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Manufacturing Discontent: National Institutions, Multinational Firm

Strategies, and Anti-Globalization Backlash in Advanced Economies

Article  in  Global Strategy Journal · February 2020

DOI: 10.1002/gsj.1369

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 Manufacturing Discontent

Manufacturing Discontent:

National Institutions, Multinational Firm Strategies,

and Anti-Globalization Backlash in Advanced

Economies

Olivier Butzbach, University of Campania “Luigi Vanvitelli”, Italy

Douglas B. Fuller, City University of Hong Kong, China
Gerhard Schnyder, Loughborough University London, UK

ABSTRACT
Research summary: There is mounting evidence of a widespread popular

backlash against globalization in advanced economies, which can hurt

multinational companies’ (MNCs) interests. In this paper we argue that MNCs are

both ‘culprits’ and ‘victims’ of backlash against globalization. Building on the

“comparative capitalism” literature, we argue that national institutions influence

the likelihood of a backlash by either encouraging MNCs to embrace a “labor

arbitrage” strategy, consisting in tapping into cheap labor markets overseas, or

preventing them from doing so. Where institutional constraints lead firms to adopt

an “upgrading” route of using domestic workers, popular backlash is less likely.

Such institutional factors help to explain variation in the likelihood of backlash

across countries. We also discuss the strategic options available to firms facing

backlash.

Managerial summary: Multinational companies are increasingly facing

a backlash against globalization that, in some countries, may lead to policies

that directly hurt their interests. Yet little is known about the link of this

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 Manufacturing Discontent

phenomenon with firm-level strategies. In this paper, we draw on comparative

analysis to show that national institutions play a key role in determining the

likelihood of backlash. They do so by inducing/discouraging MNCs to adopt

certain strategies that expose non-university-educated workers to globalization

pressures, influencing, in turn, the electorate’s attitude towards globalization. We

also present and discuss the strategic options available to firms facing backlash.

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 Manufacturing Discontent

Introduction

Since the late 1990s, multinational companies (MNCs) have found themselves in a much

more challenging global environment than in previous decades – an environment

characterized not just by recurring crises (the dot-com bubble, the Global Financial

Crisis) but also by growing skepticism towards the benefits of globalization, which we

define as relatively unfettered global flows of goods, services, and capital. There is

plenty of anecdotal evidence showing instances of popular protest against globalization

in the past two decades (Micklethwait & Wooldridge, 2001; O’Brien, 2000; Cuervo-

Cazurra et al., 2017; Kobrin, 2017), but recent years have witnessed much more dramatic

electoral expressions of public anger at globalization, principally the November 2016

election of Donald J. Trump as American president and the United Kingdom’s June 2016

Brexit referendum. We define anti-globalization backlash as electoral victories for anti-

globalization policy platforms such as Brexit and Trump's candidacy. 1

Backlash may lead governments to adopt concrete and intentional steps to reverse

pro-globalization policies, which we call policy reversal. While backlash does not

automatically lead to policy reversal, the connection between the two is that ceteris paribus

the greater the level of backlash the greater the likelihood of policy reversal. Both backlash

and policy reversal potentially constitute major challenges for MNCs which rely on open

borders to spread their activities globally. While implications of backlash for firm strategy

have recently been explored (Kobrin, 2017), the extant literature neglects the institutional

determinants of backlash and therefore cross-country variation in the likelihood of backlash

occurring. Here we use a comparative capitalist perspective (Hall and Soskice 2001; Jackson

1
It is important to note that emphasizing electoral expressions of anti-globalization discontent makes sense
given that the set of advanced economies under examination in this paper (see Table 1) are all
democracies i.e. hold elections to determine their political leadership although one of these economies
has biased laws heavily favoring the ruling party (Singapore). Our population of advanced economies
excludes one non-democratic, advanced economy (Hong Kong) (Fuller, 2010), because Hong Kong is officially
a self-governing special administrative zone of China rather than a fully sovereign and independent country
and the elections with popular suffrage component of Hong Kong’s governance system is very limited.
3
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& Deeg, 2008; Saka-Helmhout et al., 2016; Fainshmidt et al., 2016) to show that

institutions shape firm strategies in ways that may favor or prevent the socio-economic

conditions for backlash to emerge in advanced economies (detailed definition of this set of

countries is in the next section). Importantly, our focus on institutions allows us to

understand cross-national variation in backlash and strategic responses to it.

Comparative capitalism posits that national configurations of institutions constrain

firm behavior at the same time that they provide comparative institutional advantages

where the national institutions bolster specific firm-level capabilities. Here we use these

institutional differences to explain the variation of anti-globalization backlash across

advanced economies. In particular, we argue that national institutions influence the

likelihood of a backlash by either encouraging MNCs to embrace a “labor arbitrage”

strategy consisting in tapping into cheap labor markets overseas or preventing them from

doing so. We propose that those countries hewing closely to liberal market economy

(LME) configurations, which mainly rely on market mechanisms to organize economic

activities, will do the least to buffer their non-university-educated workers from

globalization-induced economic losses. They also do the least to constrain firms from

adopting labor arbitrage strategies where they replace non-university-educated workers

at home in favor of cheaper workers abroad. Thus, such economies are likely to

experience stronger backlash.

Further, we show what strategic responses firms may adopt when faced with

backlash against globalization. We thus contribute to the emerging literature on firm-

level strategy implications of anti-globalization. In particular, we theorize the link

between the institutional environment, firm-level strategies, and anti-globalization

backlash, allowing us to understand cross-national variation in the strategic antecedents

and consequences of backlash.

In this paper we focus on forms of discontent that explicitly target/blame the

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economic aspects of globalization. Although in practice, the cultural factors underpinning

backlash are often entangled with economic ones (see, for instance, Inglehart & Norris,

2017), we argue that it is possible to identify backlash that is primarily related to

economic globalization. Thus, when we refer to backlash in the rest of this paper, we

mean economically driven anti-globalization backlash.

Framework and Conceptual Background

In this first section, we discuss the political problem of globalization in

advanced economies and then analyze the causal pathways of backlash and policy reversal

in wealthy economies. Finally, we show how our argument departs from previous

comparative capitalism approaches and we provide precise definitions of the types of

capitalism under study and which economies conform to which type of capitalism.

The political problem of globalization in advanced economies

In line with the political economy and empirical literature on the impact of

trade liberalization and trade openness on advanced economies (Rodrik, 2011, 2017;

Milanovic 2016), we argue that economic globalization ceteris paribus has negatively affected

the wages and/or employment of non-university educated workers in advanced economies

via globalization (or at least radical expansion) of labor markets to include large numbers of

relatively low wage workers in developing economies. This literature stresses the negative

impact on non-university-educated workers in advanced economies, because these workers

are more likely than university-educated workers to find themselves in direct competition

with workers from developing economies. However, as Milanovic (2016) has shown, the

negative impact on non-university-educated workers while felt across the advanced

economies has not been felt equally. Indeed, some of these advanced countries have been

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 Manufacturing Discontent

able to limit the general upward swing in inequality driven by the relative wage losses of

non-university-educated workers. Adopting a comparative capitalism approach, we posit

that domestic institutions account for much of the variation in the negative impact on

non-university-educated workers across advanced economies.

