FIRM CAPABILITIES AND GREAT POWER COMPETITION DYNAMIC SENSEMAKING, MULTINATIONAL STRATEGY, AND THE STRUCTURE RESHAPING GLOBALIZATION.pdf

ESSAY 1

FIRM CAPABILITIES AND GREAT POWER COMPETITION: DYNAMIC SENSEMAKING,

MULTINATIONAL STRATEGY, AND THE STRUCTURE RESHAPING GLOBALIZATION

1. Introduction

Business leaders must be able to identify significant changes in the surrounding environment, and

to effectively adapt their strategies and operations in response to these turbulent events. Major shocks and

crises in the global economy - such as the 2008 Financial Crisis, the US-China trade war, the Covid-19

pandemic, and the Russian invasion of Ukraine - have demonstrated how environmental turbulence can

dramatically impact firm strategy and performance.

Understanding how to scan the surrounding environment for major changes, and then developing

strategic responses to defend firm performance, are skills now viewed as critically important. Through an

analysis of the structural reshaping of globalization, and the interpretation of these events by international

executives, we can begin to enhance our understanding of how executives interpret environmental

turbulence and implement strategic adaptations in order to guide their organizations through uncharted

territory.

Accordingly, this paper attempts to make a theoretical contribution to the concept of environmental

scanning within the upper echelons literature (Hambrick, 1981, 1982; Hambrick & Mason, 1984), the

concept of dynamic sensemaking in the dynamic capabilities literature (Teece, Pisano, & Shuen, 1997), and

the strategic response of firms of external shocks (Argyres, Mahoney, & Nickerson, 2019; Bigelow,

Nickerson, & Park, 2019), and will add to the ongoing discussions within the international business field

concerning the structural reshaping of globalization (Petricevic & Teece, 2019; Buckley, 2020; Witt, 2019a)

and the rise of China as a major global force (Li & Farrell, 2020; Li, 2022).

2. Motivation

This research study is motivated by the desire to better understand how executives interpret and

respond to significant changes in their environment. The past few years, for both business researchers and

practitioners, have been characterized by a number of turbulent events that have demanded often significant

strategic responses from firms.

In some cases, large economic shocks originating in a specific market spread like contagion across

borders and through industries, drying up credit and reducing consumer demand for a wide range of firms,

such as during the 2008 Financial Crisis and the Eurozone sovereign debt crisis (Sorkin, 2010; Lane, 2012).

Natural disasters such as the Covid-19 pandemic have resulted in the implementation of lockdown

policies by governments in many nations, with major impacts on businesses and local economies (Hirsch,

2022; McKinsey, 2022). Secondary effects from these government interventions in the economy for public

health purposes have resulted in supply chain disruptions and inflationary pressures, reducing purchasing

power for buyers (Shih, 2020; Casselman, 2022).

National-level policy conflicts - such as the US-China trade war - have resulted in the

implementation of tariffs and other trade barriers on large numbers of importing and exporting firms, with

specific sectors targeted for retaliatory policy actions by rival governments (Bradsher, 2019; Lau, 2019).

Military conflict between nations, as seen in the Russian invasion of Ukraine, has resulted in significant

divestments of multinational enterprises from affected areas, along with the disruption of global energy

markets and the sanctioning of target firms and executives (Krauss, 2022; Nguyen, 2022). Longer term

trends such as rise of China, the development of geopolitical multipolarity around regional trading blocs,

and the rise of domestic populism and calls for protectionist defense of local producers against foreign

competition all have the potential to give rise to significant disruptions in global markets (Dempsey &

Cornish, 2022; Eddy, 2022; Rogin, 2022).

Operating in such turbulent environments requires executives to have a deep understanding of the

shifting conditions around them, and the ability to develop and implement changes in strategy and

operations in order to avoid being caught up and destroyed by these largely uncontrollable events. Learning

about how executives can effectively respond to shocks, therefore, is a key motivator for this research study.

3. Theoretical Background

International business strategy is deeply influenced by globalization. Conceptualized as “the

broadening and deepening of interdependence among peoples and states,” (Cohn & Hira, 2020: 5),

contemporary globalization consists of the “rules of the game” in which multinational enterprises must

operate (Peng, Wang, & Jiang, 2008).

Since the end of the Cold War, there was widely shared belief that globalization was increasing.

The collapse of the Soviet Union, the gradual “reform and opening up” movement within China (leading

to their admission to the World Trade Organization in 2001), and the diplomatic and military supremacy of

the United States pointed toward a future for globalization under the rules of the “Washington Consensus”

(Williamson, 1993). For global business, this meant that firms were “moving toward a world in which

barriers to cross-border trade and investment are declining; perceived distance is shrinking due to advances

in transportation and telecommunications technology; material culture is starting to look similar the world

over; and national economies are merging into an interdependent, integrated global economic system” (Hill

& Hult, 2019: 5).

Drivers of globalization were seen both as liberalizing government policy reforms, and the

proliferation of advanced communication and transportation systems and organizational structure

adaptations that enabled for cost-cutting outsourcing and offshoring throughout cross-border supply chains

(Friedman, 2007). The twin globalizing forces of technological advancement and policy liberalization were

seen to progress together. However, the type of globalization that has existed is of a certain type, based

upon the post-WWII Bretton Woods institutions and maintained through Western (and particularly,

American) diplomacy and military strength (Steil, 2014; Sayle, 2019).

In recent years, contemporary globalization has undergone considerable strain. Major events

around the world have contributed to disruptions of global interconnectedness, in both the natural world

and social environment. Examples of these turbulent shocks include Brexit, the US-China trade war, the

Covid-19 pandemic, the Russian invasion of Ukraine, and others. In addition, long-term changes, such as

the rise of China as an economic powerhouse and the relative decline of the US as the dominant industrial

economy, have contributed to the emergence of a new multipolarity in the global economy, and the

“formation of regional economic blocs in Europe, North America, and East Asia” (Cohn & Hira, 2020: 6).

This structural reshaping of globalization – or the contested disruption of the “rules of the game”

of international business – has the potential to radically change the environments in which MNEs operate.

The world economy is now both globalized and contested, exposing firms to external shocks that have

direct implications for the survival of their business. Executives must be capable of understanding the nature

of external changes, and of developing and implementing strategic responses in order to guide their

organizations through turbulence.

In order to better understand this process of strategic adaptation to change, we will investigate how

global firms interpret major external shifts in their operating environment, such as the rise of China and the

structural reshaping of globalization.

3.1 The Structural Reshaping of Globalization

The modern global economy was constructed by the post-WWII Bretton Woods system that

established “keystone international economic organizations” - the World Bank, the International Monetary

Fund, and the General Agreement on Tariffs and Trade, later the World Trade Organization - in order to

manage international commerce (Cohn & Hira, 2020). This system of globalization was characterized, at

least initially, with American predominance in global economic output, and was supported by Western-

backed diplomatic and military strength, symbolized in the North Atlantic Treaty Organization (Sayle,

2019). With the collapse of the Soviet Union and the “reform and opening up” of China, the post-Cold War

era was marked by enhanced optimism around this form of global political economy (Fukuyama, 1992;

Friedman, 2007).

Contemporary international business scholars, however, have begun to question the long-term

sustainability of modern globalization, as it currently exists. Citing the growth of “newly industrialized

economies” and their multinational corporations, the impact of major shocks such as the 2008 Financial

Crisis and subsequent Great Recession and the Eurozone sovereign debt crisis, and the influence of China’s

rise as an economic powerhouse, scholars have remarked that “the global economic system created in the

post-World War II (WWII) era is now being disrupted and undergoing significant structural reshaping”

(Petricevic & Teece, 2019: 1487). In contrast to previous attempts to establish and maintain rules-based,

free trade systems, the “reshaping of globalization” has occurred “largely under pressure from the policies

of key states, seeking to protect their own economies from the negative effects of globalization and to

enhance their own competitiveness and power” (Buckley, 2020: 1580). This weakening of the accepted

“rules of the game” of globalization “represents the process of weakening interdependencies among

nations,” and the shift of economic and political power away from traditional sources (Witt, 2019a: 1054).

This was demonstrated concretely in the aftermath of the 2008 Financial Crisis, when “the G7 ceded

responsibility for steering the global economy to the G20,” making this “the first sign of significant change

in the global institutional framework” (Hira & Cohn, 2020: 41).

By further understanding the concept of the structural reshaping of globalization - as discussed by

Petricevic & Teece (2019), Buckley (2020), and Witt (2019a) - we can begin to understand how these macro

forces can impact the strategies and operations of international firms.

In discussing the ongoing “structural reshaping of globalization,” Petricevic & Teece (2019)

highlight their main research question on the topic, which considers “how one powerful force at the macro-

level, namely (neo) techno-nationalism, has been able to rapidly reshape the structure of the global

economic order, and create cascading effects, requiring new responses from rule-of-law countries and

rethinking by MNEs on how to develop and deploy their dynamic capabilities” (1489). For the authors, the

revival of techno-nationalism as a state policy - or the acquisition of new technologies “by any means

necessary” - has resulted in the creation of “a new, bifurcated world order,” with the capability of

engendering “an increase in conscious decoupling of firms’ and nations’ objectives as well as economic

and innovation trajectories” (1489-90). This bifurcated world order, driven by major competition between

China and the United States, has the potential to give rise to VUCA events capable to disrupting the

strategies and operations of MNEs, resulting in an international business environment that is characterized

as volatile, uncertain, complex, and ambiguous. Summarizing the state of contemporary globalization under

increasingly bifurcated governance, the authors remark that “the view of a frictionless, homogeneous, rule-

of-law borderless world and a global, levelled playing field” for international business, is “now clearly an

illusion” (1489).

For Petricevic & Teece (2019), the main cause of this new “bifurcated” governance of globalization

is the rise of China, the strategic economic policy they pursue, and the relative loss of influence of the US-

led order based upon “the principles of classical economic liberalism and the rule-of-law” (1491). Whereas

the previous, post-WWII form of globalization attempted to reduce arbitrary misappropriations of

intellectual property and proprietary technology, “China’s alternative model of governance is deploying

coordinated protectionist trade and investment policies and government intervention aimed at accessing

and acquiring intellectual property, thereby influencing the global economic and innovation system”

(1491). What makes the Chinese challenge to contemporary globalization unique, the authors state, is the

size, power, and governance of the Chinese economy. “China’s rapid growth,” they write, “its hybrid

economic structure, and its arguable opportunistic approach to norms and rules that guide international

commerce, have created both tensions among existing power constellations and revealed an alternative

model” of globalized political economy (1492). The potential success of this “alternative model of

globalization” has the potential to reshape “the structure of the global economic system along the lines of

China’s own economic model and its own ‘rules of the game,’ and may pave the way for other peripheral

economies to emulate China’s behavior (or even invest their own models or path to hegemony),” thereby

fracturing the contemporary US-led international economic order even further (1493).

Specifically, the structural reshaping of globalization is driven by the pursuit of new forms of

strategic trade and investment, powered more by government policy than commercial interest. Through its

development and implementation of strategic trade and industrial policies - such as the One Belt One Road

project and Made in China 2025 - China has worked to identify the specific “strategic” sectors required for

a modern global power, and has worked to upgrade their national capabilities in these areas as quickly as

possible. As Petricevic & Teece (2019) write, “China’s unique combination of market size and accelerated

growth, particular emphasis on tapping into advanced innovation and technology development through

outward FDI activities, and the distinctive government role in systematically drawing upon its bargaining

power to support technological upgrading” provides the “platform that facilitates Chinese firms’

international expansion trajectories with the goal of capturing the fruits of innovation and knowledge from

foreign entities to serve nation-state objectives” (1493). In essence, “by playing by a different set of rules,

China is affecting the viability of the existing global innovation system, requiring that other ecosystem

partners change their strategy.” And because of “China’s ambitions as a hegemon” - or at least to displace

America’s traditional place in that role - “this is not just an economic and business issue,” but is rather a

“national security issue too, as the United States and the European Union are now starting to realize” (1497).

For multinational enterprises operating in global markets, the consequences of the “structural

reshaping of globalization” may be significant. China’s attempt at using government policy to enact the

structural reshaping of globalization has been most pronounced in “strategic” industries, which “provides

social benefits beyond the magnitude of its direct value-added contribution,” through such “spillovers from

innovation and those stemming from locational synergies” (Petricevic & Teece, 2019: 1497; Teece, 1991).

Firm operating in markets characterized by fracturing governance structures must develop new forms of

strategic adaptability and operational flexibility, which, the authors argue, may not be focused purely on

traditional cost-minimizing and profit-maximizing guidelines. Instead, the authors argue, operating under

VUCA conditions requires multinational firms to consider the “evolutionary fitness” of their strategic

decisions, which is a concept “design to capture the essence of a world order in which the success and

failure of firms cannot explained by simple, straightforward profit-seeking,” but which now requires

“anchoring in framework(s) that recognize the importance of capability development and upgrading, as

well as the deployment of capabilities in environments where being attuned to the geopolitical process is

paramount” (Petricevic & Teece, 2019: 1498). This unique form of business strategy is built upon the

dynamic capabilities framework, which seeks to emphasize the “firm’s ability to integrate, build, and

reconfigure internal and external competencies to address rapidly changing environments (Teece, Pisano,

& Shuen, 1997: 516). The specific components of this dynamic strategy, the authors write, consist of “three

clusters of entrepreneurial activities: (1) sensing opportunities (and threats); (2) seizing (and neutralizing)

them; and (3) transforming the internal systems, culture, and business models to address the external

changes” (Petricevic & Teece, 2019: 1499). Specifically, for the purposes of this research study, the notion

of sensing (or scanning) shall be or critical importance, as “sensing (and sense-making) requires filtering

mechanisms that transcend market intelligence in the IB context, and involve spanning multiple external

and internal boundaries,” meaning that “sensing capabilities are particularly centered on the process of

identifying new opportunities and threats” (1500).

Petricevic & Teece (2019) provided a foundation for our understanding of the structural reshaping

of globalization, the challenge that China’s policy of strategic techno-nationalism presents for the existing

global order, and the challenges of managing MNE strategy through VUCA conditions. From a different

theoretical perspective, Buckley (2020) also provides valuable insights on the changing nature of global

political economy.

In summarizing the main points of Petricevic & Teece (2019) on the structural reshaping of

globalization and its relationship with rising VUCA conditions requiring strategic responses from firms,

Buckley (2020) highlights the “bifurcated governance” of contemporary globalization, “whereby two

incompatible systems struggle for hegemony” over the rules of international business (Buckley, 2020:

1581). This bifurcated governance gives rise to a power struggle over the “rules of the game” of

globalization, and these conflicts between potential hegemonies give rise in unpredictable events in global

markets that are volatile, uncertain, complex, and ambitious (VUCA). Within the contested reality of

contemporary globalization, “exogenous forces (in the prime case, government policies) impact firms that

have varying levels of adaptability (some firms can respond, others cannot)” (1581). Under conditions of

global competition marked by geopolitical rivalry over the structure of relations, firms in strategic industries

- which are often required for national defense purposes - are considered imperative by central governments

pursuing national-level goals, especially in the development of “dual use” civilian/military technologies.

