Received: 14 December 2017 Revised: 30 September 2019 Accepted: 2 October 2019

DOI: 10.1002/gsj.1369

SPECIAL ISSUE ARTICLE

Manufacturing discontent: National

institutions, multinational firm strategies, and
anti-globalization backlash in advanced
economies

Olivier Butzbach1 | Douglas B. Fuller2 | Gerhard Schnyder3

1
Department of Political Science, University of Campania “Luigi Vanvitelli”, Caserta (CE), Italy
2
Department of Asian and International Studies, City University of Hong Kong, Kowloon Tong, Hong Kong
3
Institute of International Management, Loughborough University, London, UK

Correspondence
Douglas B. Fuller, Department of Asian
and International Studies, City University
of Hong Kong, 83 Tat Chee Avenue,
Kowloon Tong, Hong Kong.
Email: douglas.b.fuller@gmail.com
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 article, we argue
that MNCs are both “culprits” and “victims” of back-
lash against globalization. Building on the comparative
capitalism literature, we argue that national institutions
influence the likelihood of a backlash by either encour-
aging 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 dis-
cuss 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 phenomenon with firm-level strategies.

Global Strategy Journal. 2020;10:67–93. wileyonlinelibrary.com/journal/gsj © 2019 Strategic Management Society 67

68 BUTZBACH ET AL.

In this article, we draw on comparative capitalism anal-

ysis 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 globali-
zation pressures, influencing, in turn, the electorate's
attitude toward globalization. We also present and dis-
cuss the strategic options available to firms facing
backlash.

KEYWORDS
comparative capitalism, globalization, institutions, multinational
corporations (MNCs), varieties of capitalism

1 | 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 toward 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 (Cuervo-Cazurra, Mudambi, &
Pedersen, 2017; Kobrin, 2017; Micklethwait & Wooldridge, 2001), but recent years have
witnessed much more dramatic electoral expressions of public anger at globalization, princi-
pally 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 vic-
tories 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 poten-
tially 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 capi-
talist perspective (Fainshmidt, Judge, Aguilera, & Smith, 2016; Hall & Soskice, 2001; Jackson &
Deeg, 2008; Saka-Helmhout, Deeg, & Greenwood, 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 back-
lash (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
BUTZBACH ET AL. 69

differences to explain the variation of anti-globalization backlash across advanced economies.

We propose that those countries hewing closely to liberal market economy (LME) configura-
tions, 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 greater amounts of backlash.
Furthermore, 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 impli-
cations of anti-globalization. In particular, we theorize the link between the institutional envi-
ronment, firm-level strategies, and anti-globalization backlash, allowing us to understand cross-
national variation in the strategic antecedents and consequences of backlash.
We focus on forms of discontent that explicitly target/blame the economic aspects of globali-
zation. 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 article, we mean economically driven anti-globalization backlash.

2 | F RAM EWOR K A ND C ONCEPTUAL BAC KGR OUND

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 provide precise definitions of the types of capitalism under study and which economies
conform to which type of capitalism.

2.1 | 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 (Milanovic, 2016; Rodrik, 2011, 2017), we argue
that economic globalization ceteris paribus has negatively affected the wages and/or employ-
ment 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 econo-
mies. 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 able to limit the general upward swing in inequality driven
by the relative wage losses of non-university-educated workers. Adopting a comparative capital-
ism approach, we posit that domestic institutions account for much of the variation in the nega-
tive 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.
70 BUTZBACH ET AL.

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, Dorn, & Hanson, 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 voting for Trump
(Autor, Dorn, Hanson, & Majlesi, 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, & Krouwei, 2017). We
therefore consider that this segment of the population is key to determining the likelihood of
backlash.

2.2 | 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 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 compet-
itive 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 profitability and/or firm sustainability 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 engage-
ment 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 article) 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.

