economic adaptation reveal that organizational
tensions may drive MNCs’ crisis risk. They suggest
that MNCs need to carefully coordinate economic and
social aspects of strategic adaptation to lower public
crisis risk. Social adaptation mitigates the impact of
subsidiary age on public crisis risk, suggesting the
importance of organizational updating and adjust-
ment to social transition over time. The unexpected
findings on local leadership and subsidiary growth
indicate that they cause public crises that cannot be
easily resolved by consumer engagement. We argue
that, while a local head’s insider knowledge and
managing fast local expansion would be valuable,
MNCs need to build social adaptation capabilities.
They need human resource policies that select and
promote local leaders committed to local stakeholders’
social expectations and a staff training system to
facilitate employees’ internalization of the values and
processes associated with social adaptation.
This paper makes three contributions to MNC and
CSR studies. First, a social adaptation view updates
and broadens our understanding of MNCs’ roles
and strategies in emerging markets. It incorporates
local stakeholders’ dynamic social expectations into
MNCs’ adaptation decisions. It is important that
MNC adaptation strategy coordinates social and eco-
nomic roles into their local operations, in particular
during the social transition of emerging markets.
Social adaptation, that is, strategically managing
evolving stakeholder expectations, is a useful com-
plement to conventional economic approaches
to localization, such as adapting to market tastes or
recruiting local managers. Second, the study deline-
ates the specific effects from conventional econo-
mic adaptation strategies of arbitrating national
differences, first-mover advantage, and people locali-
zation on public crises and shows how social adap-
tation may help avoid such crises. Lastly, the paper
extends our understanding of the impact of socially
oriented activities on financial performance through
their mediating role in public crises, which requires
further validation in future studies.
Journal of International Business Studies
 MNC strategy and social adaptation in emerging markets
858
There are a few issues that future studies should
consider. First, our observations are limited to after
2000, which represents a mature phase in MNC
activities and stakeholder claims and actions in
China. This presents an appropriate window to
study public crises given their rise mostly during this
period, but this leaves out crises related to govern-
ment agencies and business partners in early stages
of MNC operation. Future studies could study earlier
years to complete a longitudinal understanding
of the MNC–stakeholder relationship and present
a more rigorous view of social adaptation.
Second, this study does not directly examine the
impact of social adaptation on MNCs’ financial perfor-
mance. Social adaptation indicates changes in the
sources of risk in emerging markets due to new
stakeholder dynamics. For example, the recent Con-
ocoPhillips case in China manifests that unprece-
dented coordination among government agencies,
NPOs, communities, and independent lawyers can
substantively disturb business operations. Our findings
imply the possibility that ongoing investment in social
adaptation helps build up MNCs’ stakeholder influ-
ence capacity (Barnett, 2007) and hence contributes to
financial performance. As local stakeholders adopt
higher expectations of MNC CSR over time, they
may also reward MNCs that achieve higher CSR
standards. Future studies could explore how manag-
ing stakeholders’ social expectations affect the CSR–
performance relationship in emerging markets, which
could be critical to extending the MNC and CSR fields.
Third, while the underlying conceptualization
of social adaptation has broad emerging market
context in mind, our empirical testing is limited to
the specific features of stakeholder environments in
China. Other leading emerging markets, including
India and Russia, go through similar stakeholder
transitions and have similarly seen increasing stake-
holder accusations, although less dramatic than
China has, in the new century (Zhao et al., 2013).
Nevertheless, country-specific characteristics in the
social-political system would complicate the forms
and outcomes of social adaptation and other pre-
ventive strategies that MNCs use to avert the public
crisis. For example, independent civil society organi-
zations play a bigger role in leading and organizing
protests against MNCs in the West than in China.
In another case, although the mass media in China
have actively engaged in disclosing MNC misdeeds,
there remains a question on media independence
and its actual impact on auditing the misdeeds
and determining the crisis consequence. Country-
level differences influence how firms prioritize
Journal of International Business Studies
Meng Zhao et al
stakeholder expectations and how to appease and
build trust with stakeholders. It would be challen-
ging but worthwhile that future studies apply a
comparative study across multiple emerging markets
to understand the differences in MNCs’ social adap-
tation strategy and their relationships with social-
political development in different countries.
Future studies need to develop more fine-tuned
measurements and definitions of social adaption.