These strategic industries, Buckley (2020) highlights, are characterized as being “more or less” trade

intensive, related to defense objectives, subject to government procurement processes, and at least partially

subsidized by the state (1583). These characteristics combine to produce a fractured and volatile

environment for firms to operate in.

In order to be successful when operating in such turbulent environments, Buckley (2020) writes,

firms must be able to collect relevant information about the changing circumstances, and then utilize their

findings to effectively adapt their strategies and operations to the new reality. This is accomplished through

a two-part executive decision-making process: “in the first stage, the decision-maker decides how much

information to collect, and in the second stage he used the information he has collected to make the decision.

These two stages are interdependent, and the rational decision-maker arrives at his strategy by considering

them in reverse order.” (1583-4). Since “high levels of uncertainty favor the selection of flexible strategies,

since mistakes are easier to put right,” flexibility in strategy “is therefore essential as VUCA conditions

increase globally” (Buckley, 2020: 1584; Buckley & Casson, 1998). Building resilient and flexible

organizations requires firms take such actions as building slack, devoting resources to preparedness,

stockpiling inventory, and overbuying on talent - all costly initiatives - as well as to develop and utilize

internal and external intelligence systems (Buckley, 2020: 1585). Under VUCA conditions when

uncertainty is high, “the rational response is to invest in information - to collect, interpret, and share

information throughout the organization,” the act of which will “require structural changes including the

improvement of information analysis networks to confront ongoing uncertainty” (1585). Different types of

VUCA conditions will require unique firm responses, with varying levels of internalization or

externalization. In order to be successful navigating the VUCA events associated with the structural

reshaping of globalization, Buckley (2020) suggests, firm-level strategy “proceeds by recognizing the key

aspects of the VUCA environment, having an internal intelligence system that allows the collection and

internal dissemination of the duly sifted information, and empowering those decision-makers in the firm

that are closest to the information sources to respond to its impact” (1586).

Witt (2019a) emphasizes the more concrete indicators of changes in globalization, or de-

globalization, which “represents the process of weakening interdependence among nations” (Witt, 2019a:

1054). Utilizing economic data from the World Bank, IMF, and others, it appears as though “trade

globalization seems to have peaked between 2007 and 2010, and foreign direct investment (FDI)

globalization between 2007 and 2011” (1053), leading to a scenario where “countries rely less on goods

and services or on investment from other countries, relative to levels of domestic economic activity,” and

that “trade and investment flows as percentages of GDP” are declining (1055).

Key economic indicators pointing toward ongoing de-globalization include time series of world

average levels of imports of goods and services as a percentage of GDP, weighted by GDP, which has been

in relative decline since the financial crisis; and time series of world average levels of inward FDI flows as

a percentage of GDP, weighted by GDP, which has seen a “pronounced downward trend” in recent years

(Witt, 2019a: 1055; World Bank, 2017, 2018). Other indicators of globalization trends, such as the KOF

Globalization Index (Dreher, 2006; Dreher, Gaston, & Martens, 2008), find during the period of 1970 to

2015 that “de facto trade globalization peaked in 2008, and de jure trade globalization, in 2010” (Witt,

2019a: 1055-6), and that a composite financial globalization index utilizing “IMF data on the net position

of foreign direct investment stocks standardized by GDP” is also “consistent with the possibility of ongoing

de-globalization, with a considerable drop since its peak in 2011” (Witt, 2019a: 1057; IMF, 2018a, 2018b).

While warning that “these statistics do not constitute conclusive proof” of sustained de-globalization in

themselves, “they are consistent with a shift toward lower levels of economic interdependence, and thus

with de-globalization.” What makes this “particularly remarkable,” Witt (2019a) writes, is how the

indicators point toward lower levels of interdependence even when “technology has continued to improve,

a development at least in the past and all else equal facilitated higher levels of economic interdependence”

(1058).

In addition to utilizing economic indicators to analyze potential de-globalization, Witt (2019a) also

highlights the potential strategic implications for MNEs, particular in the areas of “the political strategies

and roles of MNEs, global value chains, and interactions with the national context” of competing countries

(1066). Under conditions of bifurcated governance of international economic systems, for instance, it will

be necessary to generate “a better understanding of how MNE activities support or undermine hegemony,”

including the “possibility that home country governments will determine at least part of MNE activities,”

resulting in a situation in which “MNEs represent political tools for attaining power” in a contested global

political economy (1067). As Witt (2019a) mentions, the utilization of MNE capabilities within a larger

state-backed strategy has been studied concerning how outward Chinese FDI has been utilized in the past

by the government to gain access to necessary resources required abroad (Buckley, Clegg, Cross, Liu, Voss,

& Zheng, 2007; Child & Rodrigues, 2005; Cuervo-Cazurra, 2017; Luo & Tung, 2007), or as a springboard

for domestic Chinese firms to innovate quickly and enhance the country’s larger economic power (Deng,

2009; Luo & Tung, 2018). This phenomenon has been apparent, Witt (2019a) writes, in “the involvement

of Chinese MNEs in the One Belt One Road initiative,” which is “as much a geopolitical project as an

economic project,” and may be considered as “a current, large-scale example of Chinese MNEs serving

state interests (Witt, 2019a: 1067; Ferdinand, 2016).

In the event of de-globalization, MNEs will be confronted with “questions about the future reach

and specialization of value chains, possible changes in organizational forms, and the impact of political

considerations on location decisions” (Witt, 2019a: 1068). While MNE executives had previously

conceptualized their international operations as a “Global Factory” (Buckley & Ghauri, 2004; Buckley,

2011), this may change as trading blocs arise around specific power spheres of geopolitical influence,

perhaps causing MNEs to become “Regional Factories” operating within “the economic sphere of interest

of the respective regional hegemon” (Witt, 2019a: 1069). The relationship between the state and the firm

may be significantly affected by conflict over the rules of the game for globalization, as “hegemonic rivalry

is further likely to manifest itself as pressure on MNEs to internalize the interests of the specific hegemon

in their strategic decision-making, including location choice” (1069). In essence, Witt (2019a) concludes

concerning the potential of de-globalization in the world economy, there is a real possibility that

“international business under de-globalization would look qualitatively different from what we have seen

in the past decades, and that coming to terms with this qualitative shift would require a much deeper

integration of political forces in IB research” (1071).

Based upon these foundations, we can see evidence for a shift in international business – the

structural reshaping of globalization – which has the potential to engender volatility in global markets,

thereby necessitating potential responses from MNEs. One of the major causes of this structural reshaping

is the rise of China in international business, to which we will now turn our focus.

3.2 The Rise of China in International Business

The growing influence of modern China in global business is well-documented. China has a long

history of trade with the world, and during such periods as the Tang dynasty was perhaps the most

prosperous and developed economy on earth (Fairbank & Goldman, 2006; Keay, 2012). Economic and

trade relations with the modern Western countries have persisted for centuries, and US-China relations have

developed from the time of the American Revolution (Pomfret, 2017; Platt, 2018). China and the United

States have engaged in extensive interactions over the past three centuries, in the areas of commercial trade,

cultural exchanges, and geopolitical relations. During the period of Mao’s rule, however, many of these

social and economic connections were severed (Kissinger, 2012; Peraino, 2018). Confrontations over

America’s support for Chiang Kai-Shek and the Kuomintang nationalists during the Chinese Civil War,

hostile confrontations during the Korean War, the First Taiwan Straits Crisis, and the severing of most

foreign diplomatic ties during the Cultural Revolution all served to isolate America and China during the

Maoist era (CFR, 2022).

With the rise of Deng Xiaoping as paramount leader after Mao’s death in 1976, facilitated by the

arrest of the Gang of Four and the sidelining of Hua Guofeng, there was a gradual “reform and opening up”

policy that sought to gradually liberalize certain aspects of the Chinese economy, while maintaining strict

political control under the oversight of the Chinese Communist Party (Vogel, 2013; Schell & Shambaugh,

1999). Despite setbacks in relations, such as the fallout from the 1989 Tiananmen Square Massacre, cross-

border trade and investment continued to increase during the 1990s, under the respective administrations

of Bill Clinton and Jiang Zemin. This enhanced economic collaboration lead to China’s integration into the

modern globalized economy, symbolized in the country’s 2001 ascension to the World Trade Organization,

which spurred significant global growth for Chinese firms (Shambaugh, 2013; Naughton 2018).

A unique characteristic of China’s economic system is its thorough governance by the CCP

(Shambaugh, 2008; McGregor, 2012). In stark contrast to the “shock therapy” policies adopted by post-

Soviet leaders at the end of the Cold War, Chinese leaders have carefully liberalized certain sectors of the

economy – allowing profitmaking and foreign direct investment – while maintaining strict control over the

institutional “rules of the game” of these sectors, while also maintaining extensive prohibitions on foreign

and unauthorized participations in a variety of “strategic” sectors, such as telecommunications and defense

industries. In addition, China has implemented a series of industrial policies aimed at enhancing specific

industries deemed essential to the country, as witnessed in the Made in China 2025 plan (Kennedy, 2015).

While other countries have embarked upon industrial policies in the past to promote their national

economies and domestic firms – such as the Japan, South Korea, and the United States – the combination

of China’s size, economic power, and the unique influence of the CCP create an unprecedented economic

model in the contemporary global economy.

Features of this governance model provide the state with powerful tools to achieve political and

economic objectives, both at home and abroad (Halper, 2012; Economy, 2018). Domestically, potential

economic downturns brought on the collapse of foreign consumer demand created in the aftermath of 2008

Financial Crisis were largely averted through major state-led investment drives, and China has utilized its

economic power to gain diplomatic favor through infrastructure investment deals around the world, most

notably in Asia, Africa, and South America. China’s willingness to provide “no strings attached” loans and

grants to underdeveloped countries have caused consternation amongst Western policymakers, who often

extract promises for domestic political reform in return for economic and foreign aid (Green, 2019).

The leadership of the CCP under Xi Jinping has signaled its willingness to use this power to achieve

specific geopolitical aims, even if these undermine existing global institutions (Ikenberry & Lim, 2017).

The establishment of the Chinese-funded Asian Infrastructure Investment Bank, for instance, which

provides multilateral financial assistance to countries outside the purview of Western-led global

development organizations – such as the IMF and World Bank – has been regarded as a counterweight to

these institutions and their partner organizations, such as the Asian Development Bank. Similarly, a major

policy initiative of the Xi administration – the Belt and Road Initiative – has sought to establish extensive

maritime and land-based cross-border trade networks throughout Asia, Africa, and Europe, potentially

undercutting the institutions and commercial patterns of the contemporary global economy (Hillman, 2020).

In the geopolitical sphere, defense-related actions taken by foreign countries have brought economic

responses from China, as seen in Beijing’s willingness to enforce consumer boycotts of South Korean firms,

such as Lotte Corporation, in response to America’s proposal to station advanced surface-to-air missiles in

the country (Hernandez, Guo, & Mcmorrow, 2017). Four decades after Deng launched the “reform and

opening up” policy in response to the economic devastation of the Mao years, five Chinese companies now

rank amongst the top 20 largest firms in the world, measured in terms of sales, profits, assets, and market

value (Murphy & Contreras, 2022). This combination of elements – economic strength, geopolitical

influence, and a powerful central ruling body – come together in China to create a global economic player

unlike any other in the modern world. Accordingly, observers have documented the potential threat such a

model presents for contemporary globalization under American diplomatic and military hegemony

(Pillsbury, 2016; Alison, 2018).

As seen in the previous discussion on the structural reshaping of globalization, such challenges to

contemporary global political economy can have direct consequences for MNEs, in the form of VUCA

events. Accordingly, a better understanding of the rise of contemporary China, and what it means for

international business, is provided by Li (2022).

In contrast to other major countries operating in the contemporary globalized economy, China’s

governance model under the control of the CCP presents a unique system of political-economic guidance,

and distinct challenges for foreign firms and governments. For Li (2022), the CCP’s unique governance

model has developed a “system for mobilizing the country as a whole,” as opposed to having distinct social,

political, and economic spheres (Li, 2022: 130). This is accomplished through a number of steps: “First, it

is under the absolute leadership of the party; second, it focuses on new technologies and industries deemed

strategic by the party; and third, it is linked to globalization and international markets,” enabling the Chinese

government and its domestic firms to gain access to necessary resource inputs, industrial technologies, and

consumer markets (130). Both domestic and foreign firms operating in China must not only obey the laws

of the Chinese government to continue operating in the market (as with other countries), but must also avoid

alienating the policies of the CCP as well, who maintain that living and doing business in the country is a

privilege granted by themselves, not a right (135). Within contemporary China, state involvement in even

ostensibly “private” firms runs deep, as all organizations containing more than three CCP members “must

establish a party branch office” within the firm, both in order to oversee political control within the

organization and to guide favored firms toward state-provided benefits, such as tax breaks, subsidies, and

forgivable loans, as “the party-state helps firms in China, even privately owned firms, as if they were its

own” (135-36). These privileges are not without costs, however, as business leaders may be expected to

develop strategies and implement policies in line with CCP guidelines, “for the opportunity to run a business

comes with the responsibility to do what the party-state asks the business to do” (136).

What makes this system unique, Li (2022) contends, is that the CCP essentially “runs the country

like a corporation,” as the “party-state has absolute authority over the country and its people; its total control

over all resources in China is equivalent to a unified ownership, which gives the people and businesses in

China a common goal (working for the party-state); and its system of “mobilizing the entire country as a

whole to do something big” gives it the ability to coordinate among regions and industries to accomplish

projects that have high priorities for the party” (141). This governance model is exemplified in the relations

of the various firms within China to the party center, based upon their ownership structure. As “owners of

firms in China do not have the full property rights that their counterparts in countries of rule of law enjoy,”

these firms act like business units or subsidiaries of “China, Inc.” (141). Based upon the relative degree of

privileges granted to firms by the party-state, and relative control exercised by the party-state over that firm,

Li (2022) conceptualizes that Chinese state-owned firms are similar to business units within China, Inc.,

while state-related firms are subsidiaries, Chinese-owned private firms are like joint ventures, and foreign

firms operating within the countries are similar to franchisees (146). This unique system, Li (2022) argues,

unrivaled by any elsewhere in the world, provides a direct challenge to the contemporary globalized

economic system, and the multinational firms that operate within it, as the “flexibility of China, Inc., and

its dual functions of corporation and state enable it to unfairly compete with the corporations and the states

of other countries” (151).