2.3 | Extending and refining comparative capitalism approach

The foundational framework for much of the comparative capitalism literature has been the
Varieties of Capitalism (VoC) framework (Hall & Soskice, 2001; Soskice, 1999). VoC posits that
differences across four institutional spheres (education/training, inter-company relations,
industrial relations, and financial systems-cum-corporate governance) form non-random
BUTZBACH ET AL. 71

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 either 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 VoC 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 (Fainshmidt et al., 2016; Hotho, 2014;
Jackson & Deeg, 2008; Schneider, Schulze-Bentrop, & Paunescu, 2010; Witt & Jackson, 2016)
has typically used VoC as the main or at least partial foundation of its analysis. Here we will fol-
low suit while pointing out as others have done (e.g. Schneider & Paunescu, 2012) where our
analysis and VoC 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 VoC emphasizes are critical to all advanced econo-
mies. 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. Institu-
tional 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 nar-
rowly and instrumentally defined in the LME variety, as essentially 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 (Höpner, 2007; Weimer & Pape, 1999).
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 differ-
ential conceptions and priorities are reflected in the institutional setup of different types of capi-
talisms: 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 VoC literature, two aspects of
the economy that were given relatively short shrift in the VoC literature (and only partially
incorporated elsewhere in the comparative capitalism literature) are the role of the state inter-
vention in the economy and the state's social welfare systems. The latter especially looms much
larger than the relatively narrow role the VoC literature accorded it when we consider the issue
of reactions to and buffering from globalization. Thus, the next section will consider these six
72 BUTZBACH ET AL.

institutional domains and how they mediate firms' and individuals' reactions to the structural
challenges of globalization that Kobrin (2017) highlights. This allows us, in turn, to formulate
general propositions as to the impact national institutional arrangements may have on the like-
lihood 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 (Schneider & Paunescu, 2012; Witt & Jack-
son, 2016). 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 VoC model have pointed out (Allen, 2004; Crouch, 2005). Fur-
thermore, given that our model includes two institutional spheres not fully included in VoC,
the labeling of capitalist systems as CME-lite or LME-lite does not make much sense. We also
go beyond VoC 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 also can buffer workers and firms equally well.
For buffering workers from globalization and constraining firms from adopting labor arbi-
trage, 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 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 con-
straining 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 Witt and Jackson (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 econo-
mies. 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 Tur-
key for quite some time. The past comparative capitalist scholarship was concerned with study-
ing 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 his col-
leagues' (Woo, Lu, Sachs, & Chen, 2012) definition of advanced economies as those that have
T A B L E 1 Comparative capitalism classification of wealthy countries

Additional references
(primarily for cases
with little coverage
BUTZBACH ET AL.

Overall CC across Hall & Soskice;

Hall and Fainschmidt, Witt and evaluation: Schneider & Paunescu;
Country/ Soskice Judge, Aguilera, Jackson LME versus Fainschmidt et al.;
Economy (2001)a Schneider and Paunescu (2012)b and Smith (2016)c (2016) non-LME Jackson & Witt)
Austria CME Non-LME, non-LME, non-LME NA CME Non-LME Höpner, 2007
Australia LME LME, LME, LME NA LME LME
Belgium CME Non-LME, non-LME, non-LME NA CME-lite Non-LME Höpner, 2007
Canada LME LME, LME, LME NA LME LME
Denmark CME Non-LME, LME, LME NA LME-lite Hybrid Ornston, 2012; Campbell &
Pedersen, 2007
Finland CME Non-LME, LME, LME NA LME Hybrid Ornston, 2012
France MME CME, CME, CME NA LME Non-LME Culpepper, 2010; Schmidt,
2003; Tiberghien, 2007;
Zysman, 1983
Germany CME Non-LME, non-LME, non-LME NA CME 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, non-LME, hybrid NA CME-lite Non-LME
Japan CME Hybrid, hybrid, hybrid NA LME-lite Hybrid Culpepper, 2010; Samuels, 1987;
Tiberghien, 2007; Vogel, 2006, 2018;
Whitley, 1999; Zysman, 1983
Netherlands CME Non-LME, LME, LME NA LME-lite Hybrid Culpepper, 2010
Norway CME Hybrid, hybrid, hybrid NA CME-lite Non-LME Höpner, 2007
New Zealand LME LME, LME, LME NA LME LME Höpner, 2007
(Continues)
73
 74

T A B L E 1 (Continued)

Additional references
(primarily for cases
with little coverage
Overall CC across Hall & Soskice;
Hall and Fainschmidt, Witt and evaluation: Schneider & Paunescu;
Country/ Soskice Judge, Aguilera, Jackson LME versus Fainschmidt et al.;
Economy (2001)a Schneider and Paunescu (2012)b and Smith (2016)c (2016) non-LME Jackson & Witt)
Singapore NA NA Emergent LME NA Hybrid Wong (2011)
South Korea NA NA, hybrid, hybrid Hierarchically coordinated LME Hybrid Kim & Kwon, 2017; Kim, 2010; Thurbon,
2016; Tiberghien, 2007; Whitley, 1999
Spain MME Non-LME, non-LME, LME NA LME Hybrid
Sweden CME Non-LME, LME, LME NA LME-lite Hybrid Schnyder, 2012; Ornston, 2012
Switzerland CME LME, LME, LME NA LME-lite Hybrid Trampusch & Mach, 2011; Höpner, 2007
Taiwan NA NA Hierarchically coordinated NA Hybrid Breznitz, 2007; Fuller, 2007; Wade,
1990; Whitley, 1999; Wong, 2011
UK LME LME, LME, LME NA LME LME
USA LME LME, LME, LME NA LME LME