While anti-globalization backlash is driven by a broad alliance of diverse social

groups, non-university educated workers are at its core (Eatwell & Goodwin, 2018). The

reason for this is that it is these strata of society that are most vulnerable to the downsides

of globalization. Economic globalization presents firms with new opportunities to

reconfigure their operations by accessing low and semi-skilled workers in low wage

locations at little additional cost due to lowered legal trade barriers, the "box" transportation

revolution, and the telecommunications revolution. Therefore, it is these non-university-

educated workers who have the most to lose from globalization and may feel most strongly

about policies promoting or reversing it. Research from the US has shown the negative

economic impact of the globalization of labor markets – and trade with low-wage China

in particular (Autor et al. 2013) – on non-university educated workers (Lin 2016). Areas

most negatively impacted by trade with China have been most supportive of anti-

globalization backlash in the form of v o t i n g f or T r u m p (Autor et al. 2016). Similarly,

research from political science has shown that working class socio-economic strata and

education levels were critical determinants in the Brexit backlash (Goodwin & Heath,

2016; Antonucci, Horvath, Kutiyski, & Krouwel, 2017). We therefore consider that this

segment of the population is key to determining the likelihood of backlash.

Firms, backlash and policy reversals

Drawing on Hall and Soskice (2001), we posit that the globalization of labor

markets offers opportunities (firms can utilize new sources of labor directly and indirectly)

and threats (firms may face new challenges as existing or emerging competitors utilize

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these new sources of labor) for firms, and institutions encourage or constrain firms to

either take what we call the “upgrading” or the “labor arbitrage” strategy. In the labor

arbitrage strategy, firms seek competitive advantage by exploiting the opportunities

offered by globalization to directly or indirectly use cheap labor in developing economies

in place of workers in the advanced economies. In the upgrading strategy, firms seek

competitive advantage by forgoing intensive exploitation of labor savings presented by the

workforce of the developing world and instead pursuing the more costly process of re-

investing in their home country-based capabilities. While both strategies can be successful in

terms of sustained firm profitability over time, we hypothesize that the dominant strategy

chosen by a country’s firms influences the likelihood of a backlash against globalization.

The labor arbitrage-upgrading distinction should not be viewed as a dichotomous

variable, but a range. Firms typically have relatively more or less exploitation of labor

savings via engagement with the developing economies rather than solely relying upon or

completely forsaking the cost savings offered by utilizing cheap labor in emerging

economies.

It is important to note that here we talk of firms rather than MNCs (and will

continue to do so in most of the remainder of this paper) because not all of the firms

confronted with these opportunities and threats from globalization are or become MNCs.

Many may remain domestic firms, but their very choices still help to shape the likelihood

of backlash and policy reversals.

Extending and Refining Comparative Capitalism Approach

The foundational framework for much of the comparative capitalism literature has

been the “Varieties of Capitalism” framework (Soskice, 1999; Hall and Soskice, 2001). The

Varieties of Capitalism framework posits that differences across four institutional spheres

(education/training, inter-company relations, industrial relations and financial systems-

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 Manufacturing Discontent

cum-corporate governance) form non-random configurations that produce institutional

complementarities where the simultaneous presence of two or more institutions across

spheres leads to an increased performance of the system as a whole. These institutional

complementarities lead most economies to cluster around the LME type or the

Coordinated Market Economy (CME) type, where the organization of economic activities

occurs through non-market coordination between major economic and social actors.

National institutions in the Varieties of Capitalism framework function to both constrain

firms’ behavior but also provide them with institutionally-determined input factors that

lead to institutional competitive advantage and hence specialization of firms from a given

country in certain activities (Hall & Soskice, 2001; Whitley, 2007).

Comparative capitalism scholarship in management (Jackson & Deeg, 2008; Witt

& Jackson, 2016; Schneider et al., 2010; Hotho 2014; Fainshmidt et al., 2016) has typically

used Varieties of Capitalism as the main or at least partial foundation of its analysis. Here we

will follow suit while pointing out as others have done (e.g. Schneider and Paunescu 2012)

where our analysis and Varieties of Capitalism part ways. In particular, we accept that LMEs

represent a set of relatively coherent arrangements of institutions present across a

number of advanced economies. For the other advanced economies’ capitalist systems, we

acknowledge that the CME ideal-type, as laid out in Hall and Soskice (2001), is too

specific (it may only really describe German capitalism) even as the four institutional

spheres that Varieties of Capitalism emphasizes are critical to all advanced economies.

Acknowledging the limited applicability of the CME category, we prefer to use the broader

category of non-LME to distinguish the LMEs from other advanced economies.

Institutional complementarities across these spheres may also exist in other non-LMEs

even if these complementarities are different from those found in Germany.

The fundamental difference between LMEs and non-LMEs is related to differences

in the underlying definition of the corporate purpose. The purpose of the public

corporation is narrowly and instrumentally defined in the LME variety, as essentially

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constituting a vehicle for maximizing shareholders’ returns, while in non-LMEs it is

generally considered a quasi-public institution with responsibilities beyond the profit motif

(Weimer & Pape, 1999; Höpner, 2007). As a result, non-LMEs attribute higher importance to

the survival of companies than LMEs where bankruptcies, takeovers, and other forms of

dissolution of a corporation are mainly seen as beneficial market-driven processes that free

up assets for more productive uses. These differential conceptions and priorities are reflected

in the institutional setup of different types of capitalisms: Institutions in LMEs are structured

in a way that enhances and encourages competition between firms and encourages firms

to respond quickly in ever changing markets. In non-LMEs, the institutions are structured

in a way that allows firms to adjust their strategies and restructure their capabilities over

longer time spans.

The institutions of classic CMEs as well as other non-LMEs do not make possible

this longer-term orientation solely through providing the necessary inputs (e.g. training

workers in high-value-generating skills). They also do so by buffering firms, individual

workers, and other relevant actors within the wider national economy from economic

turbulence in the short-term. Institutional buffering is key to understanding variation in

popular and corporate reactions to globalization across advanced economies.

In addition to the four institutional domains derived from the Varieties of

Capitalism literature, two aspects of the economy that were given relatively short shrift in

that literature (and only partially incorporated elsewhere in the comparative capitalism

literature) are the role of the state intervention in the economy and the state’s social welfare

systems. The latter especially looms much larger than the relatively narrow role the

Varieties of Capitalism literature accorded it when we consider the issue of reactions to

and buffering from globalization. Thus, the next section will consider these six

institutional domains and how they mediate firms’ and individuals’ reactions to the

structural challenges of globalization that Kobrin (2017) highlights. This allows us, in

9
 Manufacturing Discontent

turn, to formulate general propositions as to the impact national institutional

arrangements may have on the likelihood of a backlash against globalization.

To be sure, the differences between LMEs and non-LMEs are not dichotomous,

and for a given institutional sphere may be conceived of as a range with pure non-LME on

one end and pure LME on the other. Ideal, pure LME institutions would be those where

market mechanisms with the bare minimum of regulation necessary to sustain such market

mechanisms are the determining organizational mechanism. Previous literature has

acknowledged such ranges by denoting some economies as LME-lite or CME-lite (Witt

and Jackson 2016; Schneider and Paunescu 2012). However, such approaches assume that

countries fit comfortably on the CME-LME range and do not take into account other

institutional configurations that actually exist in the world as critiques of the original

Varieties of Capitalism model have pointed out (Allen 2004; Crouch 2005). Furthermore,

given that our model includes two institutional spheres not fully included in Varieties of

Capitalism, the labeling of capitalist systems as CME-lite or LME-lite does not make much

sense. We also go beyond Varieties of Capitalism by recognizing institutional equifinality

in outcomes, in this case buffering workers and firms from globalization’s competitive

pressure. Classic CMEs’ institutions buffer workers and firms, but we argue that alternative

non-LME institutional arrangements that do not look like Germany can buffer workers and

firms equally well.