The rise of China in global business has direct implications for multinational enterprises. Noting

that the “challenge of the CCP is entirely new and the world is still trying to understand it and learn how to

deal with it” (Li, 2022: 254), Li (2022) highlights a number of potential responses for leaders engaged in

relations with Beijing. For national leaders responsible for geopolitical relations with China, Li (2022)

recommends “collective and concerted action” toward Beijing and the CCP, acting in unison in negotiations

while also being prepared to utilize “delinking” as a potential retaliatory response in the event of

deteriorating political and economic conditions (261-65). For the purposes of this research project, Li’s

(2022) suggestions concerning potential responses from foreign multinational enterprises trading with

China, and the theoretical implications for management scholars investigating this topic, are of particular

importance.

For multinational enterprises engaging in trade with China, Li (2022) argues that in “their long-

term strategy, business executives should realize that, given the irreconcilable fundamental differences in

ideology between the CCP and the democracies, the CCP’s expansionary strategy, and the rise of China,

Inc., the friction between the democracies and China may get worse and will certainly be long term,”

requiring leaders to “plan accordingly in terms of diversification of customers and suppliers and

establishing alternative production bases” (269). MNEs interacting with China under the CCP must

understand that “Chinese firms are subunits of China, Inc.,” meaning that “Chinese firms have much less

autonomy” than private businesses in other countries, but that, “at the same time, enjoy greater state support

financially, technologically, and politically,” and may operate “on behalf of the Chinese state in business

dealings with foreign firms” (269). Different from the strategies of many traditionally private firms, Chinese

firms operating under guidance from the CCP have “operational objectives [that] may not be based on

economic efficiency and profit-maximization for their own individual firms, but rather based on the overall

strategy of China, Inc.” (269). In response to these unique challenges, MNEs doing business with China

should gain a thorough understanding of China’s distinctive relations-based social environment, and to

work closely with their home governments when confronted by pressure from China’s state-backed firms.

As “the advantage of China, Inc., is derived from and backed by the most powerful and resourceful state

that is bound by no law,” such actions taken by the Chinese state in order to gain economic advantage in

global markets can “only be dealt with by other states” (272). In essence, “when firms from the democracies

run into troubles in China, they should not try to work out the problems under the table, or keep silent as

the party-state always advises; they should seek help from their governments and the international

community” (272).

For management scholars investigating this phenomenon, Li (2022) highlights a number of future

research directions to further understand the China, Inc., concept. These directions include further

delineating the regime type of contemporary China under the CCP, which extends beyond related concepts

in global political economy such as “state capitalism” and “market socialism,” and enhancing the

contemporary theory of the firm to account for new firm-types that pursue commercial objectives while

also serving a larger geopolitical purpose with the resource capabilities of a large and powerful state (273-

74). In addition, management scholars can build upon the institutional theory of North (1990) to better

account for a business environment in which the state is “not only the rule setter and the rule enforcer but

also a player” competing with foreign governments and MNEs (Li, 2022: 275). The manner in which the

CCP accomplishes its policy goals through its business subunits is also worthy of investigation, for “these

policies are not merely state guidance, but rather corporate strategies, in which the party-state identifies

some industries, provides national resources for them, raises entry barriers, and assists them in gaining

necessary technologies” (276). From the perspective of foreign business leaders doing business with China,

how MNE executives interpret changes in business conditions – the manner in which they sense and scan

for shifts in the surrounding environment – is of critical importance for operating in competitive global

markets undergoing significant change.

3.3 The Dynamic Sensing of Emergent Risks

When operating in environments undergoing significant change – such as the shifts in the

globalized economy brought on by the rise of China – it is important for business leaders to adequately

analyze the nature of these changes, and determine how they might potentially impact their firms. The

ability of executives to scan their environment for trends and change, and to adapt accordingly, has been

studied extensively, both as the dynamic capability of “sensing” (Teece, 2007) and as “environmental

scanning” (Hambrick, 1982).

As business conditions fluctuate, executives must sense the relevant aspects of these changes,

enabling them to seize any opportunities or avoid any threats engendered by these shifts. This sensing

capability, accordingly, is “defined as the ability to spot, interpret, and pursue opportunities in the

environment” brought on by these changing dynamics (Pavlou & El Sawy, 2011: 244). Analysis of the

dynamic capability of sensing has been developed through study of how business units within the firm, and

at the executive level, first sense the changes in the business environment, then determine whether these

changes are relevant for the strategy and operations of the firm, and – if so – determine what strategic

adaptations are necessary in order to defend the company’s competitive advantage and market position. In

the context of new product development required by changes in the competitive environment, “business

units must sense the environment to gather market intelligence on market needs, competitor moves, and

new technologies in order for managers to identify new product opportunities, and decide to engage in

exploratory early-stage research activities to pursue these opportunities with new product prototypes” (244).

For scholars studying the dynamic capabilities of firms, the “three basic routines of the sensing capability

are: (i) generating market intelligence (Galunic & Rodan, 1998), (ii) disseminating market intelligence

(Kogut & Zander, 1996), and (iii) responding to market intelligence (Teece, 2007)” (Pavlou & El Sawy,

2011, 244).

Almost all firms are confronted with changing environments, but the degree and type of this change,

as well as the ability of the individual executive to interpret this change, can vary significantly between

firms. The capability of dynamic sensing presents a significant challenge for executives, as “sensing (and

shaping) new opportunities is very much a scanning, creation, learning, and interpretive activity,” because

in order to “identify and shape opportunities, enterprises must constantly scan, search, and explore across

technologies and markets, both ‘local’ and ‘distant’“ (Teece, 2007: 1322). For dynamic capabilities

scholars, this sensing activity is primarily focused on the competitive environment of firms, for the sensing

capability “not only involves investment in research activity and the probing and reprobing of customer

needs and technological possibilities, it also involves understanding latent demand, the structural evolution

of industries and markets, and likely supplier and competitor responses” (1322). The dynamic capability of

sensing has been developed into a framework for firm action, which focuses on the development of

“Analytical Systems (and Individual Capacities) to Learn and to Sense, Filter, Shape, and Calibrate

Opportunities,” utilizing processes developed to “Direct Internal R&D and Select New Technologies,”

“Tap Supplier and Complementor Innovation,” “Tap Developments in Exogenous Science and

Technology,” and “Identify Target Market Segments, Changing Customers Needs, and Customer

Innovation” (Teece, 2007: 1326). In addition, recent research on the dynamic capability of sensing –

particularly within an international business context – has highlighted its connection with strategic

execution, noting that “sensing inside MNEs is therefore about identifying future sources of competitive

advantages by assessing the value (and rarity) of resource-capability combinations,” as “sensing inside

MNEs is also about identifying which component parts of an MNE’s competitive advantage future

resource-capability recombinations confer” (Matysiak, Rugman, & Bausch, 2018: 232).

In a similar manner, studies into the “environmental scanning” processes of firms have sought to

determine how companies analyze and interpret changes in the business conditions around them, with a

particular emphasis on how the characteristics of the upper echelon executives impact this scanning process

(Hambrick, 1982). Within this stream of research, the process through which executives identify emergent

threats and opportunities in areas external to the firm is defined as the ability to “scan and monitor the

relevant changes in the environment and meet the challenges presented by these changes” (Jain, 1984: 117).

Early studies on environment scanning highlighted the important connection between scanning and

organizational strategy, as it “is generally recognized that organizations must adapt to their environment in

order to survive and proposer” (Hambrick, 1982: 159). The motivation for studying this connection was

driven by three key factors: first, that “environmental scanning can be conceived of as a key step in the

process of organizational adaptation;” second, that “theorists and executives need improved understanding

of the extent to which competitors in an industry have unequal mastery of environmental trends;” and, third,

that in previous research “has been inconclusive in explaining variations in executives’ scanning activities”

(Hambrick, 1982: 159-160). Building off Miles and Snow’s (1978) typologies of firm strategies –

concerning Defenders, Prospectors, and Analyzers – Hambrick (1982) theorized that executives sought to

scan their environments along four critical sectors. These were the [i] Entrepreneurial Sector, home of

“product/markets trends or events (example: demographic shifts affecting demand for the organization’s

products);” the [ii] Engineering Sector, home to “events or trends bearing on rationalizing the manufacturer

or delivery of products/services (example: new developments in process technology);” the [iii]

Administration Sector, home to “events or trends bearing on determination of roles and relationships in the

organization (example: new approaches to developing managers);” and, finally, the [iv] the Regulatory

Sector, home to “government regulations, taxes, sanctions, accreditations, litigations, etc. (example: court

cases involves the industry)” (Hambrick, 1982: 161). Basing the empirical study off propositions linking

the amount of scanning to the strategy undertaken by the firm, as well as the environment sector most

scanned based on firm strategy, the found that – in fact – the “hypothesized tie between strategy and

scanning clearly was not pervasive” (167). This interesting finding was explained due to the existence of a

“common body of knowledge” that existed across firms within and industry, and that strategic differences

between firms “occur primarily through internal analysis and political process, and not through unequal

possession of information,” and that – in the scanning-strategy relationship – “the organization is primarily

restricted by its capacity to act on the information” gained in the scanning process, such as by attempting

to “enter a new market [or] review a production process” (Hambrick, 1982: 168).

Similar to Hambrick’s (1982) discussion of the environmental sectors in which executives scan,

Bourgeois (1980) developed a typology of environmental sectors that is particularly useful. A foundational

conceptual piece on the interaction between strategy and the environment, Bourgeois (1980) made the

theoretical distinction between the objective and perceived environments of the firm, and the task and

general components of the objective environment. Specifically, the objective environment outside the

organization is defined of being composed of an external “reality of physical environmental attributes,”

whereas the perceived environment is defined as “managerial perceptions” through which “the environment

becomes “known” to the organization” (Bourgeois, 1980: 34). Building upon this distinction, Bourgeois

(1980) defines the task environment as being “composed of competitors, suppliers, customers, and

regulatory bodies with whom the organization interacts and whose actions direct affect organizational goal

attainment,” while the general environment is defined as being “composed of multiple task environments,”

and is the “source of general social, political, economic, demographic, and technological trends” (26). These

distinctions of environmental sector have benefited scholars in their empirical analysis of the environmental

scanning practices of firms.

Empirical studies on the environmental scanning practices of executives have shown interesting

results. Utilizing interview responses from US firms, Daft, Sormunen, & Parks (1988) found a connection

between higher scanning frequency and better performance amongst firms. In addition, the findings showed

that sectors scanned by executives “differed widely in the amount of strategic uncertainty created for chief

executives, and customer, economic and competition sectors had greater strategic uncertainty than

technological, regulatory and sociocultural sectors” (Daft, et. al., 1988: 135). Accordingly, based on these

findings, while the general environment does receive scanning by executives, US firms focus primarily on

the task environment. Conversely, in a study on the environment scanning practices of Bulgarian executives

– who operate under significantly different conditions than American executives – Elenkov (1997) found

evidence for the impact of institutional factors on the scanning practices of firms, as “the order of the

strategic uncertainty scores for the seven sectors of the environment in this study differed greatly from the

order obtained by Daft et al. (1998)” (Elenkov, 1997: 297). Whereas US executives stated that “in the

United States the customer sector had the highest strategic uncertainty score, followed by the economic,

competitor, technological, political/legal and sociocultural sectors,” in the Bulgarian example, “it was the

political/legal sector that yielded the highest uncertainty score, followed by the supplier and

customer/market sectors” (297-98). According to the researcher, this difference was driven by “the highly

constrained Bulgarian environment,” which was caused by the institutional changes created by the

structural reshaping of the political and economic system in the post-Communist country, while, in contrast,

“in the United States the political system is characterized by stability” (298).

Similarly, numerous other influential studies on environmental scanning have focused on

differences between scanning in the task and general environments, with differing evidence concerning the

importance placed by executives on respective sectors (Ebrahimi, 2000; May, Stewart, & Sweo, 2000;

Sawyerr, 1993). In this regard, a study on Hong Kong hotel executives features evidence that executives

focus more on the immediate task environment than political, legal, and economic sectors (Ebrahimi, 2000),

while a study of Russian executives in a transitionary economy highlights that sectors considered “newest”

to the executives - such as consumer markets and commercial competition - resulted in the greatest

perceptions of environmental uncertainty and scanning frequency (May, et. al., 2000). Further, Sawyerr’s

(1993) investigation of the scanning habits of Nigerian executives found that they perceived uncertainty to

be much higher in the task environment than in the general, and that as uncertainty concerning the sector

increased, so did accompanying scanning frequency and demonstrated interest. The study of environmental

scanning remains robust in the strategic management and international business literature, as recent

empirical studies on scanning have further elaborated on the link between scanning and firm performance

(Pryor, Holmes, Webb, & Liguori, 2019), and reviews of the subject have developed research agendas for

future scanning studies that emphasize the importance of understanding how scanning enables some

organizations to spot disruptive opportunities and threats, and in what ways that scanning can help provide

timely information to decision-makers (Robinson, Ahmad, & Simmons, 2021).

This theoretical background on the structural reshaping of globalization, the rise of China in

international business, and the dynamic sensing and scanning practices of executives can help us to

understand how multinational executives interpret and respond to the changing global economy of today.

4. Data and Methods

In order to further understand how multinational executives interpret changes in the surrounding

business environment under the structural reshaping of globalization, and to answer this paper’s research

question – how have multinational executives in the global automotive industry perceived and interpreted

the rise of China in international business? – this study will conduct an empirical industry illustration,

similar to Argyres, Mahoney, & Nickerson (2019).

The firms chosen for this illustration represent a wide range of automotive MNEs, which have

operated in the US and China for decades – General Motors, Ford, Chrysler (Stellantis), Tesla, Toyota,

Honda, and Ferrari. The auto industry is a good context for the study of how multinational executives

interpret significant changes in global markets, as these firms – and their rivals – have been managing cross-

border operations and supply chains throughout the Americas, Europe, and Asia for decades, and have made

large commitments to their investments in China (Teece, 2019). As these firms oversee major strategic

business operations in both the USA and China, and are subject to the trade and regulatory policies of these

governments, they are good subjects for the purpose of this study. Details on these firms, including the

brands that they manage, can be seen in Table 1:

>>> Insert Table 1 about here <<<

The global automotive industry presents an ideal context to study how MNE executives have

perceived and interpreted the rise of China in global business. China is now the world’s largest car market,

and the largest source of revenue for many global automakers (ITA, 2023). Global automotive executives

– who have extensive experience operating in China, collaborating with the Chinese government, partnering

with local firms in international joint ventures (IJVs), and operating both local production and retail

networks – are well-placed to answer this study’s research question.