It would be interesting to compare social adaptation
and crisis issues between MNCs and local firms that
would delineate common and firm-specific drivers
of public crises and social adaptation strategies.
Lastly, this study is limited to locally sourced crises,
excluding those due to country-of-origin stakeholder
pressures. Local stakeholders sometimes draw on MNC
scandals in other countries and international media to
strengthen their arguments against MNC misdeeds in
the local context. Future studies could examine these
indirect and direct effects of country-of-origin on
stakeholders and compare them with local effects on
MNC adaptation in emerging markets.
CONCLUSION
Emerging markets present lucrative but challenging
business opportunities to MNCs given their complex
and dynamic stakeholder environments and insti-
tutional changes. Prior studies were mostly con-
cerned with utilizing institutional voids and local
differences to maximize economic returns, failing to
recognize the implications of social adaptation on
MNCs’ long-term sustainable returns in emerging
markets. This study provides conceptual and empiri-
cal support for MNCs’ balanced adaptation strategies
to address economic and social issues and illustrates
related organizational capabilities and processes.
We discuss social adaptation as an important capabil-
ity for MNCs to develop over time, along with con-
ventional market-based knowledge, in order to sustain
their growth through social transition in emerging
markets. The paper concludes with a few suggestions
for practicing managers in relation with a balanced
economic-social adaptation strategy for MNCs.
MNCs run into public crises when they fail to
catch up with the stakeholder environment changes.
As emerging markets develop over time, they present
a different social context from the early stage when
civil society organizations and stakeholder aware-
ness of rights protection were largely dormant. The
social transition requires different approaches and
scales to address stakeholder challenges. However,
inherent organizational inertia makes MNCs to
replicate their experiences from earlier stakeholder
 MNC strategy and social adaptation in emerging markets
interactions to the new stakeholder environment.
MNCs’ approaches become socially controversial
and stakeholder relationships that were previously
unchallenged are more likely to cause public crises in
the new social context. It is important MNCs develop
an internal system for continuous and careful scan-
ning of broad environmental changes, including both
economic and social dimensions, so that they would
not fall into learning gap during the transition.
Social adaptation reduces the crisis risk by align-
ing economic and social components of organi-
zational processes and activities. The traditional
approaches of economic-oriented adaptation focus
primarily on obtaining local market knowledge
and talents and addressing the interests of govern-
ments and business partners. Our study shows that
these conventional approaches fail to respond to
new stakeholder dynamics. They generate organi-
zational inertia against being responsive to chan-
ging social expectations, count on local managers
vulnerable to flawed business practices, and seek
fast expansion while losing sight of misdeeds by
subsidiaries and business partners. Although deve-
loping a mechanism to respond to consumer interests
could avoid consumer-related crises, MNCs still face a
high risk of crisis if the mechanism does not involve
proper leaders and local expansion strategies. The
findings show that MNCs’ local adaptation strategy
should incorporate stakeholder-oriented initiatives,
leader selection, and expansion strategy.
Another implication is to recognize that managing
stakeholder relationships through social adaptation
becomes a valuable firm capability to maintain compe-
titiveness in an increasingly captious stakeholder envi-
ronment. Unlike the traditional belief, there is no
country-of-origin effect in the relationship between
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ABOUT THE AUTHORS
Meng Zhao is an Assistant Professor of Strategy and
Organization at Moscow School of Management
SKOLKOVO. He was research fellow of SKOLKOVO–
Ernst & Young Institute for Emerging Market Stu-
dies. His research primarily focuses on multinational
firm strategy in emerging markets, corporate social
responsibility, and social innovation.
Seung Ho (Sam) Park is Professor of Strategy and
International Business at China Europe International
Business School. He was President of SKOLKOVO–
Ernst & Young Institute for Emerging Market Studies
and Samsung Economic Research Institute China.
His research interest lies in managing high perfor-
mance organizations, globalization of local com-
panies, and multinational firm performance and
strategy in emerging markets.
Nan Zhou is a Researcher at China Minsheng Bank.
She was a Research Fellow at SKOLKOVO–Ernst &
Young Institute for Emerging Market Studies. Her
current research focuses on understanding how firm
capabilities and institutional environments affect
strategic decisions and the key drivers of sustained
high performance firms in emerging markets.
Journal of International Business Studies