For buffering workers from globalization and constraining firms from adopting

labor arbitrage, different domestic institutions may act in very different ways to

exacerbate or ameliorate the adjustment costs of non- university-educated workers in the

face of globalization. We opt for the term hybrid to denote those economies in which the

institutions do not all manifest purely liberal market tendencies or their opposite in terms

of the long-termism and buffering against short- term market forces across institutional

spheres in pure non-LMEs (see Tables 1 and 2 below). In other words, instead of

assuming equal levels of buffering across institutional spheres as denoted by terms such
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as CME or CME-lite (the latter having slightly less buffering across the spheres than the

former), we acknowledge that within a given hybrid economy various institutional

spheres may be working at cross-purposes in terms of buffering workers and constraining

firms. For example, Sweden now has increasingly equity-based finance relying on

external shareholders, which is a typical LME feature (Schnyder 2012). This feature may

heighten the propensity to backlash as it pressures firms to pursue labor arbitrage.

However, Sweden also has one of the most developed, solidaristic welfare states in the

world and this non-LME feature works against the propensity to backlash. The typical

comparative capitalist approaches, such as Jackson and Witt (2016)’s labeling of Sweden

as LME-lite, obscure rather than illuminate how different institutions interact with the

opportunities of globalization and firms to produce very different pressures for or against

labor arbitrage.

Before we proceed with the analysis, we need to define what we mean by

advanced economies. Hall and Soskice (2001) and their academic antecedents were

concerned with institutional processes in wealthy capitalist systems, but they tended to use

less than rigorous definitions, such as OECD membership, which has included developing

countries such as Mexico and Turkey for quite some time. The past comparative capitalist

scholarship was concerned with studying wealthy countries that did not rely solely on

natural resources or serving as offshore banking hubs and thus they excluded oil/petrol-

dependent economies and offshore banking centers from their studies. However, beyond

excluding these types of economies, a clearer, operationalizable definition of advanced

economies is needed. Here we use Woo and colleagues’ (Woo et al 2012) definition of

advanced economies as those that have attained at least 60 percent of US GDP in purchasing

power parity (PPP) terms, but following along the lines of the previous comparative

capitalism literature, we exclude petrol-dependent economies and offshore banking centers.

Table 1 below lists the countries that meet these criteria, how we classify each economy’s

capitalist system and how other scholars have classified the same economies.
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<insert Table 1>

<insert Table 2>

Theoretical Development: Comparative Capitalisms and Anti-globalization

Backlash

The comparative capitalism approach is particularly well-suited to unpacking and

problematizing how different arrangements of national level institutions provide

different incentives and capabilities to firms to deal with technological and economic

pressures from abroad. Our propositions follow the above-mentioned six institutional

spheres and are divided into two sub-propositions involving (a) non-firm actors and (b)

firms, respectively, because non-firm actors and firms both interact with institutions to

influence the likelihood of backlash. In addition, we consider the effects of sectoral

specialization and overall comparative institutional advantage on backlash. Unless

otherwise specified, all the firms and non-firm actors in the propositions below are from

the advanced economies.

Education and training

LMEs typically have focused on training white-collar professionals in universities with

relatively weak vocational training programs for secondary and tertiary students (Thelen

2001). In contrast, non-LMEs have generally put in place institutions that increase

investment in training of workers either through direct state provision or by incentivizing

firms to do so through institutions that lower the risk of poaching of trained workers by

competitors. Thus, some non-LMEs use extensive training programs for vocational

students sometimes in conjunction with industrial associations (e.g. Austria, Germany, and
12
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Switzerland), through active national public skills training (Sweden), or through in-house

lifetime training and employment (Japan) to deliver high-quality non-university-

educated workers for industry (Jackson & Deeg, 2012; Jackson & Sorge, 2012; Hall &

Soskice, 2001; Schnyder, 2012). Consequently, non-university-educated workers in LMEs

tend to have lower, more general skills that are transferable across employers, while non-

university-educated workers in non-LMEs tend to have higher skills, but with a

stronger firm-specific component, making them less transferable (Hall & Soskice, 2001).

If we regard globalization as leading to an increase in the global low-skilled workforce

that firms from the advanced world can utilize either internally by moving activities abroad or

externally by engaging external suppliers located in emerging economies (Rodrik 2011;

Milanovic 2016), it follows that non-university-educated workers in the LMEs in tradable

goods and services sectors would feel the brunt of globalization (Kobrin, 2017) in a

manner that highly skilled, non-university-educated workers in Baden-Wurttemberg would

not (Baccaro & Benassi, 2016). Thus, we formulate the following propositions:

Proposition 1a: The more the national or supra-firm-leveltraining and education

institutions invest in non-university-educated workers, the less vulnerable non-

university-educated workers of this economy are to competition with workers from

developing economies and therefore the lower the likelihood of backlash.

At the firm level, the skills profiles of non-university-educated workers in the two

types of advanced economies also lead to the specialization of firms from these countries

in activities where these types of skills are most appropriate. Thus, firms from LMEs tend to

specialize in the mass production of tradable goods that can be standardized or R&D-

intensive activities utilizing university-educated workers. Firms in non-LMEs on the other

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hand tend to utilize their respective training systems to train their non-university-educated

workers deeply in industry- or firm-specific skills (Thelen 2001). These skills develop in the

nexus of interactions between firms, industries and national training systems in these

national institutional contexts so are not so easily replicated in other countries (Sorge and

Streeck 2016, Thelen 2004 and De Massis et al. 2018). Non-LME firms, which have co-

evolved their own competencies to depend on the unique skill sets offered by their

respective training systems, will therefore find it harder to relocate their production to

developing markets than LME firms. We therefore propose:

Proposition 1b: The more the national and/or supra-firm-level training and education

systems invest in non-university-educated workers, the more firms rely on non –

university -educated workers from their home economy to compete rather than utilizing

workers in developing economies and, consequently, the lower the likelihood of

backlash.

Inter-company relations

LME firms typically engage in arm’s-length, market-based transactions with other firms,

while firms in non-LMEs often produce a variety of stable, longer-term, and thus more

cooperative relationships. This is the case even among firms competing in the same

industry who coordinate their activities via unwritten ‘relational contracts’, for instance in

the areas of training and R&D, to pool resources and produce collective goods. In non-

LMEs more extensive formal cooperative relationships exist than in LMEs. Thus, non-

LME firms are typically interconnected through a dense network of shareholding ties and

board overlaps, although some of these ties have recently started to decline in some cases
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(Heemskerk & Schnyder, 2008; Höpner & Krempel, 2004). Such inter-company networks

provide the ‘social infrastructure’ for coordination amongst legally independent economic

units, shape corporate behaviors by allowing the diffusion of practices among firms, and

create a certain ‘shared business ethics’ among the business elite (Windolf, 2002; Mizruchi,

1996). Inter-company networks and relationships insulate companies to some extent from

competitive market forces by providing alternatives to market-based transacting.

Beyond Europe, in East Asia, both Korea and Japan have produced large business

groups spanning many sectors. These structures insulate group firms to some extent from

the full might of market forces (Gerlach and Lincoln 2004). Indeed, such relationships give

these firms a buffer from short-term pressures brought about by sudden technological

and other changes. In the face of globalization and firms creating competitive challenges via

labor arbitrage, the stable inter-company relations common in non-LMEs buffers non-LME

firms embedded in such stable inter-company structures from having to respond in the

short- term to these competitive pressures. Thus, firms in non-LMEs can forgo taking labor

arbitrage and have more time to seek out and develop new, viable upgrading strategies.