The modern automotive industry in China emerged following the implementation of the “reforming

and opening up” economic liberalization policies of the Deng administration, with Toyota and Volkswagen

being among the first foreign automotive MNEs to operate in the country (Vogel, 2013). The 1990s and

2000s saw market growth for both domestic and foreign players, driven by China’s ascension to the WTO.

China’s automotive industry is now the largest in the world, and is largely comprised of the “Big Four”

domestic state-owned enterprises (SAIC, FAW, Dongfeng, and Chang’an), domestic private automakers

(Geely, Chery, GAC, and Great Wall), and foreign MNEs from Japan, Korea, Europe, and the US.

Concerning foreign multinationals in the Chinese automotive industry, entrants into the domestic

automotive market have been closely regulated by the government, with regulatory mandates from 1994 to

2022 stipulating that foreign MNEs must operate in an IJV with a state-selected partner. These partnerships

have included a 50:50 JV between GM and SAIC begun in 1991; a 50:50 JV between Ford and Chang’an

begun in 2001; and a 50:50 JV between Chrysler and GAC begun in 2010. Tesla, the only strictly electric

vehicle (EV) producer in the sample, was the first foreign MNE allowed to operate domestically with a

local JV partner. Hence, global automotive executives operating in China have developed unique dynamic

capabilities to compete under these particular institutional constraints (Teece, et. al., 1997; Eisenhardt &

Martin, 2000; Peng, et. al., 2008; Teece, 2019; Rotjanakorn, Sadangharn, & Na-Na, 2020).

4.1 Sample & Methods

For the purposes of this study, and its investigation on how multinational executives interpret

environmental changes, we will use empirical data from the Section 1A Risk Factor disclosures of the 10K

and 20F Annual Reports of the sample firms, as submitted to the US Securities and Exchange Commission

(SEC). These official, legally-binding documents were collected from the SEC EDGAR database, as well

as the official Investor Relations webpages of the firms. These documents are submitted annually to the

SEC, are signed off on by top firm executives, and serve to provide both government regulators and

investors with insight into the executives’ thinking concerning the top ongoing risks facing the firm. Risk

Factor disclosures from 10K and 20F reports have been used widely in business and management research

(Hoberg & Phillips, 2010; Bao & Datta, 2014; Campbell, Chen, Dhaliwal, Lu, & Steele, 2014; Brown, Tian,

& Tucker, 2018). Details on the Risk Factors collected for this study can be seen in Table 2:

>>> Insert Table 2 about here <<<

This study utilizes text analysis and descriptive statistics of the Risk Factor text, which has been

widely utilized in the field of management research (Short, Broberg, Cogliser, & Brigham, 2010; Gaur &

Kumar, 2018). This study investigated the mentions of China within the Risk Factor dataset, in order to

investigate the content of the MNE executives’ perceptions and interpretations of business operations in the

country had evolved over time. From the overall risk factor dataset, mentions of China were analyzed

according to:

Task vs. General: Whether the China-related risk mention corresponded to the task environment or

the general environment of the firm (Bourgeois, 1980).

Threat vs. Opportunity: Whether the China-related risk mention is considered a threat to firm

performance or an opportunity by the executives (Dyer, Godfry, Jensen, & Bryce, 2022).

Specific vs. Non-Specific: Whether the risk factor relates directly to China in particular, or to other

countries and/or regions as well (Dyer, et. al., 2022).

These variables and their corresponding statistical analysis will provide an exploratory study of

how multinational automotive executives have interpreted the changing environment of business in China

over time.

5. Findings

The SEC 10K Risk Factors of a total of seven multinational automakers operating in the China

market were analyzed for China-related risk mentions for the years that published reports were available.

The overall number of China-related risk mentions for the sample firms in the years reported can be seen

in Graph 1:

>>> Insert Graph 1 about here <<<

During the years under analysis, we see that General Motors reported the most China-related risk

mentions in their SEC 10K annual reports, followed by – in order – Ferrari, Chrysler, Tesla, Ford, Toyota,

and Honda.

In terms of the analysis variables, the following tables list each firm’s overall China Mentions,

Task-related mentions; General-related mentions; Task & General combined mentions (i.e., combining

elements of both the task and general environments); Threat-related mentions; Opportunity-related

mentions; Specific China-related mentions; Non-Specific China-related mentions; and mentions of US-

China relations.

The totals of these variables can be seen in Table 3:

>>> Insert Table 3 about here <<<

In addition, the aforementioned variables, along with the firm-years of each sample firm under

investigation, are displayed as percentages in Table 4:

>>> Insert Table 4 about here <<<

The findings of this analysis – investigating how multinational automotive executives have

perceived and interpreted the rise of China in global business over time through the study of their China-

related risk mentions in published SEC 10K annual reports – provide a platform for better understanding

the changing nature of global business strategy under the structural reshaping of globalization, and point

toward potential upgrades to dynamic firm capabilities that can help executives to navigate these issues.

6. Analysis

This study analyzed a total of 96 firm-years of observations during the time period under

investigation, beginning with 2004 and ending in 2022. During this observational window, all sample firms

saw an increase in China-related risk mentions in their annual reports to regulators and shareholders.

The total number of all China-related risk mentions was 449. For the task vs. general environmental

variable pair, 292 (65%) of the China-related risk mentions were coded as task-related, while 91 (20.3%)

were coded as general-related. Interestingly, 66 (14.7%) of these risk mentions included elements of both

the task and the general environment of the firm, which was a unique feature not previously disclosed in

strategic management environmental analysis (Bourgeois, 1980; Dyer, et. al., 2022). For the threat vs.

opportunity variable pair, 368 (82%) of China-related risk mentions were deemed to be threats, compared

to 81 (18%) of mentions which were deemed to be opportunities by the MNE executives disclosing the risk.

For the specific vs. non-specific variable pair, 257 (57.2%) of the China-related risk mentions were coded

as specific to China, while 192 (42.8%) were coded as including other countries and/or regions beyond

strictly China. In addition, there were 45 risk mentions that specific referenced the impact of US-China

relations on firm strategy, operations, and/or performance. From these findings, we see that the majority of

China-related risk mentions for automotive MNE executives were related to the task environment, deemed

to pose a threat to firm performance, and specific to China itself to the exclusion of other countries.

In terms of individual sample firms, General Motors, the US-based company that has been

operating in China since 1991 through a 50:50 joint venture with SAIC, had the greatest amount of China-

related risk mentions in its 18 reported firm-years of observations, with 184 total. The majority of these

were task-related (with a significant number of task-general hybrid mentions), threat-related, and specific

to China.

This was followed by 95 mentions over 7 firm-years from Ferrari (majority task, threat, specific);

61 mentions over 12 firm-years from Tesla (majority task, threat, and non-specific); 60 mentions over 11

firm-years from Chrysler (majority task, opportunity, and non-specific); 37 mentions over 13 firm-years

from Ford (majority task, threat, and non-specific); 9 mentions over 19 firm-years from Toyota (majority

task, threat, and non-specific); and finally, 3 mentions over 16 firm-years from Honda (majority task and

general hybrid, threat, and non-specific).

While all sample firms saw the overall number of China-related risk mentions increase over the

study’s time period, there was significant heterogeneity in the number, density, and environmental origin

of the risks. For instance, the two Japanese firms – Toyota and Honda – despite accounting for 36.5% of

the total firm-year observations, disclosed only 12 combined China-related risk mentions out of a total of

449 overall (2.7%).

Conversely, General Motors registered more China-related risk mentions than all EU- and Japan-

based firms combined. The peak of the annual China mentions occurred in 2018, perhaps unsurprisingly,

during the height the US-China trade war (Lau, 2019). During this time, the number of threat- and specific-

related risk mentions was particularly acute, as executives overseeing extensive cross-board production and

retail networks between the US and China had to weather the consequences of an overt geopolitical

confrontation over the conditions of this dyadic international trade. Nevertheless, while the number of

China-related risks continued to multiple, many firms remained adamant that the country continued to

represent an ongoing cornerstone of their international growth strategy, as both the number of automotive

units produced and sold within the country had exceeded that of many alternative national markets. While

the number and type of China-related risks has continued to multiply for these firms, so has their

commitment to continuing their current operations and investments in the country.

What can account for this? It appears that the unique combination of positive aspects – including

China’s size, its market strength, consumer base, and production capability – continue to make it attractive

for MNE executives, outweighing the potential risks posed by its particular regulatory environmental and

interventionist political system. For the time being, the promises of the China market continue to take

precedence over the risks and challenges posed by the China, Inc. governance model (Li, 2022).

Further, an interesting development from the environmental analysis of the risk factor mentions

was the emergence of a “hybrid” level of risk origin, which combined elements of the task environment

and the general environment of firms, but which is distinct from both (Bourgeois, 1980; Dyer, et. al., 2022).

Due to China’s unique governance model, which allows for direct strategic policy interventions by the

government into commercial markets in the pursuit of state-level objectives, this hybrid level of risk

analysis – not previously investigated in other studies on strategic management environmental analysis –

represents a unique feature of business operations in China under the China, Inc. governance model (Li,

2022). An example of this hybrid task-general risk origin can be seen in GM’s 2020 report: “Certain risks

and uncertainties of doing business in China are solely within the control of the Chinese government, and

Chinese law regulates the scope of our foreign investments and business conducted within China.” China’s

unique socio-economic governance model – which exists separately from traditional political economy

conceptions of free market and centrally-planned economies – represents a unique business environment

that international business researchers and multinational executives are only beginning to understand.

Based upon this analysis of the findings generated by this study, we can begin to better understand

the changing nature of international business strategy under the structural reshaping of globalization, and

to develop research propositions that will guide future investigations in this important area.

7. Discussion

Based upon this analysis of the data findings, we can began to determine how the structural

reshaping of globalization – caused, in part, by the rise of China in international business – has impacted

the ability of MNE executives to perceive, identify, and respond to novel emergent risks in global markets.

Operating in an environment that is characterized as volatile, uncertain, complex, and ambiguous (Buckley,

2020), multinational firms must now not only contend with other companies as direct rivals (dyadic

competition), but must also prepare to defend themselves from intrusions engendered by forces above the

level of the firm itself, such as national governments and system-wide forces.

Motivated by a desire to help MNE executives better prepare for this changing global reality, we

can develop a series of research propositions that can guide further investigations into this important area

of study.

7.1 Proposition Development

As seen from the data findings and subsequent analysis, all sampled firms saw their number of

China-related risks grow over time. Early risks show concern over losing marketing share to competitors

in the country, of being “beat to the punch” by rivals in this large and fast-growing market. However, later

risks multiplied in complexity, reflecting concerns over the rise of domestic competition, increasing

regulatory burdens, extensive government interference in the economy, and the emergence of great power

geopolitical conflict, particularly between the US and China. This diversification of risks throughout the

external environment reflects a major change for firms doing business in China. Accordingly, the first

proposition of this study is as follows:

Proposition #1: The socio-economic conditions under which foreign MNEs entered China have

undergone significant change, moving from a period of relative policy liberalization during the WTO

ascension years to one characterized by strategic protectionism and non-dyadic competition.

As seen in the data analysis, US-based firms averaged 94 China-related risk mentions in their

published annual reports, while EU-based firms averaged 77.5, and Japan-based firms average 6, exhibiting

significant heterogeneity based on firm origin and national registration. Further, older US-based firms –

such as General Motors and Ford – showed much greater concern over the changing political environment

in China, and were relatively more vocal concerning the potential risks of US-China geopolitical

confrontation. EU-based firms demonstrated a greater focus on task-related risks in the China market, in

comparison to their US-based counterparts, while Japan-based firms registered minimal China-related risks.

Why might this be the case? One potential reason is that nations engaged in direct geopolitical rivalry –

such as the US and China – will likely have greater ability to pressure home country firms to follow strategic

directions, at least in comparison to firms based elsewhere, where the ability to coerce is less direct.

Accordingly, the second proposition of this study is as follows:

Proposition #2: Under conditions of contested globalization and great power competition, MNEs

based in directly competing nations will be under greater pressure to “pick a side” in the state-level rivalry,

while firms in peripheral states will “watch which way the wind blows.”

Despite a marked increased in China-related risk for automotive MNEs, and a diversification in the

type and scope of these risks, however, foreign MNEs continued to highlight China as a key aspect of their

future growth strategy, both as a production platform and source of retail revenue. For example, Tesla

recently opened a new GigaFactory outside Shanghai, and Ferrari’s risk disclosures demonstrated that

company executives pay close attention to China’s macroeconomic indicators as a proxy for consumer

demand, hoping to effectively position the firm to effectively take advantage of the growing purchasing

power of domestic consumers. General Motors, the firm that recognized the greatest number and type of

China-related risks, regularly declared that “maintaining a strong position in the Chinese market is a key

component of our global growth strategy,” despite the mounting risks. Over the past few decades, and

particularly since China’s ascension to the WTO, foreign MNEs have tied large parts of their production

based, supply chains, and revenue streams to China, and will continue to operate their despite the changing

socio-political environment and proliferation of risk. Accordingly, the third proposition of this study is as

follows:

Proposition #3: Nevertheless, absent home government policy intervention, foreign MNEs will

continue to invest and operate in China irrespective of the mounting risks, reflecting an ingrained path

dependency.

From a research perspective concerned with the study of international business strategy, an

interesting development was the demonstration that at least 20% of the total China-related risks from the

data sample exhibited characteristics of both the task environment and the general environment of the firm.

In order words, these risks combined elements of both the larger general environment (such as the

surrounding political and economic system) and the smaller task environment of the firm itself (i.e., the

immediate competitive and regulatory institutions), working in tandem to affect the strategy, operations,

and performance of the firms in question. Within the strategic management and international business

research literature, these task and general environment dimensions had typically been kept separate

(Bourgeois, 1980; Porter, 2008; Dyer, et. al., 2022). Not so in the case of foreign automotive MNEs

operating in contemporary China. As seen from the data analysis, under conditions of contested

globalization and great power competition, state-level actors intervene in competitive markets to achieve

strategic objectives, blurring the traditional task-general environment distinction – a finding in line with the

China, Inc. conceptual model (Li, 2022). Accordingly, the fourth proposition of this study is as follows:

Proposition #4: There exists a hybrid level of environmental analysis that combines task and

general environmental attributes, but which is distinct and independent from both.

