Large corporations’ role in the wake of disruptive events

The notion of “doing well by doing good”, specifically regarding investments that address environmental, social and governance (ESG) issues, is axiomatic in the investment world. Profit motivation, it is argued, can dovetail neatly with responsible investment strategies.

New research suggests that this concept may have a broader application, relating to the role played by multinational enterprises (MNEs) in helping the economies and societies in which they operate to recover from systemic shocks such as epidemics, natural disasters and terrorist attacks.

Since the turn of this century, MNEs have been the fastest-growing source of such funding, ahead of governments, donor agencies and charities. While much academic work has focused on philanthropic activity by MNEs during periods of relative stability, helping to address long-standing problems such as high levels of poverty and low levels of healthcare and educational provision, less attention has been paid to MNE involvement in helping recovery from severe, system-wide and unpredictable shocks, and research in this area has tended to ascribe the same motives in the wake of such shocks as those ascribed during periods of stability. These include altruism, the attempt to accumulate reputational capital, hedging against political risk, and political pressure.

Our research points to a very different motive; one that, until now, has not been studied. Put simply, the philanthropy of MNEs in such circumstances is motivated by the basic need to restore working order to the market. Without a functioning market, businesses cannot operate.

Commercial threat

The types of shock we study pose a severe threat to MNEs’ commercial activities: the destruction of infrastructure prevents transporting inputs such as fuel and raw materials to manufacturing plants and the movement of goods to market; impaired purchasing power reduces business and consumer demand for those goods; severe damage to housing, schooling and healthcare reduces workforce productivity; suspension of legal, regulatory and law-enforcement systems hurts MNEs; and disruption to financial intermediaries can lead to the cancellation of investments.

Taking all this into account, the clear interest of MNEs is to use their financial strength to restore affected markets in order to get back to business as usual as soon as possible.

To assess whether the economic importance of the country to the firm affects its motivation for donating in the aftermath of large, disruptive shocks, we selected the 2,000 largest public MNEs. These have headquarters in 63 countries. We then put together a global database of disaster response, covering financial and other donations from MNEs, governments, international agencies and non-governmental organisations, to all such events from 1990 to 2019.

Next, we analysed MNEs’ contributions in the aftermath of 265 disruptive shocks affecting 129 countries. The analysis showed that the economic importance of a country to an MNE is directly linked to the scale of its response. This evidence survived our inclusion in the analysis of the standard alternative explanations of motive, including altruism, government pressure, poverty aversion and employees’ philanthropic intentions.

What this means is that the larger the economic importance of a country to an MNE in terms of the extent to which it sells, buys or rents items such as fuel, raw materials, final products and services, and the extent to which it employs people in that country, the greater the adverse impact of disruptive shocks to the firm’s performance.

And the greater this impact, the greater the incentive for the firm to use its resources to help the affected market to recover. By measuring the relative economic importance of a country to MNEs, we can identify which firms are likely to make donations in the event of market disruption.

However, such “philanthropic” giving, and its relationship to the importance of the country in question to a particular MNE, is not always straightforward. We interviewed decision-makers from companies in the S&P 500 index. To take one example, we learned that the link between country importance and MNE giving could be modified by the availability of other sources of funding, including insurance payments, aid from foreign countries and spending by the government of the country in question.

Furthermore, if a country had a recent history of substantial public spending or had been the beneficiary of significant foreign aid, or both, it fostered the expectation among MNEs that public-sector sources would fund the recovery; thus leading to smaller donations from MNEs, despite the country’s importance to their operations.

Regulatory factor

A second factor is low regulatory quality, leading to bureaucratic delays and the misallocation of resources, disincentivising MNEs from generous philanthropic activity. Our findings indicated that MNEs donated comparatively large amounts to country markets with high regulatory quality, contradicting the conventional view that the incentives for giving rise in situations of institutional underdevelopment.

The increased likelihood of larger donations also applied when markets were dominated by the MNE in question. This contradicts the existing academic theory that philanthropic giving rises in competitive markets as firms strive to differentiate themselves through pro-social behaviour.

It is essential that such disruptive events, wherever they occur, are not confused with the permanent absence in some emerging economies of market-based institutions. Four factors distinguish disruptive shocks from other institutional contexts.

The first is the temporary nature of the shock. While priority is appropriately given to restoring education, housing and healthcare facilities, transport infrastructure can take years to restore.

The second distinguishing factor is the sudden and unexpected nature of disruptive shocks. They are highly unpredictable and feature rapid falls in the functioning or availability of the factors needed for market functioning. Firms interested in entering new locations can scrutinise country risk. This, however, is a poor measure of the likely resilience of an economy to disruption.

A third difference is in the severity of disruptive shocks. Disruptions involve significant economic destruction in the affected countries. For instance, the US Federal Emergency Management Agency indicates that 40% of businesses do not reopen after a natural disaster, while 90% will become insolvent within a year if they do not reopen within a week.

The provision of goods and services can also be severely interrupted. For example, earthquakes in Chile and Japan in 2010 and 2011 respectively destroyed 32% and 17% of the goods supply for at least two months.

Strategic motive

To end where we began, the type of MNE philanthropy that we identify is an example of doing well by doing good. We introduce a strategic motive for the philanthropy of market restoration whose benefits approximate a public good – companies and society at large benefit from MNE contributions to restore the market. MNEs provide considerable public benefit for civil society, from schools to highways, hospitals and ports, when they contribute, albeit in the interest of returning to business as usual. Given its public nature, this type of philanthropy is more susceptible to collective-action issues. For instance, some companies will free ride on the contribution of others and still benefit from the outcome. Consequently, a measure of economic importance facilitates identifying the pool of firms that are likely to become substantial contributors to the recovery of the country market.

Moreover, the findings indicate that disruptions give rise to a scenario where the motivations of MNEs and those of society at large are more closely aligned. Large, monopolistic MNEs are particularly important contributors to market recovery and function as a backstop when disruptions overwhelm the financial capacity of governments.

Catherine Magelssen is Assistant Professor of Strategy and Entrepreneurship at London Business School.

Luis Ballesteros is Assistant Professor of International Business at George Washington University.