Based on this discussion we develop the following two propositions in terms

of the implications of inter-firm networks for individuals and firms:

Proposition 2a: Long-term, stable inter-company relations buffer non-university-educated workers from

competition with developing economies’ labor because long-term, stable inter-company relations constrain

firms from taking labor arbitrage strategies. Thus, long-term, stable inter-company relations

lower the likelihood of backlash.

Proposition 2b: Long-term, stable inter-company relations lower firms’ cost of adjustments to the external

market shock of competitors using workers in developing economies. As a result, in economies with stable

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inter-company relations, firms are more willing to adjust to competition from companies relying on workers from

developing economies via upgrading strategies, and therefore reduce the likelihood of backlash.

Industrial relations and trade union organization

Comparative capitalism research has shown that labor markets in LMEs are less regulated

than in non-LMEs, and trade unions are much smaller, weaker, and fragmented in the

former too (Thelen 2001). This has often given raise to concerns about flexibility in heavily

regulated and/or unionized labor markets. Yet, more “rigid” labor markets have the

advantage of providing buffers for workers in tradable sectors from the economic

pressures of globalization. 2 Equally important, these same industrial relations systems in

non-LMEs even help to better protect workers in non-tradable sectors. In other words,

these industrial relations systems tend to dampen the shock and burden of globalization

across society. For example, Carre and Tilly (2017) demonstrate that retail workers have

better pay and working conditions in a number of non-LMEs than they do in liberal market

America. We derive the following proposition from this discussion:

Proposition 3a: The higher the level of unionization and/or labor market regulation, the more non-

university-educated workers will be protected from competition with developing economies’ workers,

thereby reducing the likelihood of backlash.

2
Even non-LMEs that have recently liberalized their labor market institutions, still may provide higher
levels of buffering than LMEs. Thus, some non-LMEs have been able to create new flexicurity systems
where workers’ livelihoods are still protected but employment is flexible (e.g. Denmark).

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The non-LME labor market institutions described above do not only directly affect

workers by guaranteeing a certain level of income and social security, but also by

constraining firm’s strategic choices. There is therefore also an indirect, firm-level, channel

through which labor market institutions affect the likelihood of a backlash. Indeed, strong

unions and labor market regulations constrain companies’ strategic decisions regarding

labor market issues, such as mass layoffs and redundancies, because such actions either

cannot be taken in non-LMEs or they incur very high costs, such as paying the laid-off

workers higher portions of their salary for longer periods of time than in LMEs (Gospel

and Pendleton 2003). These stronger constraints make it therefore more difficult for firms in

non-LMEs to take advantage of the global economy by re-locating operations to low- wage

countries. These constraints may have negative impacts on firm profitability in the short-

run because they incur higher restructuring costs and/or labor costs, but essentially push

firms in non-LMEs to seek out viable upgrading strategies since pursuing labor arbitrage

strategies is either too costly in terms of pay-outs to laid-off workers and/or virtually

impossible due to rigid labor regulations in some non-LMEs. These strong industrial

relations and labor regulation institutional pressures on firms in non-LMEs thus provide

non-university-educated workers in these countries with greater protection from negative

employment impacts from globalization than exist in LMEs. Therefore, we formulate the

following firm-level proposition:

Proposition 3b: The higher the level of unionization and/or labor market regulation, the lower the

likelihood that firms can take advantage of the opportunities of globalization via labor arbitrage strategies

and therefore the lower the likelihood of backlash.

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Financial systems-cum-corporate governance

The comparative capitalism literature further distinguishes institutions that shape the ways

in which corporations are governed and financed. In particular, a long line of studies has

emphasized the difference between equity- and banked-based financial systems (cf

Zysman 1983).

LMEs tend to be equity finance-based systems where banks do not enter into long-

term relationships with client firms. In contrast, non-LMEs generally have less developed

equity and bond markets but have strong banking sectors that provide long-term finance to

non- financial companies. The dominant stream of comparative corporate governance

research emphasizes the advantages of stock-market-based financial system over bank-

based ones for firm growth (Beck et al., 2000; La Porta et al. 2008; see Armour et al., 2009

for a critical view). The key advantage of the equity finance-based system is considered to

be the fact that it pools large amounts of capital through small investments by

households and institutions and allows firms to minimize their capital costs by

maximizing their share prices (Beck et al., 2000). Moreover, equity-market based systems

generally have deeper venture capital markets, allowing start-up companies to easily access

finance (Armour & Cumming, 2006).

Non-LMEs, on the other hand, feature a wide variety of institutional arrangements

whereby relationships between banks and firms are long-lasting. Thus, the time horizons

for return on investment can be elongated (patient capital) (Deeg et al., 2016). Also,

personal, long-term ties lower the cost of capital due to better (insider) information and

the possibility of relational monitoring by banks of their industrial clients (Khan 2000).

The differences in corporate governance and finance systems also have important

implications for corporate control and firm strategy. As a result of their reliance on equity

markets, LMEs tend to be characterized by minority shareholder-oriented corporate

governance systems where various legal mechanisms enhance managerial accountability

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towards shareholders (Fainshmidt et al., 2016; Hall & Soskice, 2001; Weimer & Pape, 1999;

Shleifer & Vishny, 1997). Moreover, the absence of long-term patient capital providers in

LMEs makes ownership structures more fluid and also exposes firms to the threat of

hostile takeover. Indeed, in LMEs, firms themselves can become commodities in the so-

called ‘market for corporate control,’ which is seen as a key disciplinary corporate

governance mechanism that guarantees that managers focus on maximizing shareholder

value (see the classical statements by Manne, 1965; Jensen & Ruback, 1983). Non-LME

corporate governance systems generally lack such mechanisms to increase shareholder

power. To the contrary, long-term bank finance and the existence of large, patient

blockholders have made external minority shareholder interests a secondary concern for

non-LME managers.

These differences in stakeholder power have implications for firm strategy vis-à-vis

workers. Institutionally reinforced capital market pressures incentivize LME firms often to

use layoffs as a first measure in a crisis to reduce costs, but keep up dividend payments

(Gospel & Pendleton, 2003). Conversely, patient capital allows firms in a bank-based

system to retain their workforce during times of crisis, sacrificing dividends and financial

performance instead (Deeg et al., 2016).

This discussion leads us to the following propositions:

Proposition 4a: The more bank-based the economy, the less power external shareholders can exert and the

more influence non-university-educated workers will exert on firms to protect domestic jobs and wages.

Thus, the more bank-based the economy is the lower the likelihood of backlash.

Proposition 4b: The more bank-based economy, the less power external shareholders can exert to

pressure firms to adopt labor arbitrage strategies and thus the lower the likelihood of backlash.

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Welfare systems

The comparative capitalism literature, as utilized in management, has paid insufficient

attention to state welfare systems. Yet, work preceding the Varieties of Capitalism approach

delineated three explicit welfare regimes in advanced economies; namely, the liberal

variant of the Anglosphere, the social-democratic version in Scandinavia, and a Christian-

democratic one in Germany and Western European countries (Esping-Andersen 1990).

These systems are critical for understanding how some economies have coped better than

others in providing for the losers from global economic integration.