Building upon this insights, we saw in the data analysis that both hybrid-level risks and mentions

of the impact of US-China geopolitical relations on international business operations rose for firms in the

later years of the study, reaching a peak during the height of the 2018 US-China trade war. Both countries

involved in this policy confrontation have recently implemented protectionist policy initiatives – such as

the Made in China 2025 initiative and the US CHIPS Act, respectively – which signal a mutual desire from

both the US and Chinese governments to enhance domestic competitiveness in strategic industries, such as

modern transportation and advanced manufacturing. As the structural reshaping of globalization continues,

and great power competition between the US and China increases, these state-level strategic interventions

into global markets will likely grow. As government policymakers seek to achieve national objectives

through direct market interventions, this will create a volatile, uncertain, complex, and ambiguous

environment for MNEs characterized by novel risks emerging from the task-general hybrid environment,

requiring the development of new forms of dynamic firm capabilities (Petricevic & Teece, 2019; Buckley,

2020; Witt, 2020). Accordingly, the fifth proposition of this study is as follows:

Proposition #5: As governments increase their policy interventions in strategic economic sectors

for policy purposes, and should the conditions driving the structural reshaping of globalization continue to

exist, the number of hybrid risks facing MNEs will increase.

While many companies and large MNEs will likely feel the impact of the structural reshaping of

globalization, those directly involved in US-China business may feel the greatest impact of the

consequences engendered by modern great power competition between the two countries. Building upon

the fifth research proposition, these hybrid-level risks are likely increase in the great amount and scope of

foreign MNEs operating in China. Unlike like other countries that these MNEs operate in, China is unique:

the combination of its rapid growth over the past decades, along with its unique economic system and

governance model, make it distinct from other contemporary nations (Petricevic & Teece, 2019; Li, 2022).

Under contested globalization, MNEs – particularly those in strategic sectors necessary for national strength

and economic prosperity – “represent tools for gaining political power” in inter-state competition (Witt,

2020), and the China, Inc., governance model makes the Chinese government particularly effective in

utilizing state-level capabilities to achieve strategic objectives at the firm-level, creating a new reality of

non-dyadic competition for foreign MNEs operating in the country (Li, 2022). These elements – the

reshaping of modern globalization, great power competition between the US and China, the long-term and

sustained investment of foreign MNEs in China, and the unique China, Inc. governance model – combine

to create a volatile environment for international business that is unique to any other national market in the

world, creating new categories of risk that are specific to the Chinese market. Accordingly, the sixth

proposition of this study is as follows:

Proposition #6: The increasing presence of hybrid-level risks reflects China’s unique socio-

economic governance model – China, Inc. – with sub-units of the central political authority operating

within the task environment of MNEs on behalf of the primary governing body.

Accordingly, it is now apparent that the environment of international business is changing in new

and dramatic ways, and that MNE executives must effectively upgrade their dynamic capabilities to meet

these challenges (Teece, et. al., 1997). MNEs confronted with hybrid-level, non-dyadic competition must

develop effective counter-strategies, particularly if they are to continue (and increase) their operations and

revenue dependence on the Chinese market. However, firms by themselves are largely in capable of

effectively confronting state-level capabilities on their own (Li, 2022). Individual companies must either

acquiesce to the demands of Chinese regulatory authorities, or risk being excluded from the country’s large

and fast-growing consumer market, potentially harming the firm’s performance in relation to competition

(Hu, 2022). As seen with corporate counterintelligence operations in response to economic and industrial

espionage, only the infusion of state-level resources into the firm itself can raise it to the appropriate level

for strategic competition with state-backed rivals (FBI, 2022). This reality will require MNE executives to

develop novel dynamic firm capabilities that access resource assets beyond the traditional boundaries of

the firm itself. Accordingly, the seventh and final proposition of this study is as follows:

Proposition #7: MNEs confronted with state-level hybrid risks may be unable to develop and

implement effective strategies to counter these challenges on their own, and may require support, guidance

and resources from their home country governments in order to compete with state-backed rivals.

Based upon the data analysis of this study, and the research propositions developed in this section,

we can see that MNE executives have witnessed a dramatic change in the business conditions of the Chinese

market over the years. While the risks have proliferated in quantity and quality, the commitment to continue

operating in the country has deepened, and likely will continue to do so as long as is profitable. The unique

aspects of the Chinese market – as described in the China, Inc. governance model (Li, 2022) – poses novel

risks that MNE executives must account for, and which are different from other national markets. This

nuanced understanding of the modern realities of international business strategy under great power

competition and the structural reshaping of globalization will help researchers, practitioners, and

policymakers to develop the new competitive capabilities of the future.

8. Contributions

This study contributes to our understanding of how multinational executives scan and interpret their

surrounding external environments, in order to identify threats and opportunities in dynamic global markets.

MNE executives operating in strategic sectors involved in US-China commercial relations maintain a

unique perspective on the changing nature of modern globalization and great power competition, making

their observations over the past few decades of particular interest. As we have seen from our data analysis

and discussion, the emergence of the China, Inc. governance model in global business gives rise to a hybrid-

level of environmental analysis that builds upon previous task-general distinction within the environmental

analysis stream of strategic management and international business strategy research (Bourgeois, 1980;

Porter, 2008; Dyer, et. al., 2022).

The emergence and identification of this hybrid-level of environmental risk analysis allows

researchers to better discern what makes the contemporary challenges of doing business in China unique,

and lays the groundwork for the further development of novel dynamic firm capabilities that can effectively

defend firm strategy, operations, and performance in these environments. By investigating competitive

market strategy under conditions of contested globalization and great power competition, international

business scholars will have the opportunity to study instances of interventionist governments utilizing state-

level capabilities to achieve strategic goals through firm-level actors within the task environment of MNEs.

Building upon this novel contribution of the identification of hybrid-level risks in environmental

analysis, we can begin to pave the wave for the development of a new generation of dynamic firm

capabilities able to effectively overcome novel challenges in changing global markets.

9. Implications

The practical and research-based implications of this study are extensive, for international business

scholars, multinational executives, and national policymakers.

For IB researchers, the emergence and identification of hybrid-level risks in environmental analysis

allows for further study of how the unique aspects of modern global business, particularly in US-China

trade relations under great power competition and the structural reshaping of globalization, give rise to

unique challenges and the development of novel capabilities in these rapidly changing conditions. In

addition, the ongoing strategic interventions of national policymakers into competitive commercial markets

in the pursuit of strategic objectives calls into question the specific boundaries of the firm in modern global

business, as the line between state and firm becomes increasingly blurred, particularly in strategic sectors.

For multinational executives, it is clear that the nature of modern global business is changing. Risks

in international business no longer emerge solely from the distinct task and general environments

surrounding the firm, but can also arise from a hybrid origin marketed by state-level strategic geopolitical

competition, and its corresponding manifestation in commercial markets. This rapidly changing reality calls

for the development of new firm capabilities that will be capable of safeguarding performance in the new

era, particularly for foreign multinational enterprises operating in China.

For national policymakers interested in safeguarding their country’s economic prosperity and

defending the performance of their home country firms, the implications of this study are significant. Home

country MNEs confronted with state-level non-dyadic competition in global markets may not have the in-

house capabilities needed to meet these novel challenges – particularly if they operate in China – and may

require the infusion of state-level resources to effectively engage with a new generation of global

competition. How these infusions of outside-firm resources and capabilities are utilized will be of particular

importance, and require further careful study.

10. Limitations and Future Research

As with any research study, this paper has both inherent limitations and avenues for future

investigation to build upon the data analysis, discussion, and contributions presented.

For limitations, this study utilizes the official pronouncements of global automotive executives –

in the form of their 10K and 20F annual report filings to the SEC – and does not contain informal “off the

cuff” analysis or the post hoc strategy adaptations enacted by these firms in response to these environmental

shifts. In addition, the sample firms of this study are located within a single industry operating in a specific

country – foreign MNE automakers operating in China – which may limit the overall generalizability of the

findings outside this context.

For future research, additional investigations will be necessary to highlight the direct mechanisms

by which governments achieve strategic objectives through firm-level actors, and the countermeasures that

MNEs and rival states can enact in response. As this study has identified the necessity of the development

of new dynamic firm capabilities to safeguard performance under conditions of great power competition

and the structural reshaping of globalization, further research will be required to identify the specific

substance of these emergent capabilities.

11. Conclusion

The environment of international business is changing. Gone are the days of “level playing field”

competition regulated by impartial institutions. The impact of contested globalization, great power

competition, and US-China geopolitical confrontation over trade relations and commercial policy marks a

new reality for multinational executives operating in these countries.

As seen from the findings of this study, MNE executives now realize that the nature of the Chinese

market in which their firms entered in the early years of “reform and opening up” has dramatically shifted,

made apparent by the emergence of the China, Inc. governance model that has taken shape during the recent

years. The combination of China’s size, market growth, socio-economic environment, and political system

make it a unique environment unmatched by any similar country in the world. Many MNE executives,

especially those leading the firms in this study, oversee large, complex corporations that have made

significant investments in the country, and which derive a substantial (if not majority) of their revenue from

China’s growing consumer market. They face a challenging environment full of novel, proliferating risks,

to which their companies are committed for the foreseeable future by path dependencies forged by previous

generations of leadership.

This unique moment in globalization and international business calls for a new understanding of

how powerful governments intervene in commercial markets to achieve strategic objectives, and how

multinational executives can develop novel capabilities and resources to meet this challenge and defend

their firms’ competition advantage. The call for new research in this area will be answered in the second

essay of this dissertation.

ESSAY 2

CORPORATE COUNTERINTELLIGENCE AS A DYNAMIC CAPABILITY UNDER

CONDITIONS OF GREAT POWER COMPETITION

12. Introduction

From the perspective of the modern multinational executive, contemporary international business

is characterized by confrontations with a wide range of exogeneous shocks, including pandemics, trade

wars, economic crises, and geopolitical confrontations. One source of these shocks is enhanced policy

interventions in global markets by national governments seeking strategic advantage, particularly those

involved in great power competition (Mearsheimer, 2001; Witt, 2019a). As nation-states use firms and

markets to achieve strategic goals, modern multinational enterprises (MNEs) operate under conditions

engendered by the structural reshaping of the globalization, or rapid and complex change in the underlying

“rules of the game” that have governed the post-WWII global economic order (Buckley, 2020).

There is an ongoing discussion among international business scholars concerning the contemporary

“structural reshaping of globalization,” particularly in terms of the impact that evolving relations between

China and the United States have on global markets and the operations of multinational enterprises

(Petricevic & Teece, 2019; Li, 2022). US-China relations have significant influence on contemporary

international business, and the past few years have been characterized by heightened tensions of geopolitical

strategy and global trade policy (Liu & Woo, 2018; Sutter, 2019; Wiseman, Crutsinger, & Rugaber, 2019).

Changes in the Sino-American relationship have direct implications for national economies and

multinational enterprises, and a major source of this influence relates to the effect of trade conflict policies

on firms (Li, He, & Lin, 2018). The 2018 US-China trade war saw the implementation of tariffs and quotas

on the trade of MNEs, as well as the use of economic and industrial espionage operations to gain

competitive advantage over foreign rivals, particularly in strategic sectors deemed important for state

security and national economic prosperity (Li, Balistreri, & Zhang, 2020; Wray, 2020).

In order to better understand the impact of state-level strategic policy interventions on international

business strategy, this study utilizes an investigation of economic and industrial espionage operations within

the context of US-China trade conflict, which has important implications for global strategic management,

particularly in terms of the boundaries of the firm in international business, the development of effective

firm-level counterstrategies, and the changing nature of contemporary globalization (Cuervo-Cazurra,

Mudambi, & Pedersen, 2018; Peng, Lebedev, Vlas, Wang, & Shay, 2018). In addition to answering calls

to make contemporary international business (IB) research interesting and relevant (Buckley, Doh, &

Benischke, 2017), this paper also contributes to the discussion concerning the implications of modern

China’s emergence for IB research and practice (Guo, Huy, & Xiao, 2017; Li & Farrell, 2020, 2021),

utilizing perspective and phenomena that have not been significantly investigated before in the field.

13. Motivation

This paper is motivated by the desire to understand how contemporary state-level relations between

great powers – such as the United States and China, in the modern context – impact the strategies,

operations, and performance of multinational enterprises engaged in significant cross-border trade.

The integration of China into the global economy following the implementation of its “reform and

opening up” and ascension to the World Trade Organization (WTO) have presented both significant

opportunities and challenges for MNEs doing business with the country. As seen in the results of the first

paper of this dissertation, the domestic market environment that many foreign firms initially entered into

China has changed dramatically, moving from a developing market to a mature economy characterized by

strong rivalry, extensive regulation, and direct policy interventions by the central government in the pursuit

of strategic objectives.

As market conditions change, so must the strategies and capabilities of firms. IB scholars have

called for a better understanding of how firms can develop novel dynamic capabilities in order to effectively

compete in global markets characterized by great power competition and the structure reshaping of

globalization (Petricevic & Teece, 2019), where competition in strategic sectors against state-backed rivals

with advanced resources has been commonplace. Accordingly, this paper is motivated by a desire to

investigate the firm-level mechanisms of this new competitive environment, and to begin developing

insights into the novel corresponding dynamic capabilities that can be designed to effectively response to

business operations in a rapidly changing strategic context.

In doing so, this paper will attempt to answer a relevant and pertinent question relating to a principal

concern in modern international business – How can multinational enterprises confronted with hostile

strategic policy interventions under conditions of great power competition upgrade their dynamic

capabilities in order to protect proprietary trade secrets?

14. Theoretical Background

In order to begin addressing the potential answer of this study’s research question, this paper will

develop a theoretical background using three primary streams of research within the fields of strategic

management and international business – the structural reshaping of modern globalization, the ongoing

fusion of the state and the firm in global markets, and the capability of corporate counterintelligence in the

face of economic and industrial espionage operations targeting exclusive technology and proprietary trade

secrets.

3.1 Great Power Competition and the Structural Reshaping of Globalization

The post-war Bretton Woods system of globalization, as developed and implemented primarily by

the US and enforced through its security alliances, has come under increasing strain (Cohn & Hira, 2020;

Cuervo-Cazurra, et. al., 2020). The relative decline of the US as the world’s primary trade and economic

power, driven by the rise of China and other factors, has resulted in an increasingly bifurcated global order,

particularly in terms of international trade policy, as great powers compete to write the “rules of the game”

of the global economic system to their own benefit, giving rise to a condition of contested globalization

(Mearsheimer, 2011; Petricevic & Teece, 2019).

The contested nature of contemporary globalization often gives rise of VUCA shocks, or strategic

and business environments that are characterized by volatile, uncertain, complex, and ambiguous events,

creating unstable contexts for the development and implementation of MNE strategies and operations

(Buckley, 2020). While the post-war decades through the 1990s and 2000s had seen relatively stable

progress toward technological and policy integration within the globalized world economy, there are now

signs of “de-globalization,” with countries and firms withdrawing from the heights of interconnectedness

and the re-emergence of identifiable regional blocs (Witt, 2019a).