Notes: 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 Taiwan.
Abbreviations: CME, coordinated market economy; LME, liberal market economy.
a
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).
b
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.
c
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.
BUTZBACH ET AL.
BUTZBACH ET AL. 75

attained at least 60% of US GDP in purchasing power parity (PPP) terms but following along
the lines of the previous comparative capitalism literature, we exclude petrol-dependent econo-
mies 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.

3 | THEORETICAL DEVELOPMENT: C OMPARATIVE

C A P I TA L I S M S AN D A N T I - G LOBALIZATION BACKLASH

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

lematizing 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. Table 2 shows how the propositions differentiate
LMEs from non-LMEs.

T A B L E 2 Types of capitalism and institutional spheres

Propositions Liberal market economies (LMEs) Non-LMEs

Proposition 1: Training/ Low investment in non-university High investment in non-university
education students educated
Proposition 2: Short-term, unstable Long-term, stable
Inter-company
relations
Proposition 3: Unions/ Weak unions/labor market regulation Strong unions/labor market regulations
labor market
regulation
Proposition 4: Banking Small role Large role
finance
Proposition 5: Welfare Small in coverage and stingy Generous and extensive
state
Proposition 6: State Limited Active
intervention
Proposition 7: Sectoral Focus on market and modular value Focus on relational, captive and
specialization chains hierarchical value chains
Proposition 8: Overall Conform generally to the above Conform generally to above categories:
categories: Australia, Canada, Austria, Belgium, France, Germany,
Ireland, New Zealand, US, and UK 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.
76 BUTZBACH ET AL.

3.1 | Education and training

LMEs typically have focused on training white-collar professionals in universities with rela-
tively 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 insti-
tutions above the firm-level 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 Switzerland), through
active national public skills training (Sweden), or through in-house, lifetime training, and
employment (Japan) that are embedded in wider institutions discouraging cross-firm poaching
to deliver high-quality non-university-educated workers for industry (Hall & Soskice, 2001;
Jackson & Deeg, 2012; Jackson & Sorge, 2012; 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- or industry-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 exter-
nally by engaging external suppliers located in emerging economies (Milanovic, 2016; Rodrik,
2011), it follows that non-university-educated workers in the LMEs in tradable goods and ser-
vices 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,
2017). Thus, we posit the following propositions:

Proposition 1a The more the training and education institutions invest in non-university-
educated workers, the less vulnerable non-university-educated workers of this economy are to
competition with workers in 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 uti-
lizing university-educated workers. Firms in non-LMEs on the other 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 (De Massis, Audrestch, Uhlaner, & Kammerlander,
2018; Sorge & Streeck, 2016; Thelen, 2004). 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 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 and, therefore, the lower the likelihood of backlash.
BUTZBACH ET AL. 77

3.2 | 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 coordi-
nate 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 (Heemskerk & Schnyder, 2008; Höpner &
Krempel, 2004). Such inter-company networks provide the “social infrastructure” for coordina-
tion among legally independent economic units, shape corporate behaviors by allowing the dif-
fusion of practices among firms and create a certain “shared business ethics” among the
business elite (Mizruchi, 1996; Windolf, 2002). Inter-company networks and relationships insu-
late 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 & 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 sta-
ble 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 implica-
tions of inter-firm networks for individuals and firms:

Proposition 2a The longer-term and more stable inter-company relations are, the lower the like-
lihood of firms applying labor arbitrage strategies, and therefore the lower the likelihood of
backlash.

Proposition 2b The longer-term and more stable inter-company relations, the greater the likeli-
hood that firms will adjust to competition from companies relying on workers in developing
economies by applying upgrading strategies and therefore the lower the likelihood of
backlash.

3.3 | 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 provid-
ing 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
78 BUTZBACH ET AL.

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 workers in develop-
ing economies, and therefore the lower the likelihood of backlash.