Kobrin cites Dobbs et al (2016) to the effect that 65-70% of households across twenty-

five advanced economies had real market incomes that were flat or had fallen over 2005-

2014. While this is an undisputed reality, the welfare state in many of these countries goes

far to supplement these market incomes, making falling or flat real incomes (relatively)

less of a problem for the poorest strata of society in some countries than in others. Thus,

those non-university-educated workers (and ex-workers) bearing the cost of adjusting

to the globalization of labor markets in which they are forced to compete with lower

cost workers in developing economies are buffered from these costs of adjustment to the

extent that they live in states with more generous welfare systems (Anderson and

Pontusson, 2007). More generous welfare systems also provide better living conditions for

retirees and thereby lower the level of economic anxiety for retirees and soon-to-retire

workers (Estes and Philippson, 2002).

We therefore propose the following:

Proposition 5: The larger the welfare state, the more individuals are protected from bearing the costs of

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globalization, and the lower the likelihood of backlash.

State intervention

The state fulfills a variety of roles in organizing finance, labor, and even business

associations in ways that go beyond the typical comparative capitalism assumptions of

voluntary private organization with only a subsidiary role for the helping hand of

government (Sallai & Schnyder, 2019). Both in East Asia (Wade, 1990) and in certain

Western European countries (e.g. France and Italy) (Zysman, 1983), there have been

traditions of proactive state intervention in the economy. For our purpose, state intervention

in the global economy takes two main forms, trade policy and industrial policy.

In terms of trade policy, Kim (2010) argues that protection of agriculture via high

tariffs in advanced East Asian economies (Japan, Korea, and Taiwan) should be viewed as a

form of welfare policy for a disadvantaged group, farmers, and one that has widespread

legitimacy within East Asian societies. Similarly, Taiwan, despite being a wealthy economy,

was able to negotiate to retain a large tariff on automobiles (one higher than those in place in

Japan, the EU and North America) under WTO rules. While this protectionist barrier has not

allowed Taiwan to become an auto manufacturing powerhouse due to its small domestic

market (cf. Cunningham et al., 2005), it did protect three percent of Taiwan’s manufacturing

workforce from being displaced by trade as would have happened in LMEs with more liberal

trade policies. Critically, state intervention to protect against the costs of trade is

considered entirely legitimate by Taiwanese firms and the wider public. This consensus

has limited Taiwan’s embrace of institutionalized globalization through trade agreements.

Taiwan has often violated its WTO commitments without any substantial political fallout

at home. Taiwan’s ideological acceptance of state intervention to block many of the costs

of free trade is one shared with its wealthy Northeast Asian neighbors, Korea and Japan

(Fuller 2014).
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In sum, more interventionist states may employ more protectionist barriers

(including formal tariffs, non-tariff barriers, and regulations), which may affect economic

growth, but can also serve to shield certain sectors from competitive pressures. These

interventions have also strengthened many of the buffers that cushion the blows of

globalization.

Thus, we propose the following proposition about the impact of state intervention

through trade policy:

Proposition 6a: The more the state intervenes in the economy via trade protection, the greater the

likelihood that non-university-educated workers will be less exposed to competition from developing

countries, thus reducing the likelihood of backlash.

As in other institutional areas, state intervention also has a more indirect effect on

backlash via its impact on firm strategies. Firstly, protectionist trade policies reduce

competitive pressures on those firms who would otherwise have to compete with cheaper

imported goods. This reduces cost pressure on the firm, which in turn reduces their

incentives to relocate to low-wage developing economies. Secondly, governments also

intervene in the economy through industrial policy. These interventions have served to

encourage home country firms to enter new sectors and place the core activities of the

new ventures at home. In Taiwan, for example, state influence over the formal banking

sector still looms large and this state intervention has been directed at creating patient

capital for strategic sectors that Taiwan’s relatively weak business groups and bank-

firm linkages cannot provide (Fuller, 2007; Wong, 2011). In Korea, the state has provided

policy and financing for Korean chaebol to enter new sectors, such as green energy, while

centering the high value-added activities of these new sectors in Korea (Thurbon, 2016).

These industrial polices via creating high-value activities at home have helped deter de-

industrialization and provided profound socio-economic benefits for Korean workers (Kim

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and Kwon, 2017), making them less fearful of globalization. Based on these examples, we

propose:

Proposition 6b: The more the state intervenes in the economy via trade protection or industrial policy,

the greater the likelihood that firms will place their activities and concomitant employment inside the

economy, thus reducing the likelihood of backlash.

Sectoral characteristics

There are five ideal-typical value chain governance structures that typify the organization

of modern industries: hierarchical, captive, relational, modular and market value chains

(Gereffi et al. 2005). Non-LME firms are more likely to eschew using modular and market

value chains, which are organized on the basis of weak ties and no ties respectively.

Moreover, non- LME firms have greater institutional support to foster and sustain

industrial organizations relying on either stronger ties (captive and relational value chains)

or greater reliance on in-house activities (hierarchical value chains). Institutionally, LME

firms are more likely to embrace modular and market value chains. This difference in fit

with particular value chains is due to all of the comparative capitalist institutional spheres

except welfare systems and state intervention. LMEs favor modular and market value

chains because their lack of patient capital and quarterly demands for positive corporate

financial performance, educational and training systems favoring general skills, weak

inter-firm ties and cooperation, and weak unions either push them or allow them to

outsource value chain segments in which they underperform (Lane 2008; Fuller et al.

2003). Modular and market value chain governance in turn makes it much easier for firms

to engage in labor arbitrage because in these value chains there is extremely low

dependency on the specific capabilities of existing suppliers, which are essentially

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interchangeable while incurring minimal costs (Gereffi et al. 2005; Gereffi 2018). Thus,

we propose:

Proposition 7a: The less exposed non-university-educated workers are to modular and market

value chain sectors, the less likely they will be displaced by labor arbitrage strategies, and thus the

lower likelihood of backlash.

Proposition 7b: The less engaged firms are in sectors characterized by modular and market value

chain governance structures, the more costly it will be for such firms to use labor arbitrage

strategies and thus the lower likelihood of backlash.

Complementarities and the aggregate effects of national institutions

While we have so far focused on the implications of institutional arrangements in each

one of the institutional spheres, a key argument of the comparative capitalism literature is

that institutions do not just work in isolation but may deploy their effects in combination.

Furthermore, the institutional complementarities argument emphasizes that the combined

effects of these complimentary institutions are greater than the sum of their parts

(Amable, 2016; Crouch, 2005; Deeg and Jackson, 2008; Hall and Soskice, 2001). It is

therefore important to also consider the impact that the above-mentioned institutional

arrangements have in the aggregate because when working in concert they amplify the

individual effects of each institution.

Thus, some economies organizationally coalesce around LME-style institutions

with the result that these institutions' mutual reinforcement produces a stronger

institutional push to pursue the labor arbitrage route than the simple addition of one or

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more of these institutional effects would produce. However, in institutional

configurations where there is sand thrown into the LME gearbox because some

institutions are not mutually reinforcing with other LME-like institutions, the result is

something quite far from LMEs' strong push for firms to pursue labor arbitrage. To

provide examples, Japan has adopted some LME-style reforms, but the system in other

ways works at cross-purposes to LME-style institutions (e.g. the continuation of lifetime

employment, strong/rigid inter-firm supplier networks) so the economy has not moved

over to the labor arbitrage-centric equilibrium of LMEs (Vogel, 2018). Similarly,

Taiwan has weak labor protections and strong equity markets that encourage labor

arbitrage, and yet due to government intervention and informal inter-firm networks, it

too has not coalesced around the heightened push for labor arbitrage strategies that

characterize LMEs (Fuller, 2014).