While previous international business research had largely relied upon an assumption of continued

globalization in their studies, the increased centrality of political considerations in the formulation of

economic policy has been a key driver of contemporary de-globalization, which Witt (2019a) calls a “real

possibility.” Citing economic data that highlights a plateau in global trade levels, Witt elaborates on

competing theories of international relations and lays out the implications for international management,

particularly in the areas of global value chains, national contexts, and the political strategies of MNEs.

Importantly for IB researchers, the study of international business during deglobalization would be

“qualitatively different” than it was before.

Similarly, Petricevic & Teece (2019) regard post-WWII Breton Woods-style globalization as

“disrupted,” with major changes having taken place in global markets that have direct implications for

international business. Rejecting the “flat world” globalization of Friedman (2007), the authors emphasize

the structural reshaping of the global economic system, which works to further entrench the contrasting

varieties of national capitalism, and the erosion of “rule of law” governance in international trade.

Referencing the perception of heightened volatility and increased complexity in international business, the

authors emphasize the current importance of strategic trade and investment for national governments - such

as China’s Belt and Road initiative - particularly in reference to a country’s strategic and nonstrategic

industries. These evolving contexts require multinational enterprises to develop new strategic dynamic

capabilities to manage competing interests.

Much of the pullback from modern globalization has come from within the major great powers

themselves. Cuervo-Cazurra, Doz, & Gaur (2020) investigated the public perception in many countries of

the negative aspects of modern globalization, regarding drivers such as inequality, identity, and influence

as key for contemporary skepticism toward the policies of global free trade. Nevertheless, the authors argue

that economic policies arising from this populist/protectionist sentiment can be countered by corresponding

strategies from MNEs, who should be capable of counteracting these forces. The transition from skepticism

towards globalization toward protectionist economic policies would include the development of MNE

counterstrategies regarding the global value chain, localization of foreign operations, and effective

protection of firm assets. The importance of this topic has been recently stressed by influential scholars in

the international business field (Buckley & Hashai, 2020; Enderwick & Buckley, 2020).

Changes in the system of modern globalization have been reflected in the structures and boundaries

of the multinational firm itself, particularly concerning the reemergence of national and local characteristics

in the strategies and operations of MNEs (Cuervo-Cazurra, Mudambi, & Pedersen, 2018; Peng, et. al.,

2018). Recognizing the extensive history of research into the boundaries of the firm in global strategy,

analysis from Cuervo-Cazurra, et. al. (2018) investigated the influence of national characteristics on the

evolution of the boundaries of the firm in global strategy. The authors use transaction cost economics and

the resource-based view to recognize the importance of geographical location in international business,

with significant implications for conducting economic relations across borders (Coase, 1937; Williamson,

1981). In modern global markets, characterized by contested globalization and great power competition

between the US and China, the reflection of national characteristics through major MNEs – manifested in

terms of their strategic and commercial objectives – is particularly relevant.

Similarly, Peng, et. al. (2018) investigated the boundaries of the firm in contemporary global

strategy through an analysis of its methods of growth, particularly in terms of its organic, acquisitive, and

network-based forms. Applying the principles of Penrose (1959) to emerging economies, the authors

highlight the emergence of innovation capabilities and organic growth strategies amongst global firms. The

execution of cross-border acquisitions by government-affiliated firms in emerging countries is of particular

interest, particularly in terms of the presence of network capitalism and institutional transitions, and the

corresponding effect on organizational performance.

As the rules underlying contemporary global trade have changes, so have the nature and structure

of the firms that engage in this international economic system. Great powers competing with each to achieve

specific strategic and economic objectives – such as the US and China – now often utilize specific firms,

such as large MNEs engaged in strategic sectors, to pursue policies independent of specific firm-level

commercial priorities. No longer simply private corporations dedicated to the pursuit of shareholder value,

many modern strategic multinational enterprises are now “political tools for states to gain power” (Witt,

2020), creating a new reality of international business where the boundaries between the state and the firm

have begun to blur and often merge.

3.2 State-Firm Fusion

As seen in the discussion concerning the evolution of modern MNEs under great power competition

and the structural reshaping of globalization, there is now significant overlap between the boundaries of the

state and the firm in modern contemporary international business. Particularly in “strategic sectors” – or

those industries deemed essential by the government for national security and economic prosperity –

markets are increasingly characterized by direct state interventions to achieve strategic state-level policy

goals, such as with the Made in China 2025 initiative and the recently passing of the US CHIPS Act.

This is particularly true in China, where MNE executives must simultaneously balance commercial

and political objective (Guo, Huy, & Xiao, 2017), who investigated how middle managers in Chinese state-

owned enterprises (SOEs) handle the competing demands of commercial objectives and political

obligations, as enforced by the presence and influence of the Chinese Communist Party (CCP). Chinese

SOEs respond to both market pressures and political dictates, and there is a significant CCP presence within

the enterprises, creating a form of multi-level interlock between the Party and the SOEs. The often-

competing demands of the market shareholders and the political actors requires SOE middle managers to

“bridge” often countervailing objectives, which is accomplished through finding commonalities between

interests and using personal relationships (guanxi) to facilitate corporate activity. In essence, the authors

find that Chinese SOEs pursue commercial success, but are obligated to obey CCP orders when called upon.

This unique form of state-firm fusion has also been investigated by Li & Farrell through their study

of the China, Inc. governance concept (Li & Farrell, 2021) and the utilization of strategic state-firm fusion

in pursuit of the CCP’s industrial policies (Li & Farrell, 2020).

The China, Inc. hypothesis, fundamentally, holds that the Chinese Communist Party manages the

People’s Republic of China like a corporation (Li & Farrell, 2021; Li, 2022). Groups and individuals are

obligated to serve Party goals, and the manner in which the PRC government supports Chinese firms

operating in strategic industries has significant implications for the strategies of foreign MNEs dealing with

the Chinese market, as well as IB research concerning the boundaries of the firm in the modern global

economy. Critiquing the engagement view that increased market liberalization would lead to political

democratization in China, the authors highlight how the PRC government actively leverages state assets to

acquire foreign technology for domestic Chinese firms, and uses talent recruitment and cyberattack

campaigns to gain trade secrets and proprietary information from foreign competitors. The model of CCP-

controlled SOEs acting as subsidiaries of China, Inc. presents a hybrid form of the firm in modern

international business, which has implications for research in global strategic management.

In Li & Farrell (2020), the authors analyze China’s unique industrial policy, arguing that it is

inspired by CCP political philosophy and enforced by Party directives, with political leadership acting as

the executive decision-making body responsible for the national economic system - China, Inc. PRC

industrial policy constitutes a nationalistic development strategy for the country, and the ongoing trade

conflict between the US and China has upset the post-WWII global order, with significant implications for

international business. Chinese state support for national firms includes the co-optation of foreign

technology and the granting of policy benefits for strategic industries. The emergence of Chinese industrial

policy as a significant influence in global markets entails potentially large changes to contemporary trade

theory and our understanding of the barriers of the firm in global strategy.

The significance of China’s rise for international business has also been analyzed by Witt (2019b),

who frames the issue against the backdrop of the changing international context of global markets, with

US-led hegemonic globalization being replaced with Sino-American strategic rivalry. Deglobalization and

US-China rivalry are political phenomena with direct impact on cross-border economic relations, and Witt

lays out a range of possible scenarios arising from the ongoing trade conflict, including increased economic

competition and transformations in international relations. Of particular interest is the author’s

acknowledgement that previous engagement views concerning potential harmony between the world’s two

largest economies have become disillusioned amongst many Western observers, as “hopes for democratic

peace with China have been dashed, economic interdependence seems to have produced fewer benefits than

hoped for, and plenty of additional frictions become salient” (Witt, 2019b: 694). These institutional

transitions have particular influence for multinational enterprises, as the author points out a number of areas

in global strategy that will be affected by de-globalization, including cross-border technology transfer, the

highlighting of critical dependencies on foreign suppliers, and the possibility of political hostility in foreign

markets. Witt’s analysis of the implications of China’s rise for international business concludes on a

pessimistic note, writing that “a deepening cold war thus remains a likely trajectory” (701).

The fusion of the state and the firm in pursuit of strategic policy objectives has important

implications of global markets. As great power countries like China pursue a form of “(neo) technical

mercantilism” (Petricevic & Teece, 2019) willing to use tactics such as economic and industrial espionage,

talent recruitment, and forced technology transfers in order to gain access to proprietary technology and

intellectual property (Li & Farrell, 2021), the nature of global business competition has changed. In the face

of competition with state-backed rivals willing to acquire assets through various means, new dynamic firm

capabilities – such as corporate counterintelligence – are required by modern MNEs to succeed in rapidly

changing environments.

3.3 Corporate Counterintelligence

As seen from the discussion on the state-firm fusion and the structural reshaping of globalization,

modern MNEs operating in global markets are today confronted with a wide range of exogenous shocks

and interventions, which their executives must quickly perceive, identify, and respond to in order to defend

firm performance in rapidly changing environments. These outside interventions include aggressive

economic and industrial espionage operations, which attempt to “collect information, appropriate trade

secrets, and steal knowledge” (Soilen, 2016: 52). In order to effectively counteract these attempts by

outsiders at the unauthorized appropriation of proprietary intellectual property, there is a need amongst firm

executives to develop corporate counterintelligence (CCI) as a distinct dynamic capability, which can

“detect, prevent and eliminate” espionage-related threats against firms and their exclusive assets (Gonzalez-

Diaz, Acevedo-Duque, Gomez, & Vargas, 2021: 342).

In the United States, government-issued guides to CCI highlight different aspects of corporate

counterintelligence as a capability, including the ability to conduct a counterintelligence risk assessment,

lay the groundwork for an in-house CCI program, identifying the specific capabilities required for the

program, and implement the CCI program internally, with a focus on identifying the prioritizing assets,

determining threats, and assessing vulnerabilities (ONCIX, 2012). Effective CCI cases have been

documented, as seen with collaboration between US agricultural firms and the FBI to counter attempts by

Chinese state-backed companies to acquire proprietary seeds and farm technology in support of Five-Year

Plan initiatives (Wilber, 2016). While there is a history of public-private CCI partnerships in the United

States (Michal, 1994), federal government guides to CCI best practices do not emphasize close state-firm

collaboration in this area, primarily for ideological reasons, stating that “unlike many of our most active

competitors who engage in cyber espionage, the United States does not have a centralised industrial policy

- nor should it,” as the country’s “long-standing prosperity is a reflection of the free market,” which places

“a large responsibility [for CCI programs] on the shoulders of American CEOs” (ONCIX, 2012).

The study of economic and industrial espionage has attracted attention in a number of academic,

practitioner, and popular media contexts, particularly in relation to modern US-China relations (Nasheri,

2004; Javers, 2011; Hannas & Tatlow, 2021; Hvistendahl, 2021). Nevertheless, the study of this important

topic has received relatively little attention in the international business and global strategic management

research fields. For instance, searches for “espionage” in the research article databases of top IB journals

returned a minimal number of pieces, many which were related to different topics. The Journal of

International Business Studies had seven articles (Saimee, 1984; Fang & Zou, 2009, 2010; Ralston, Egri,

& de la Garza Carranze, et. al., 2009; Tsui-Auch & Mollering, 2010; Contractor, 2019; Schaefer, 2020);

Journal of World Business had three articles (Newburry & Zeira, 1997; Ghaui & Fang, 2001; Cheung,

Aalto, & Nevalainen, 2020); Asia Pacific Journal of Management had four articles (Cope, 1985; Brown,

Rugman, & Verbeke, 1989; Lacniak, Pecotich, & Spadaccini, 1994; Globerman & Shapiro, 2008); and

Journal of International Management had four articles (Kshetri, 2005; Spich & Grosse, 2005; Buckley,

Cheng, Clegg, & Voss, 2016; White, Fainshmidt, & Rajwai, 2018). Searches in the databases of

International Business Review and Management International Review returned none each. Many of these

referenced articles are not explicitly about economic espionage as an IB topic. As can be seen, this relative

lack of research into the phenomenon of economic espionage in the international business research literature

represents a significant gap in the field that needs to be filled.

Outside of the premier IB strategy journals, specialist journals related to espionage in business have

worked to define the specific concepts. Building upon Nasheri (2004), Soilen (2016) defines economic

espionage as “a government’s efforts to collect information, appropriate trade secrets, and steal

knowledge,” while industrial espionage “is the same, but without direct government involvement,” and

information warfare is espionage “on the internet, conducted by the military, [and] is a version of economic

espionage where the primary aim is first of all to destroy vital infrastructure in a country, not to steal

company secrets or help companies become competitive” (Soilen, 2016: 52).

In order to fill this gap in the international business and global strategic management fields, this

study will analyze a series of Chinese economic and industrial espionage cases against US firms, in order

to better understand the nature of these actions, and to begin developing the novel dynamic firm capabilities

required for success in global markets under rapidly changing conditions of great power competition and

the structural reshaping of globalization.

15. Data and Methods

As seen in the previous discussion on the structural reshaping of globalization, state-firm fusion,

and corporate counterintelligence, MNEs competing in modern global markets characterized by great power

competition confront a wide-range of rivals with state-level resources and capabilities (Naughton, 2018).

One of these capabilities is the ability to implement economic and industrial espionage operations designed

to acquire the proprietary trade secrets of a rival, which has become a significant component of US-China

trade relations and contemporary global markets (Burke, Serrone, Thomas, & Nelson, 2019; Mattis &

Brazil, 2019). By investigating Chinese economic and industrial espionage operations against US firms,

this study can begin the identify the effective dynamic capabilities that area required for competition with

state-backed rivals.

In order to better understand how strategic policy interventions into commercial markets - in the

form of economic and industrial espionage operations - impact modern international business strategy, and

to begin to identify the new forms of dynamic capabilities that MNEs must develop to counteract them, this

study will analyze a sample of cases relevant to the substance of this study’s research question. To

understand the scope of this phenomena, and its importance for international business, the current FBI

director has stated that the “greatest long-term threat” to America’s economic vitality is “the

counterintelligence and economic espionage threat from China” (Wray, 2020). Nevertheless, many US

government guides to corporate counterintelligence (CCI) have placed responsibility to countering these

threats with business executives, placing “a large responsibility on the shoulders of American CEOs”

(ONCIX, 2012). A key component of this study will be to determine whether these firm-specific resources

and capabilities are adequate to effectively respond to state-level operations, or whether an expansion of

our contemporary definition of dynamic firm capabilities requires broadening (Teece, et. al., 1997;

Eisenhardt & Martin, 2000).

