31 Aug 2010  Working Papers

Multinational Firms, Labor Market Discrimination, and the Capture of Competitive Advantage by Exploiting the Social Divide

Executive Summary — Women and ethnic minorities are frequently discriminated against in the labor markets of both developed and emerging economies, particularly in opportunities for management positions. Multinationals entering such markets must decide whether to aggressively hire and promote the excluded group, thus reaping the benefits of their underutilized talent, or conform to local practice and avoid provoking some bigoted policymakers, executives, purchasers, and/or supply agents. In this paper, HBS professor Jordan Siegel, Lynn Pyun, and B.Y. Cheon find that multinationals gain significant competitive opportunities by scanning the host-market social landscape, identifying social schisms in the labor market, and exploiting such schisms by actively hiring and promoting members of the excluded group to positions of management responsibility. Key concepts include:

  • Foreigners achieve a competitive advantage by exploiting the social divide in a host market.
  • This competitive advantage is not unique to foreigners. However, foreign multinationals, who are not affected by prior social network obligations, may often find it easier than some domestic firms to in effect form an alliance with the excluded group. Foreign multinationals can exploit market failure where the excluded group is talented but underutilized.
  • This competitive advantage is associated with a significant profit benefit, and one that is only very slowly being whittled away through imitation.

 

Author Abstract

The organizational theory of the multinational firm holds that foreignness is a liability, and specifically that lack of embeddedness in host-country social networks is a source of competitive disadvantage; meanwhile the literature on labor market discrimination suggests that exploiting the bigotry of others can be a source of competitive advantage. We seek to turn the former literature somewhat on its head by building on insights from the latter. Specifically, we argue that multinationals wield a particularly significant competitive weapon: as outsiders, they can identify social schisms in host labor markets and exploit them for their own competitive advantage. Using two unique data sets from South Korea, we show that in the 2000s multinationals have derived significant advantage in the form of improved profitability by aggressively hiring an excluded group, women, in the local managerial labor market. Our results are economically meaningful, realistic in size, and robust to the inclusion of firm fixed effects. Multinationals, even those whose home markets discriminate against women, often show signs of having seen the strategic opportunity. Though the host market is moving toward a new equilibrium freer of discrimination, that movement is relatively slow, presenting a multi-year competitive opportunity for multinationals.

Paper Information