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 lon-
ger periods of time than in LMEs (Gospel & 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 vir-
tually impossible due to rigid labor regulations in some non-LMEs. These strong industrial rela-
tions and labor regulation institutional pressures on firms in non-LMEs thus provide non-
university-educated workers in these countries with greater protection from negative employ-
ment 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 apply labor arbitrage strategies and therefore the lower the like-
lihood of backlash.

3.4 | 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 empha-
sized 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 rela-
tionships 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, Levine, & Loayza, 2000; La Porta, Lopez-de-Silanes, & Shleifer, 2008; see Armour,
Deakin, Lele, & Siems, 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 invest-
ments by households and institutions and allows firms to minimize their capital costs by
BUTZBACH ET AL. 79

maximizing their share prices (Beck et al., 2000). Moreover, equity-market based systems gener-
ally 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, Hardie, & Maxfield, 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 implica-
tions 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 toward shareholders
(Fainshmidt et al., 2016; Hall & Soskice, 2001; Shleifer & Vishny, 1997; Weimer & Pape, 1999).
Moreover, the absence of long-term patient capital providers in LMEs makes ownership struc-
tures 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 apply
upgrading strategies and therefore the lower the likelihood of backlash.

Proposition 4b The more bank-based the economy, the less power external shareholders can
exert to pressure firms to apply labor arbitrage strategies and therefore the lower the
likelihood of backlash.

3.5 | Welfare systems

The comparative capitalism literature, as utilized in management, has paid insufficient atten-
tion to state welfare systems. Yet, work preceding the VoC 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 under-
standing how some economies have coped better than others in providing for the losers from
global economic integration.
80 BUTZBACH ET AL.

Kobrin cites Dobbs et al. (2016) to the effect that 65–70% of households across 25 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 sys-
tems (Anderson & 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 & Phillipson, 2002).
We therefore propose the following:

Proposition 5 The larger the welfare state, the more individuals are protected from bearing the
costs of globalization, and therefore the lower the likelihood of backlash.

3.6 | 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 econ-
omy. 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 wel-
fare 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,
Lynch, & Thun, 2005), it did protect 3 % of Taiwan's manufacturing workforce from being dis-
placed by trade as would have happened in LMEs with their more liberal trade policies. Criti-
cally, 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 institu-
tionalized globalization through trade agreements. Taiwan has often violated its WTO commit-
ments 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).
In sum, more interventionist states may employ more protectionist barriers (including for-
mal 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:
BUTZBACH ET AL. 81

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
workers in developing economies, and therefore the lower the likelihood of backlash.

As in other institutional areas, state intervention also has a more indirect effect on back-
lash 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 inter-
vention has been directed at creating patient capital for strategic sectors that Taiwan's rela-
tively 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 & 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, and therefore the lower the likelihood of backlash.

3.7 | 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,
Humphrey, & Sturgeon, 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 reli-
ance 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 prioritizing 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 (Fuller, Akinwande, & Sodini, 2003; Lane, 2008). 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 interchangeable while incurring minimal costs (Gereffi, 2018;
Gereffi et al., 2005). Thus, we propose:
82 BUTZBACH ET AL.

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
therefore the lower the 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 therefore the lower the likelihood of backlash.

3.8 | 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 institu-
tions 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; Jackson and Deeg, 2008; Hall & 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 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 life-
time 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 coa-
lesced 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 compar-
ative 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 arrange-
ments, but how the combination of these institutions leads to heightened incentives and capa-
bilities 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 likely non-university-educated workers will be exposed to competition
from workers in developing economies, and therefore 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,
BUTZBACH ET AL. 83

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 strat-
egies, and therefore the lower the likelihood of backlash.

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.

4 | D E A L I N G WI T H BA C K L A S H : F I R M S ' S T R A T E G I E S

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 insti-
tutions 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 addi-
tion, 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 real-
ity 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, Xie, & Peng 2016) or can
84 BUTZBACH ET AL.

FIGURE 1 Causal chain of anti-globalization backlash and policy reversal

seek to address the actual “macro” sources of backlash (such as the education and training sys-
tem). In the former case, firms will adapt 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 cor-
porate political strategy to either block backlash-induced policy reversal, or to lobby policy
makers to change institutions to make backlash-resilient strategies viable (Mellahi, Frynas,
Sun, & Siegel, 2016).