What are we looking for in our investigation of Chinese economic and industrial espionage

operations against US firms? We are looking to better understand the target(s) of these operations, in terms

of the assets, firms, and industries that were specifically targeted by espionage operations. In addition, we

are also looking to better understand the actor(s) of these operations, in terms of the occupations, industries,

and organizational affiliations of those who orchestrated these economic and industrial espionage

operations. This will be accomplished through an initial qualitative analysis of six cases of Chinese

economic and industrial espionage operations, which will be followed with statistical analysis of a larger

sample screened from relevant data sources (Burke, et. al., 2019; Mattis & Brazil, 2019). As discussed

previously concerning the relative lack of academic IB research on this important topic, a major objective

of this study is to provide illuminating cases and research directions to lay the foundation for further study

and theory development in this area (Eisenhardt, 1989).

4.1 Qualitative Case Analysis

The initial data for this qualitative case analysis of Chinese economic and industrial espionage

operations against US firm comes from the Center for Strategic and International Studies’ (CSIS) database

on Chinese economic and industrial espionage operations against US-related targets (Burke, Serrone,

Thomas, & Nelson, 2019). CSIS is a well-respected, non-partisan foreign policy think tank in Washington,

DC (McGann, 2020; Smith, 2020).

The six cases have been selected as representative of the range of various operations that

contemporary MNEs face in global markets. In line with similar papers on international business strategy

(Li & Farrell, 2020, 2021), this paper will utilize a descriptive analysis of the data following an Eisenhardt

(1989)-style case method designed for theory development, combining the CSIS dataset descriptions with

confirmatory data from official US government and popular media sources in order to confirm variables

such as target asset, target firm, target industry, actor occupation, actor organizational affiliation, actor

sector, and actor method for each case. The wide-ranging investigation of these cases will inform our

subsequent analysis of the larger data set.

The details of the cases are as follows:

Case #1 – May 2014: In the first case, as stated in the CSIS description, “Chinese military hackers

targeted six American companies in the power, metals, and solar production industries and stole trade secret

information. The US Department of Justice indicted them and identified them as members of the People’s

Liberation Army Unit 61398” (Burke, et. al., 2019: 7).

The direct information on this economic espionage case was provided by the US Department of

Justice (Department of Justice, 2014a). A US grand jury indicted five members of the Chinese military for

computer hacking and economic espionage targeting American firms in the nuclear power, solar products,

and metals industries. According to the DOJ press release, these Chinese military hackers intended to hack

into American entities in order to “maintain unauthorized access in their computers and to steal information

from those entities that would be useful for their competitors in China, including state-owned enterprises

(SOEs)”. The indictment states that the defendants were Chinese military officers serving in Unit 61398 of

the Third Department of the People’s Liberation Army (PLA). The targeted entities include Westinghouse

Electric Co., SolarWorld AG, United States Steel Corp., Allegheny Technologies, Alcoa Inc., and the

United Steel, Paper and Forestry, Manufacturing, Energy, Allied Industrial and Service Workers

International Union (USW). Charges include economic espionage and trade secret theft, and examples of

the types of assets targeted include confidential designs for AP1000 power plants, internal cash flow and

product line information documents, and access credentials to internal company computer networks.

Popular media reports on this case identified PLA Unit 61398 as a military cyberunit located in Shanghai,

which had been involved in other economic espionage operations against US targets on behalf of their

Chinese rivals (Schmidt & Sanger, 2014). According to The New York Times report, at the core of the DOJ

indictment is the argument that China uses “state-run intelligence assets to seek commercial advantage,”

and that the Chinese state, with its large SOEs, maintains that “economic security and national security are

one,” making state-run economic espionage operations against commercial targets legitimate.

From this case, we can see that the sharp dividing line separating the state and the private sector is

blurred in contemporary China, as Chinese state assets were used for the direct benefit of domestic Chinese

firms in a way not normally accounted for under the modern Western theory of the firm. A Chinese state

entity - PLA Unit 61398 - utilized economic espionage efforts to target US firms in the power, metals, and

solar production industries for the benefit of their Chinese counterparts. As can be seen, this case has

implications for investigating state/firm dynamics in the contemporary global economy.

Case #2 – August 2014: In the second case, according to the CSIS description, “Su Bin, a Chinese

national, worked with co-conspirators in China to infiltrate Boeing’s computer networks to gain access to

confidential access about the C-17, the F-22, and the F-35” (Burke, et. al., 2019: 8).

The direct information for this case came from the United States Attorney’s Office in the Central

District of California (Department of Justice 2014b). A federal grand jury indicted the defendant on counts

of computer hacking and theft of trade secrets targeting the assets of American defense firms such as The

Boeing Company, specifically focusing on confidential information concerning US military programs,

including the C-17 transport aircraft, the F-22 fighter jet, and the F-35 fighter jet. The DOJ release describes

the defendant, Su Bin, as a businessperson working with undisclosed co-conspirators based in China to gain

unauthorized access in US computer networks, illegally export proprietary defense items from the US to

China, and to steal trade secrets from American firms. Popular media reports on the case state that the

defendant was operating an aviation and aerospace company in Canada, and was involved in a six year

economic espionage operation with “military officers in China about what sites to hack and which files to

steal,” in which Boeing’s “sensitive military information was accessed on the servers and sent to China”

(Hamilton, 2016). In addition, this economic espionage operations also targeted proprietary data related to

Lockheed Martin Corp.’s confidential F-22 and F-35 fighter jet programs, as the defendant was accused of

reviewing confidential documents and translating technical flight test data reports into Chinese, sending

summaries back to China for further analysis.

From this case, the dividing lines in corporate governance between the public and private sectors

continue to blur. The identified operative for this economic espionage operation is considered a

businessperson and manager of a private sector firm, but the DOJ indictment and popular media reports

state that dual-use military and commercial technologies were targeted, and that the trade secrets and

proprietary information was shared with co-conspirators based in China. As the Los Angeles Times report

states, this businessperson was working in partnership with the People’s Liberation Army Air Force to steal

confidential information and technological assets that would benefit both the Chinese government and the

businessperson’s (apparently) private firm. In addition, the pattern of causation and nature of relationships

becomes convoluted. Did the state approach the businessperson to launch the economic espionage operation

to target specific valuable assets, or did the businessperson - upon discovering access to the assets - inform

state agents of this potentially valuable find? The truth is not immediately clear. From these first two cases,

we see that both firms and government actors are involved in economic espionage operations targeting both

commercial and military assets that benefit the state and the private sector in China.

Case #3 – September 2014: In the third case, according to the CSIS description, “Chinese company

Huawei repeatedly attempted to steal trade secret information about robotics designs from T-Mobile”

(Burke, et. al., 2019: 8).

The data for this case comes from the United States District Court for the Western District of

Washington at Seattle, indictment number CR-19-010 (Department of Justice, 2014c). In United States of

America vs. Huawei Device, Co. Ltd. and its US subsidiary, the famous telecom firm was charged with

conspiracy to steal trade secrets, wire fraud, and obstruction of justice concerning their economic espionage

efforts to “steal, appropriate, take, carry away, and conceal trade secrets belonging to TMobile,” particularly

in regard to the US telecom rival’s proprietary robotic phone testing system. Popular media reports of the

case reported that Huawei employees “gain illicit access to a T-Mobile lab in Bellevue, stole parts of a

smartphone testing robot called Tappy, and copied operating software and design details, all in violation of

confidentiality agreements signed by the two companies” (Tabuchi, 2014). Since 2014, Huawei - with its

ex-PLA founder and CEO, Ren Zhengei - has been at the center of recent US-China trade war confrontations

(Rachman, 2020).

This case provides an interesting new angle on our discussion concerning the distinction between

public and private corporate governance structures in contemporary international business. Specifically,

Huawei represents a unique case because it is an ostensibly private firm run by former Chinese state agents.

Because of its history of connection to the Chinese state, it has been entangled in diplomatic disputes

between Beijing and Washington, and discussions concerning its corporate governance structure have

highlighted the ongoing influence of the Chinese Communist Party (Zhong, 2019). The influence of the

CCP on Chinese firms has been extensively documented (Shambaugh, 2008; Tsui-Auch & Mollering, 2010;

McGregor, 2012; Guo, Huy, & Xiao, 2017; Li & Farrell, 2020, 2021; Schaefer, 2020). Analysis of the

relationship between the Chinese state and the CCP has recognized the dominance of the former by the

latter (Wright, 2015). Concerning corporate governance structures in modern IB, the pervasive influence

of the CCP on Chinese firms may have significant implications for our understanding of the theory of the

firm.

Case #4 – May 2015: In the fourth case, according to the CSIS description, “Chinese intelligence

officers infiltrated networks and exfiltrated trade secret information about turbofan engines from US and

European aerospace firms over the course of five years” (Burke, et. al., 2019: 9).

The data from this case comes from the US Department of Justice’s Year in Review for China

Related Cases for 2018 (Department of Justice, 2018). According to the DOJ report, Chinese intelligence

officers from the Jiangsu Province Ministry of State Security (JSSD) recruited hackers and company

insiders to steal trade secrets concerning turbofan engine designs from firms like US-based Capstone

Turbine, which supplies technology for the turbofan engines used in commercial airliners. The JSSD, the

report notes, is “a provincial foreign intelligence arm of the People’s Republic of China’s Ministry of State

Security (MSS),” and is “primarily responsible for domestic counter-intelligence, non-military foreign

intelligence, and aspects of political and domestic security” (Department of Justice, 2018: 6). Documenting

economic espionage activities from 2010-2015, the report also details efforts by the JSSD officers to acquire

proprietary turbofan designs from a French aerospace firm operating in Suzhou, which had partnered with

a US-based company to develop technology for turbofan jet engines. The DOJ notes that “at the time of the

intrusions, a Chinese state-owned aerospace company was working to develop a comparable engine for use

in commercial aircraft manufactured in China and elsewhere” (6). Popular media reports on the case focused

on the extensive state-backed effort to acquire US and European commercial trade secrets for use by

Chinese SOEs, noting that the “indictment marks the third time since September [2018] that the United

States has brought charges against Chinese intelligence officers and their recruits for stealing American

intellectual property” (Nakashima, 2018a). Amongst other cases described in the DOJ report, state-backed

Chinese economic espionage operations targeted commercial technology being developed by a US-French

joint venture, with MSS officers coordinating the actions of external hackers and internal company recruits

within the French firm’s Suzhou office. As will be seen in Case #5, these espionage operations have not

been the only efforts targeting advance aviation technology.

The case detailed in Department of Justice (2018) represents a sophisticated, multi-level economic

espionage effort led by Chinese state actors and directly targeting commercial trade secrets, reportedly on

behalf of a competing Chinese state-owned enterprise. MSS case officers, through their provincial branches,

organized an operation using China-based hackers, Chinese nationals hired to infiltrate the physical offices

of a foreign company, and attempts to co-opt non-Chinese company employees into providing access to

secret technology. This case presents a relatively stark example of the Chinese state using its assets to

directly target US trade secrets for the benefits of a domestic competitor, providing additional evidence for

the China, Inc. concept of state-firm integration (Li & Farrell, 2020, 2021).

Case #5 – April 2018: In the fifth case, according to the CSIS description, “Yanjun Xu, an MSS

operative, attempted to recruit experts employed by leading American aviation companies to China, often

under the guise of giving a presentation at a university” (Burke, et. al., 2019: 10).

The data for this case comes from the US Department of Justice’s Year in Review for China Related

Cases for 2018 (Department of Justice, 2018). According to the DOJ report’s reference of the indictment,

“Xu targeted certain companies inside and outside the United States that are recognized as leaders in the

aviation field,” including GE Aviation, and the agent “identified experts who works for these companies

and recruited them to travel to China, often initially under the guise of asking them to deliver a university

presentation.” In popular media reports of this operation (Nakashima, 2018b), Xu is identified as “a senior

officer with China’s Ministry of State Security (MSS),” whose actions provided an “example of China

seeking to develop its economy at the expense of American firms and know-how.” As opposed to other

cases that utilized outside hackers to access secure computer systems, this case relied on “traditional

espionage techniques, including the attempted recruitment of corporate insiders,” and acquired information

was shared “with individuals at Nanjing University of Aeronautics and Astronautics, once of the top

engineering schools in China, which has significant influence over the country’s aerospace industry.”

This case highlights a number of interesting aspects. First, the direct targeting of American

executives, policymakers, and academics has become a major tactic in Chinese economic espionage

operations, a prominent example being the “Ten Thousand Talents” plan (Barry & Kolata, 2020). Second,

the connection between the MSS and top universities in China also demonstrates the government-academia-

industry connection that allows technological innovations acquired through espionage to be effectively

utilized in both research and commercial activities. By sharing acquired trade secrets with top Chinese

universities, who themselves, are well connected with domestic firms, economic espionage operations are

able to help firms realize great benefits from technological advancements without having to invest the

significant, long-term costs required by large-scale research & development programs.

Case #6 – April 2019: In the sixth case, according to the CSIS description, “Chinese hackers stole

General Electric’s trade secrets concerning jet engine turbine technologies” (Burke, et. al., 2019: 11).

The data for this case comes from the Department of Justice’s Office of Public Affairs (Department

of Justice, 2019). According to the DOJ press release, the accused operative was employed as an engineer

at GE Power & Water in New York, exploiting “his access to GE’s files by stealing multiple electronic

files, including proprietary files involving design models, engineering drawings, configuration files, and

material specifications having to do with various components and testing systems associated with GE gas

and steam turbines.” The indictment states that the accused operatives intended to use the stolen trade

secrets to benefit Chinese aerospace firms in which they had interests (Liaoning Tianyi Aviation

Technology Co., Ltd., and Nanjing Tianyi Avi Tech Co. Ltd.), as well as to “commit economic espionage,

as the thefts of GE’s trade secrets surrounding various turbine technologies were done knowing and

intending that the thefts would benefit the People’s Republic of China and one or more foreign

instrumentalities, including LTAT, NTAT, Shenyang Aerospace University, Shenyang Aeroengine

Research Institute, and Huaihai Institute of Technology.”

Popular media reports of this case highlight the espionage operation’s connection to China’s larger

industrial policy of developing advanced technology and manufacturing capabilities, as “China has

identified aerospace technology as vital to its economic and military objectives,” and the DOJ “in its

indictment tied the trade-secret theft to China’s “Made in 2025” initiative, aimed at vaulting China’s

economy into higher-value areas in competition with the United States, including in aviation equipment

and power generation” (Nakashima, 2019). While the accused defendants were not considered to be

officially-mandated government spies or officials, they “are alleged to have [coordinated] with Communist

Party officials to discuss a “strategic partnership” with the research organizations to develop aircraft engine

technology” acquired through the economic espionage operations. The DOJ indictment states that the

operatives “received financial support from the Chinese government and coordinated with Chinese

government officials to enter into research agreements with state-owned institutions to develop turbine

technologies,” with DOJ officials highlighting a “link between the alleged theft of trade secrets and China’s

economic program.”