Correspondingly, there are mutually reinforcing institutions at the other end of the

comparative capitalism spectrum (what we term the pure non-LMEs). Here various

institutional spheres come together to create a more than additive push to

upgrade. Germany's Mittelstand firms are not explained simply by labor protections or

skills formation or financial arrangements, but how the combination of these institutions

leads to heightened incentives and capabilities to upgrade (De Massis et al., 2018).

Therefore, we propose:

Proposition 8a: The further an economy’s institutions are from the ideal-typical LME model of

institutions, the less non-university-educated workers will be exposed to competing with labor from

developing economies, and thus the lower the likelihood of backlash.

At the firm level, LME institutions imply that companies are more exposed to competition,

both domestic and international. Yet, they are also less constrained in their strategic choices,
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which allow them to take advantage of the opportunities afforded by globalization more

freely than firms in non-LMEs. Furthermore, various institutional spheres combine to

incentivize firms to pursue labor arbitrage strategy of relying on cheap, low-skilled workers

in other parts of the globe. Thus, financial market pressures and the threat of hostile

takeovers constantly force firms to reduce costs. Moreover, non-university-educated

workers in LMEs are often not a valuable resource that the firm invested in, but a

replaceable cost that needs to be minimized. The institutional complementarities of non-

LMEs combine to produce the exact opposite effect: Not only are firms less exposed to

pressure to increase profitability and reduce costs due to their embedding in long-term,

personal relationship both with capital providers and other firms, but they also rely on a

higher-skilled workforce, which they invest in and therefore often consider as a valuable asset

that cannot be easily replaced. We therefore propose:

Proposition 8b: The further an economy’s institutions are from the ideal-typical LME model of

institutions, the less companies will be pressured/incentivized to pursue labor arbitrage strategies, and thus

the lower the likelihood of backlash against globalization.

The six institutional features directly influence the level of backlash within a given

advanced economy. They also indirectly affect the level of backlash by influencing value

chain specialization and by sometimes enhancing the effects of other institutional spheres

through institutional complementarity in those economies coalescing at the two ends of

the spectrum of comparative capitalism as LMEs or unadulterated non-LMEs. The value

chain specialization and LME institutional complementarity (or its polar opposite) in turn

directly affect the level of backlash. Finally, the higher the level of backlash ceteris

paribus the higher the likelihood of policy reversal. The proposed causal pathways are

shown in Figure 1 below.

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<insert Figure 1>

Dealing with Backlash: Firms’ Strategies

When faced with populist backlash in their country of origin that threatens the liberal

market order and the trade ties that the country has with its partners, MNCs are likely to

strategically adapt to these new circumstances. In this section we thus shift the focus of

the analysis to firm-level strategic choices (post-backlash) - while the previous section

focused on the country-level likelihood of firms pursuing backlash-prone strategies

(namely, labor arbitrage).

To be sure, the options available to MNCs facing backlash are constrained by the

same institutions that shaped their backlash-inducing strategic choices in the first place.

However, the strategic options selected below fit within an LME context associated with

a higher likelihood of backlash. Indeed, we do believe, like most scholars in the

comparative capitalism literature, that within any given institutional framework, firms

have some room for maneuver. In addition, we assume that the occurrence of anti-

globalization backlash will provide firms with incentives to explore the opportunities to

buckle the institutional constraints they are facing.

We assume that top managers of MNCs in the face of backlash increasingly accept

the reality of the costs of globalization in terms of job displacement and income inequality

(Kobrin, 2017). Based on this assumption, we focus on three types of strategic options

available to MNCs, each of which is tied to a different source of backlash: the strategic

choice between off-shoring and re-shoring, the strategic choices around firm capabilities,

and the more practitioner-oriented ADDING framework of Ghemawat. Such strategic

responses can either aim at making the firm resilient to backlash by increasing its

legitimacy (Stevens et al., 2016), or can seek to address the actual “macro” sources of

backlash (such as the education and training system). In the former case, firms will adapt
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their market strategy to eschew practices that may lead to backlash and public blame of

individual firms. In the latter case, firms may resort to corporate political strategy to either

block backlash-induced policy reversal, or to lobby policy makers to change institutions

to make backlash-resilient strategies viable (cf. Mellahi et al., 2016).

Re-shoring

As a response to anti-globalization backlash, MNCs may be encouraged to re-shore their

value chain or production processes. Re-shoring may be defined as the relocation of

productive activities to a firm’s home country. Given the negative impact borne by non-

university-educated workers in LMEs, re-locating operations to an MNC’s home country

may represent a suitable strategic response for firms facing backlash. Yet no study has, to

our knowledge, explored the causal links between backlash against globalization and re-

shoring strategies.

The usual factors for re-shoring, explored in a growing number of studies within

the management and business literature, include the erosion of cost advantages of

emerging economies, the underestimation of the full costs of offshoring, the need for

production to be brought closer to home markets and to research and development

activities, the protection of intellectual property, and the need to reduce supply risk

(Ancarani et al., 2019; De Backer et al., 2016).

The expectation raised by re-shoring is that it may help re-create jobs in home

countries. In the early 2010s, several studies by consulting firms, such as the Boston

Consulting Group for the US (in 2011 and 2013) or PricewaterhouseCoopers for the UK

(in 2014) estimated large gains for home economies in terms of job creations (see De

Backer et al., 2016). As such, managers may consider it a viable option to maintain or

regain legitimacy in a situation of anti-globalization backlash in the home country; Or to

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avoid the potentially costly consequences of a backlash-induced policy reversal on their

foreign operations.

From the point of view of a multinational company, the main backlash-related

rationale for the decision to re-shore part of its offshore operations to its home country

would likely lie in (a) the higher costs generated by backlash-induced policy reversal (for

instance, tariffs on key supplies or more stringent tax regulations on revenue generated

above) that may exceed the benefits of offshoring and (b) the higher uncertainty linked to

global operations, thus increasing the risks associated with global supply chains.

Indeed, the existing literature on re-shoring shows the prevalence of cost

motivations behind the choice to relocate (see Fratocchi et al., 2015). Therefore, we would

expect that the potential costs added by backlash to the foreign operations of multinationals

may be a determining factor in post-backlash re-shoring. In this regard, the impact of

backlash on firms’ strategic choices will be mediated by the government’s policy reaction

to the backlash. Backlash against globalization may provoke a mixed “sticks and carrots”

policy response by the government: the higher costs provoked by new tariffs and

regulatory restrictions on foreign operations (policy reversal) may be accompanied by new

tax- and regulatory incentives for multinationals to relocate part of their operations to their

home country. For instance, the current US administration recently adopted, on top of new

tariffs, a new tax deduction for foreign-derived intangible income to encourage US

multinationals to export from the US rather than keep their production offshore (Davison

and Gottlieb, 2019).

In sum, re-shoring might provide a viable strategic response to backlash by

alleviating the pressures on home country labor markets. This is especially the case for

non-university educated workers - who are, in LMEs more exposed to world market

fluctuations and thus more prone to backlash. Re-shoring may also imbue individual

MNCs with higher public legitimacy in the face of backlash, thus potentially shielding
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them from the negative consequences of such backlash on their operations. Finally, re-

shoring may also lead MNCs to invest in longer-term, more stable inter-company networks

and relational value chains at home, which are another important factor influencing the

likelihood of backlash (see Propositions 2a, 2b, 7a and 7b in the previous section), because

these types of networked production are more viable in advanced economies in the face of

low wage competition from developing countries.