4.1 | 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 activi-
ties 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 man-
agement 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 prop-
erty, and the need to reduce supply risk (Ancarani, Di Mauro, & Mascali, 2019; De Backer,
Menon, Desnoyers-James, & Moussiegt, 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,
BUTZBACH ET AL. 85

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 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 reshore 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, Di Mauro, Barbieri, Nassimbeni, & Zanoni, 2014).
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 reac-
tion 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 regula-
tory 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 & 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 edu-
cated 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 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.

4.2 | 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, Lau, & Yeh, 2002) and capability-augmenting strategies are both motivations for firms
to operate abroad (Bartlett & Ghoshal, 1989; Dunning, 2001; Kogut & 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 for-
mer 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
86 BUTZBACH ET AL.

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 et al. (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 communi-
ties. 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 exploita-
tion 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 as per Prop-
ositions 7a and 7b above), given the higher premium on the capabilities of suppliers and stake-
holders generated by such strategies.

4.3 | 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 ana-
lyze possible managerial reactions by applying Ghemawat's practitioner-focused ADDING
framework, which stands for adding volume/growth, decreasing costs, differentiating, improv-
ing 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.
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 stake-
holders 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.

4.4 | 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
BUTZBACH ET AL. 87

operations or profits mainly because backlash will translate into actual policy reversal. How-
ever, 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.
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 could do this through non-market or political strategies, which have now been
widely acknowledged by the management and strategy literatures (Baron, 1995; Hadani, 2016;
Hillman, Keim, & Schuler, 2004; Mellahi et al., 2016; Shaffer, 1995). 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 (Hillman, Withers, & Collins, 2009; Pfeffer & Salancik, 1978). By doing so, firms
may be able to improve both their performance and their public legitimacy (Banerjee, Venaik, &
Brewer, 2019). 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 policymakers, participating in trade associations (Hadani, 2016). These
instruments are used to obtain political access and influence (Hillman & Hitt, 1999), which are
then levered to the firm's benefits (Oliver & 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 CPS identified in
the literature (Lux, Crook, & Woehr, 2011). However, most of the literature on multinationals'
corporate political activity focuses on MNCs' interaction with host countries (for instance, see
Hillman, 2003; Banerjee et al., 2019), while home-country institutional determinants of corpo-
rate political strategies have seen less attention (White, Fainshmidt, & Rajwani 2018;
Schnyder & Sallai, forthcoming). 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, 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 pos-
sibility 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 United States in the fall of 2018 (Niquette, 2018).

5 | DISCUSSION AND CONCLUSION

In this article, we argued that national institutions affect the likelihood of backlash against
globalization and policy reversals in a given country. Institutions by constraining or encourag-
ing firms' propensity to adopt a labor arbitrage strategy in turn decrease or increase the likeli-
hood of a backlash and policy reversals in as given country.
88 BUTZBACH ET AL.

Our framework opens up venues for future research. This framework obviously needs
refinement and empirical validation. In particular, the political systems in these advanced econ-
omies 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 per-
mission from the legislative branch. Thus, it is likely going forward that Trump will use presi-
dential 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 article to be valid first steps toward an understanding
of the complex, multi-layered role played by institutions in causing significant variation in the likeli-
hood, the extent, and the consequences of a backlash against globalization—and, consequently, in
the uncertainties now faced by multinational companies across the advanced economies. Further-
more, 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 back-
lash 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 charac-
terized with extensive cross-border institutional bricolage (Fuller, 2016) commonly found in the
developing world.
Our article'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 pol-
icy 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 individ-
ual 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 due to 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 by demands and needs of capitalist entrepreneurs (Estevez-Abe, Iversen, & Soskice,
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.

ACK NO WLE DGE MEN TS

The authors would like to thank the three editors (Alvaro Cuervo-Cazurra, Yves Doz and Ajai
Gaur) and two anonymous reviewers for their insightful and thorough comments and critiques
on the manuscript.
BUTZBACH ET AL. 89

ORCID
Douglas B. Fuller https://orcid.org/0000-0002-9813-6322
Gerhard Schnyder https://orcid.org/0000-0002-6681-6227

E N D N O T ES
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 article (see Table 1) are all democracies,
that is, 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-demo-
cratic, 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.
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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How to cite this article: Butzbach O, Fuller DB, Schnyder G. Manufacturing

discontent: National institutions, multinational firm strategies, and anti-globalization
backlash in advanced economies. Global Strategy Journal. 2020;10:67–93. https://doi.org/
10.1002/gsj.1369