Similar to previous cases, this instance illustrates the connections between “state” and “non-state”

actors in contemporary China, making it difficult to draw clear distinctions between business strategies

implemented purely for the private commercial benefit of firms and those chosen in coordination with

Chinese government or CCP officials in pursuit of larger, “strategic” objectives.

Contrasting Case – Russia: In order to provide additional context and contrast for contemporary

Chinese economic espionage operations against US targets, it is beneficial to provide a contrasting case

concerning another major player in modern international espionage - Russia. The last several years have

seen extensive attention paid to Russian espionage operations against the United States (McMillan & Volz,

2021; Stubbs, 2021). Many of these operations have specific, more “traditional” objectives of gathering

information or manipulating events in the political (United States Senate, 2020) and military (Goldman,

2020) spheres.

Data on Russian economic espionage was recently collected in a report published by the US Office

of the Director of National Intelligence’s National Counterintelligence and Security Center (NCSC). This

report (National Counterintelligence and Security Center, 2018) highlights Russian economic espionage

methods including cyberspace operations, the use of commercial and academic exchanges with foreign

countries, the recruitment by intelligence agencies of Russian immigrants with technical skills, and the

penetration of public and private enterprises to gain access to “sensitive technical information from

industry” (8). The purpose of these operations, according to the report, were to benefit the Russian economy,

which, “needs to enact structural reforms, including economic diversification into sectors such as

technology, to achieve the higher rate of gross domestic product growth publicly called for by Russian

President Putin,” as “Russian intelligence services have conducted sophisticated and largescale hacking

operations to collect sensitive U.S. business and technology information.”

For illustration, four cases of Russian economic espionage against US targets were identified. The

first case recounted reports of a Russian hacker who contended to have worked with the Russian Federal

Security Service (FSB) to conduct economic espionage operations, which, according to media reports,

suggests “that Moscow employs cyber criminals so they can deny being behind the operations” (Associated

Press, 2018). The second case highlights Russian economic espionage operations designed “to collect

property data from U.S. energy, healthcare, and technology companies,” reporting that “Russian

Government hackers last year compromised dozens of U.S. energy firms, including their operational

networks,” with the operations potentially “driven by multiple objectives, including collecting intelligence,

developing accesses for disruptive purposes, and providing sensitive U.S. intellectual property to Russian

companies” (National Counterintelligence and Security Center, 2018: 8). The third case mentions the

Russian state-sponsored economic espionage program codenamed “APT28”, which “routinely collected

intelligence on defense and geopolitical issues, including those relating to the United States and Western

Europe,” as “obtaining sensitive U.S. defense industry data could provide Moscow with economic (e.g. in

foreign military sales) and security advantages as Russian continues to strengthen and modernize its

military forces” (8). The final case features a DOJ indictment of two Russian FSB officials who utilized

cyber operations to collect the emails of US and European transportation and financial services firms, and

media reports have also highlighted Russian espionage efforts against US technology firms, such as Yahoo

(Viswanatha & McMillan, 2017).

From these cases, we can begin to detect some patterns on the specific targets and objectives of

Russian economic espionage operations against US firms, which will help to enrich this paper’s discussion

on the implications of China’s rise, and its utilization of economic espionage campaigns to gain competitive

advantage in global markets.

4.2 Data & Variables

Based upon this foundation of analysis developed by our investigation of the preceding six cases,

we can begin to identify potentially relevant variables to extract further insights pertaining to the research

question of this study. To enhance this investigation, 30 total cases have been screened from relevant data

sources (Burke, et. al., 2019; Mattis & Brazil, 2019) in order to develop an initial database of Chinese

economic and industrial espionage operations against US firms, and has been coded according to the

following variables:

[1] Target Asset Type (Target_Asset): Commercial, Strategic, Dual-Use

[2] Actor Occupation (Actor_Occ): Commercial, Official, Other, Combination

[3] Actor Industry (Actor_Ind): Commercial, Official, Other, Combination

[4] Actor Organizational Affiliation (Actor_Org_Aff): Private, Official, Asset with Handler

[5] Target Firm Type (Target_Firm): Private, Public

[6] Target Firm Industry (Target_Ind): Commercial, Strategic, Dual-Use

Through an analysis of the 30 cases utilizing these variables, we can begin to determine whether

specific patterns exist in the economic and industrial espionage operations, and to lay the groundwork for

the development of effective counter-capabilities.

16. Results

The result of the data analysis for the 30 cases using the six specified variables can be seen below

in Table 5 and Figure 1:

>>> Insert Table 5 about here <<<

>>> Insert Figure 1 about here <<<

[1] Target Asset Type (Target_Asset) (Nominal, n = 30): Concerning the types of the assets

targeted in the espionage cases, the majority of target asset types were dual-use (46.7%), followed by

commercial (30%) and strategic (23.3%). The results demonstrate an interest in target assets that can be

used in both commercial and strategic/military contexts, enhancing their usability across a range of sectors.

[2] Actor Occupation (Actor_Occ) (Nominal, n = 30): The majority actor occupation was

commercial (66.7%), followed by official (30%), other (6.7%), and combination (3.3%). Businesspeople

and government officials oversaw most espionage operations, exhibiting a public-private partnership in the

management of clandestine asset acquisition.

[3] Actor Industry (Actor_Ind) (Nominal, n = 30): The majority actor industry was commercial

(60%), followed by official (30%), combination (6.7%), and other (3.3%). Similar to actor occupation, the

majority actor industries managing espionage operations were both commercial and state-related, along

with research institutes and public universities.

[4] Actor Organizational Affiliation (Actor_Org_Aff) (Nominal, n = 30): The majority actor

organizational affiliation was asset with handler (50%), followed by official (26.7%), and private (23.3%).

Traditional espionage methods of recruiting and handling assets-in-place were utilized extensively, along

with designated intelligence officers, showing a strong state-firm connection.

[5] Target Firm Type (Target_Firm) (Dichotomous, n = 30): The majority target firm type was

public (70%), followed by private (30%). Espionage operations extensively targeted large, well-established

public companies, showing a confident willingness to confront firms housing significant in-house CCI

capabilities in the pursuit of desired assets.

[6] Target Firm Industry (Target_Ind) (Nominal, n = 30): The majority target firm industry was

dual-use (50%), followed by commercial (30%), and strategic (20%). Similar to target asset type, most

espionage operations targeted dual-use industries, which allow the acquired assets to be used across a wide

variety of commercial and strategic sectors.

17. Discussion

As can be seen from this data analysis, it is increasingly difficult to draw a clear dividing line

between the “firm” and the “state” when dealing with economic and industrial espionage cases concerning

countries such as China and the United States.

For instance, Case 1’s acknowledgement, in cases of state-backed espionage against critical

technological trade secrets, that “economic security and national security are one,” and that government

assets will be utilized to gain both national and commercial advantage through espionage operations against

foreign targets, highlights the erosion of the crisp distinction drawn by Soilen (2016) between economic

(government-backed) and industrial (non-government-backed) espionage. Case #2 highlighted how

international businesspeople can become involved in global espionage operations that benefit both their

own commercial operations and the larger strategic ambitions of their home country governments, and Case

#3 provides an example of how specific “national champion” firms – through their state-backed ownership

structure – often implement the objectives of the national government through their competitive practices

against rival foreign firms.

Similarly, Case #4 and Case #6 demonstrates how state intelligence assets have been utilized to

directly benefit a domestic commercial entity at the expense of foreign competitors, while Case #5

illustrated how state and non-state partnerships can be utilized through espionage operations to gain access

to confidential information profitable to both entities. In line with cutting edge research on international

business and contemporary US-China relations (Li, 2022), the crisp dividing line between state and non-

state entities no longer seems to apply to global business, at least concerning firms originating in nations

with powerful central governments and active industrial policies. These examples of “state-firm fusion”

represent a new contribution to international business research by helping to illuminate how contemporary

global business is now often carried out under the auspices and in the interests of sovereign nation-states.

What does this changing reality mean for modern global business strategy? MNEs face a wide

range of state-level policy interventions from hostile forces in contemporary global markets, including

espionage operations from government-backed actors seeking to acquire proprietary assets by any means

necessary. From our research, these institutions seeking commercial and strategic advantage through

economic and industrial espionage include the Chinese People’s Liberation Army, the Ministry of State

Security, state-owned enterprises, the public university system, think tanks and research institutions, and

ostensibly private companies. Even large, well-resourced public firms are confronted with extensive

espionage operations, especially if they hold strategic dual-use assets - and the experienced, intelligent

executives leading these companies have often failed to protect their most important assets and trade secrets.

Accordingly, confronted with strategic policy interventions from great powers coupled with state-backed

resources, it appears that firm-level capabilities along are largely inadequate for effectively confronting

rivals characterized by state-firm fusion.

Within the strategic management research field, traditional dynamic capabilities focused on the

“firm’s (specific) asset positions” (Teece, et. al., 1997: 509). In order to solve a major problem of

contemporary international business - the unauthorized appropriated of exclusive intellectual property and

proprietary trade secrets, often of a strategic dual-use nature - a fusion of capabilities utilizing resources

from firms, government, and research institutes must collaborate together to succeed in developing effective

counterstrategies. These “fusionist” counter-capabilities - which transcend the firm itself and connect with

alternate resource bases - are for global firms operating under great power competition, especially if they

are targeted by hostile forces utilizing economic and industrial espionage operations.

To give a practical definition for this novel concept, “fusionist” capabilities are resources and

capacities that firms can utilize that originate outside their traditional asset base. As seen with the above

quote from Teece, et. al. (1997), this separates fusionist capabilities from traditional, specifically firm-level

capabilities. An example of such a fusionist capability would be the development of an open database of

known economic and industrial operations, coded according to relevant variables, using data from firms,

intelligence agencies, policy institutes, and researchers. MNEs would have access to the database, and

would be able to run internal analyses on their own at-risk assets, and thereby develop predictive models

and implement effective corporate counterintelligence programs to defend these valuable resources. Often

firms affected by espionage operations do not immediately disclose their vulnerabilities for a variety of

reasons, including looking vulnerable to rivals or acknowledging internal security failures by the firm

leadership. Access to this open database for the purposes of internal risk analysis would circumvent this

issue, and would also allow for enhanced public-private cooperation without disrupting current legal

ownership structures.

In the face of hostile policy interventions by rivals with state-level resources, modern MNEs must

develop new and effective counter-capabilities, and the concept of fusionist capabilities that combine

resources from a wide range of sources beyond the boundaries of the firm itself helps to point executives

in a productive direction for the future.

18. Contributions

This study contributes to the research fields of international business and global strategic

management through the development of the concept of fusionist dynamic capabilities, or the ability of

firms to access and utilize resources and capabilities beyond their traditional asset bases. Collaborations

between business, government, and research institutions can enable firms to more effectively compete

against state-backed rivals under conditions of great power competition. In addition, this study also

contributes to the study of economic and industrial espionage and corporate counterintelligence in business,

which - despite being a critically important topic for practitioners and policymakers - has largely been

neglected in IB research.

The goal of this research is to investigate a relatively understudied phenomenon in light of changing

global market conditions, which have been driven by the structural reshaping of globalization and the

emergence of great power competition between the United States and China. By providing illuminating

cases and research directions, this study contributes to future study and theory development in this critical

area of international business study research.

19. Implications

The implications of research on “state-firm fusion” in international business are clear and relevant.

Under traditional IB frameworks that divided “state” and “non-state” actors, purely commercial firms

operating for private profit were seen as being in dyadic competition with similar organizations, with

competitive strategies tailored for this environment. However, in this new era of “great power competition”

amongst power central governments that utilize domestic firms to achieve strategic objective through

industrial policies, these assumptions no longer hold.

International executives, particularly those in strategic sectors deemed vitally important by national

governments, must understand their operations as taking place within a much larger geopolitical context

that extends well beyond the boundaries of their own firm and that of their immediate rivals. Accordingly,

under conditions of increased “state-firm fusion,” both international business scholars and practitioners

must begin the process of adapting our understanding of non-dyadic forms of global competition, and

enhance our knowledge concerning how changes in the geopolitical environment impact firm strategies,

operations, and performance.

Specifically, executives must know that MNEs operating in modern global markets are faced with

non-dyadic, state-backed rivals with non-traditional resource bases. This study provides a practical tool in

the form of fusionist capabilities that executives can utilize to defend their firms against economic and

industrial espionage operations. Policymakers must realize that national prosperity is built on economic

strength, and national leaders and strategists are therefore responsible for developing tools and plans to help

domestic firms to protect trade secrets, market share, and critical industries from unscrupulous competition.

Finally, researchers should realize that the “rules of the game” of globalization and international business

are changing, and that the field would benefit from a problem-solving focus that can build closer

connections between scholars, executives, and policymakers with the intention of identifying and solving

the majority contemporary problems of global business.

20. Limitations and Future Research

As with any academic research study, there are inherent limitations and opportunities for future

investigation. Limitations include the primary focus on a specific country pair - the US and China - and can

be expanded by incorporating more country cases into the data sample. In addition, more sophisticated

quantitative and methodological technologies will be required for future study.

Future research can build upon the initial database to provide an open resource that MNEs can

utilize to run internal analyses on their own at-risk assets, allowing them to develop predictive models for

which resources may be most vulnerable for economic and industrial espionage operations, and to develop

corporate counterintelligence programs capable of effectively neutralizing these threats.

21. Conclusion

The rise of powerful nation-states such as China, which are capable to changing and disrupting the

post-Cold War US-dominated international economic order, poses new challenges to international business

and the firms that operate across borders.

Increasingly, the line between “state” and “non-state” in global business is fading, especially in

sectors deemed strategic by governments. As global executives navigate this complex world of non-dyadic

relations between governments and firms, they must pay close attention the competitive dynamics of rivals,

some of whom may be backed with the resources of powerful governments, giving them a decisive edge in

commercial competition. As these dynamics of “state -firm fusion” continue to play out in global business,

the competition strategies of firms involved in the competition between and amongst companies and

governments will warrant continued study.

As seen in the findings of this study, state-level geopolitical tensions directly impact the strategy

and operations of multinational enterprises. Trade secrets and proprietary assets are targeted by rivals with

nation-level resources.

In order to succeed during the structural reshaping of globalization, firms must expand their

competitive ability beyond traditional dyadic (firm vs. firm) rivalry. Fusionist capabilities - or the effective

collaboration between multilevel resource bases - can develop the counteractions required to thrive under

conditions of great power competition.

FIRM CAPABILITIES AND GREAT POWER COMPETITION DYNAMIC SENSEMAKING, MULTINATIONAL STRATEGY, AND THE STRUCTURE RESHAPING GLOBALIZATION.pdf

Students also viewed