Augmenting capabilities versus exploiting capabilities

Beyond rethinking the question of where to locate production, a second strategic choice

for MNCs to revisit in the face of anti-global backlash in their home country is how to

produce i.e. what basic strategy and business model to adopt in different markets as part

of the firm’s global strategy. Scholars have long recognized that capability-exploiting

(Dunning, 2001; Makino et al., 2002) and capability-augmenting strategies are both

motivations for firms to operate abroad (Bartlett and Ghoshal, 1989; Dunning, 2001;

Kogut and Zander, 1993).

One strategic shift MNEs may undertake in face of backlash is to increasingly

move from capability exploitation strategies to capability augmenting strategies. Indeed,

while in the former case the focus is on using home-grown capabilities in order to gain

competitive advantage in the foreign market, capability augmenting strategies are aimed

at complementing home-country capabilities and reshape the domestic market (Lessard,

Lucea, & Vives, 2013). To be sure, such capability augmenting strategies do not

necessarily imply that they make workers better off in the home market. However, contrary

to capability exploiting strategies, they are more likely to change the company’s global

strategy in a way that provides home country workers with new opportunities. Thus, new

technological capabilities acquired abroad can lead to the development of new products

and even entirely new markets that provide more jobs in the home country. Lessard and
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his colleagues (2013) argue that Walmart’s capability enhancing strategy led it to discover

the success of small stores in its Latin American markets. As a result, it decided to

introduce similar Walmart-express stores in its home market the US to serve rural

communities. This provided low-skilled workers in the US with new opportunities and

employment that a capability exploitation strategy focused on foreign markets would not

provide.

More generally, as shown in the previous section, labor arbitrage strategies

pursued by MNCs, especially LME-based MNCs, are a primary source for anti-

globalization backlash. While labor arbitrage and capability exploitation are not

synonymous, the shift away from capability exploitation to capability augmentation may

offset the negative effects on non-university educated workers in MNCs’ home country of

internationalizing strategies based on labor arbitrage.

Capability-augmenting strategies may also lead MNCs – even LME-based MNCs

– to shed modular and market value chain governance structures (a major source of

backlash - see Propositions 7a and 7b above), given the higher premium on the capabilities

of suppliers and stakeholders generated by such strategies.

The ADDING framework and backlash

The institutional causes of anti-globalization also have implications for practical

applications of global strategy and how managers would react to such a shift in popular

attitudes. Here we analyze possible managerial reactions by applying Ghemawat’s

practitioner-focused ADDING framework, which stands for adding volume/growth,

decreasing costs, differentiating, improving industry attractiveness, normalizing risk and

generating knowledge (and other capabilities) (Ghemawat, 2007). Ghemawat argues that

these six strategies are the primary global strategies for MNCs to add value.

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In the face of backlash, the key problematic global strategy is decreasing costs,

because in the current era of globalization many of the opportunities to decrease cost

involve going the labor arbitrage route that further exacerbates backlash at home.

However, increasing industry attractiveness can also be problematic if the industry

attractiveness (improved bargaining power) is done in a way to undercut domestic

stakeholders thereby undermining these stakeholders support for the gains of

globalization. Other strategies appear to run much less of a political risk of exacerbating

backlash, such as adding volume/growth, generating knowledge, and differentiation,

because these strategies can be done without negatively impacting the firm’s domestic

workforce. Indeed, these strategies are more likely to be top-line enhancing as well as

bottom line-enhancing and can be executed without a ruthless quest for labor arbitrage.

Finally, normalizing risk itself demands that the firm try to pursue strategies that do not

inflame anti-globalization further.

Corporate political strategy

So far, we have described the market strategies available to multinational companies faced

with backlash, taking for granted that a backlash would have negative consequences for

their operations or profits mainly because backlash will translate into actual policy

reversal. However, the latter does not necessarily ensue. Indeed, while a backlash against

globalization might directly harm a firm’s interests – through, for instance, damaging its

brand and provoking a drop in the firm’s share price – its negative consequences are often

mediated by political actions, as mentioned above. When no political action follows a

backlash, the latter might have limited effects on the firm’s operations and profits. Higher

tariffs or regulatory restrictions are the typical policy outcomes of a backlash - made

possible once the backlash has been translated from the ballot box into concrete policy

reversals.
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For multinational companies (and firms in general), that distinction matters,

because once a backlash occurs, firms may still be able to prevent such backlash from

turning into policy reversal. Firms can do this through non-market or political strategies,

which have now been widely acknowledged by the management and strategy literatures

(Baron, 1995; Shaffer, 1995; Hillman et al., 2004; Hadani, 2016; Mellahi et al. 2016). The

core idea behind non-market or corporate political strategies is simple: Confronted with

widespread uncertainty, firms are induced to seek to shape their environment in a way that

is more favorable to their interests by weighing in on the policies and regulations that (at

least in part) constitute that environment (Pfeffer and Salancik, 1978; Hillman et al., 2009).

By doing so, firms may be able to improve both their performance and their public

legitimacy (Banerjee et al., 2018). Various instruments are available to that end: engaging

in lobbying, contributing to political campaign finance (especially, in the US, through

political action committees), hiring former regulators or policy-makers, participating in

trade associations (Hadani, 2016). These instruments are used to obtain political access

and influence (Hillman and Hitt, 1999), which are then levered to the firm’s benefits

(Oliver and Holzinger, 2008).

Multinationals are especially susceptible to engage in non-market strategies - given

their large size and their exposure to foreign competition, two of the key drivers of

corporate political strategies identified in the literature (Lux et al., 2011). However, most

of the literature on multinationals’ corporate political activity focuses on MNCs’

interaction with host countries (for instance, Hillman, 2003; Banerjee et al., 2008), while

home-country institutional determinants of CPS have seen less attention (White et al.,

2018; Schnyder & Sallai, 2019). To our knowledge, to date no study of backlash-induced

CPS in the home country has been conducted. Yet, it is well-established that firms can use

defensive or pro-active influence strategies to seek legislative changes that protect their

interests or create new opportunities (Oliver & Holzinger, 2008). From this perspective,

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individual MNCs or groups of MNCs may be effective in stopping or hindering the policy

consequences of backlash through non-market strategies as they are in other areas

(Culpepper, 2010). Faced with the possibility of new tariffs or a trade war, both instances

of what we call policy reversal following a backlash against globalization, firms may

undertake targeted lobbying. As an illustration of this strategic response to backlash, one

could mention the sharp increase in “pro-trade” corporate lobbying in the US in the fall of

2018 (Niquette, 2018).

Discussion and Conclusion

In this paper we argued that national institutions affect the likelihood of backlash against

globalization and policy reversals in a given country. Institutions by constraining or

encouraging firms’ propensity to adopt a labor arbitrage strategy in turn decrease or

increase the likelihood of a backlash and policy reversals in as given country.

Our framework opens up venues for future research. This framework obviously

needs refinement and empirical validation. In particular, the political systems in these

advanced economies are likely to add a further mediating factor to both the likelihood of

backlash and policy reversal (Culpepper, 2010; Lijphart, 1999). For example, one could

argue that Trump’s election thus far has not led to much true reversal of pro-globalization

policies other than the failure to enact further globalization-deepening policies (e.g. TPP).

However, the executive branch of the US government has many levers over trade policies

that the president can wield without permission from the legislative branch. Thus, it is likely

going forward that Trump will use presidential power to enact some reversals of pro-

globalization policies, such as the “trade war” with China and the multiple trade disputes with

erstwhile allies.

However, we hold the propositions in this paper to be valid first steps towards an

understanding of the complex, multi-layered role played by institutions in causing significant

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variation in the likelihood, the extent, and the consequences of a backlash against

globalization – and, consequently, in the uncertainties now faced by multinational companies

across the advanced economies. Furthermore, future conceptual and empirical research

should explore the motivations and institutional factors behind backlash in developing

countries as well as drivers of non-economically driven backlash to globalization

everywhere. In particular, the role of regional trade institutions, such as the ASEAN, EU,

Mercosur and NAFTA, in mediating the influence of domestic institutions spurring or

constraining backlash and policy reversal is a critical topic to explore in future research.

Also, by incorporating developing countries, the analysis could broaden consideration to

the different types of capitalist systems, such as hierarchical market economies (Schneider,

2012), and systems characterized with extensive cross-border institutional bricolage

(Fuller, 2016) commonly found in the developing world.

Our paper’s main managerial implication centers on how firms in LMEs can try to

pursue politically sustainable globalization because our work suggests that the current

manner in which many firms in LMEs pursue globalization enhances risks of backlash and

ultimately policy reversal that would eventually constrain firms’ freedom to reap the

benefits of globalization. Beyond the firm-level strategic decisions laid out in the previous

section, what else can individual firms, even large and powerful ones, do to make their

engagement with globalization more politically sustainable? Thomas Kochan (2017)

provides a partial answer in documenting high performance American workplaces with

significant engagement by firms with their American workforces. However, he also

acknowledges that such an upgrading strategy in the US is made much more difficult by the

lack of the type of supportive institutions for such engagement that are commonly found

in non-LMEs. Thus, a further implication is that firms could engage in political strategies

that seek to build such institutions that make upgrading strategies more feasible (less costly)

for individual firms. There is historical precedent for this type of endeavor because many

of the training and welfare institutions within continental Europe were driven in large part
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by demands and needs of capitalist entrepreneurs (Estevez-Abe et al., 2001). Our analysis

thus highlights a critical collective action problem facing firms in LMEs. Individually, firms

in LMEs have incentives to pursue a labor arbitrage strategy, but collectively firms would

suffer the costs of such strategies via anti-globalization policy reversal if many firms were to

pursue labor arbitrage.

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Table 1 Comparative Capitalism Classification of Wealthy Countries

Country/ Hall and Schneider Fainschmidt, Jackson Overall CC Additional

References
Economy Soskice and Judge, and Witt Evaluation:
(primarily for
2001* Paunescu Aguilera and 2016**** cases with little
LME versus non-LME coverage across
2012** Smith 2016*** Hall & Soskice;
Schneider &
Paunescu;
Fainschmidt et
al; Jackson &
Witt)
Austria CME Non-LME, NA CME Non-LME Höpner, 2007
Non- LME,
Australia LME LME, LME, LME NA LME LME
Belgium CME Non-LME, NA CME-lite Non-LME Höpner, 2007
Non- LME,
Canada LME LME, LME, LME NA LME LME
Denmark CME Non-LME, NA LME-lite Hybrid Ornston 2012;
LME, LME Campbell &
Pedersen,
Finland CME Non-LME, NA LME Hybrid Ornston 2012
LME, LME
France MME CME, CME, CME NA LME Non-LME Culpepper
2010;
Schmidt

2003;

Germany CME Non-LME, NA CME Non-LME

Non- LME,
Ireland LME LME, LME, LME NA LME LME Crouch 2005

Israel NA NA Emergent LME NA Hybrid Breznitz 2007

Italy MME Non-LME, NA CME-lite Non-LME

Non- LME,
Japan CME Hybrid, NA LME-lite Hybrid Culpepper
Hybrid, Hybrid 2010;
Samuels

1987;

Tiberghien
2007; Vogel
Netherlands CME Non-LME, NA LME-lite Hybrid Culpepper
LME, LME 2010
Norway CME Hybrid, NA CME-lite Non-LME Höpner, 2007
Hybrid, Hybrid
New Zealand LME LME, LME, LME NA LME LME Höpner, 2007

Singapore NA NA Emergent LME NA Hybrid Wong (2011)

South Korea NA NA, Hybrid, Hierarchically LME Kim et al. 2017;

Hybrid
Hybrid Kim 2010;
Coordinated
Thurbon 2016;
Tiberghien
2007; Whitley

Spain MME Non-LME, NA LME Hybrid

Non- LME, LME
Sweden CME Non-LME, NA LME-lite Hybrid Schnyder 2012;
LME, LME Ornston 2012
Switzerland CME LME, LME, LME NA LME-lite Trampusch &
Hybrid Mach, 2011;

Höpner, 2007
Taiwan NA NA Hierarchically NA Hybrid Breznitz 2007;
Coordinated Fuller 2007;

Wade 2004;
UK LME LME, LME, LME NA LME LME
USA LME LME, LME, LME NA LME LME
*Hall and Soskice (2001: p. 21) tentatively argue that certain Mediterranean countries share their own coherent type of capitalism, which they refer to as Mediterranean Market
Economies(MMEs).

**Based on Schneider and Paunescu’s Table 1 (p. 740) cluster analysis, the column takes the results for 1990, 1999 and 2005 and combines the state-dominated and CME categories as
constituting the Non-LME category in the column, the hybrid category from the original table remains the hybrid category and the LME and LME-like categories are listed as LMEs. Each
country entry has three separate categories in chronological order for 1990, 1999 and 2005.

***Fainschmidt et al. (2016) argue that Hierarchically Coordinated economies feature a modicum of labor coordination but substantial indirect state intervention via their developmental
states so we consider the Hierarchically Coordinated category a form of non-LMEs. We left their category of Emergent LME as is.

Note: The calculations of GDP PPP per capita were made for 2007 and 2016 using World Bank data as well as data from Taiwan’s statistical agency for
Taiwan. Two years were used because PPP calculations can vary widely, especially over time. Countries with populations of less than one million
people were also excluded. The economic calculations led to the inclusion of important, but all too often ignored East Asian cases, such as Singapore and
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Taiwan.

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Table 2 Types of Capitalism and Institutional Spheres

Propositions Liberal Market Economies Non-LMEs

(LMEs)
Proposition 1 Training/education Low investment in non- High investment in non-
university students university educated

Proposition 2 Inter-company Short-term, unstable Long-term, stable

relations
Proposition 3 Weak unions/labor market Strong unions/labor market
regulation regulations
Unions/labor market regulation
Proposition 4 Banking finance Small role Large role

Proposition 5 Welfare state Small in coverage and stingy Generous and extensive

Proposition 6 State intervention Limited Active

Proposition 7 Sectoral Focus on market and modular Focus on relational, captive and
specialization value chains hierarchical value chains

Proposition 8 Overall Conform generally to the above Conform generally to above

categories: Australia, Canada, categories: Austria,
Ireland, New Zealand, US and
UK Belgium, France, Germany,
Italy and Norway
Note: All other economies (11 economies constituting a plurality of the economies under study) had such a
mix of policies that they did not generally conform to the LME or non-LME categories as they used a
mix of market coordination/weak buffering of the economic impact of short-term competition in some areas but
not in others.

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Figure 1: Causal Chain of Anti-Globalization Backlash and Policy Reversal

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