Gatekeeper to its country’s natural resources, the state often relies on foreign multinationals to exploit oil, gas, and mineral deposits. So, how do state-controlled entities in resource-rich countries choose their foreign partners? Does corporate social performance matter at all? Our study, recently published in the Journal of Management Studies, analyzed data from 48 countries and over 200 joint ventures from 2000-2015. The results suggest that when deciding on partners, states are influenced by the potential legitimacy-enhancing characteristics of a possible partner’s social performance, which affects how salient local and international stakeholders view the selection decision, the venture, the enterprise, and the state itself. Beyond this, the legitimacy effect of the candidate partner’s social performance will, in turn, influence the decision outcome through its interaction with the level of corruption in the candidate partner’s home country, the extant socio-political legitimacy of the host state, and the number of the host country’s neighbors that participate in international multi-stakeholder initiatives. Social performance matters, and this study begins to untangle how.

Why the extractives, and why do we care?

Non-renewable mineral resources accounted for a quarter of global GDP in 2021, generating annual revenues in excess of $2 trillion in 2019. Our way of life is—for the time being—dependent on them for energy and technological development. Our study’s focus on this industry’s value network reflects its economic and environmental importance. By its very nature, the extraction of these resources uses energy, disrupts communities, and disturbs the land; resources cannot be replenished at the speed they are consumed. Their “sustainable” development is elusive at best, if possible at all. The decisions on how non-renewable resources are managed are thus critically important, as is earning social acceptance for the success not just of specific projects but of the industries more generally. Our study sheds light on how these decisions are made by testing whether and how socio-political legitimacy concerns guide partnership decisions.

So, how does social performance matter?

Much of the literature assumes that international strategy decisions reflect the interests of an expanding multinational. However, increasingly, there is an appreciation for the reality that the other party to the deal—the host state—holds sway. Indeed, our investigation highlights how decisive this role can be. Focusing specifically on the perspective of the state entity, we find that social performance can be and, in fact, is legitimacy-enhancing. It thus becomes a selection criterion fraught with interesting nuances. The first is that a potential partner’s social performance is more important if the partner comes from a corrupt(er) country. The incongruence between the firm’s responsibility behavior and the corrupt institutional environment in its home country alters how relevant social performance is to its new state partner. Second, more legitimate states pay more attention to the legitimacy effects of the social performance of potential partners. The underlying logic here is that tapping into the partner’s social performance allows for value congruence with the state’s socio-political stakeholders and for the state to avoid potential backlash for violating expectations. More legitimate states utilize the candidate partner’s social performance to demonstrate commitment to meeting expectations.

Additionally, there is evidence that pressure from international socio-political stakeholders influences organizational perceptions of legitimacy. Our findings confirm that legitimacy is a complex and dynamic concept that hovers between individual- and collective-level considerations and effects. Multi-stakeholder initiatives, such as EITI, may benefit non-participants via positive legitimacy spill-overs; it would seem that your neighbors matter.

In partnering to extract resources, states can and do seek to safeguard socio-political legitimacy, and our study highlights how they evaluate the potential legitimacy benefits of potential partnerships. As the institutional environment permeates the extractives’ global value chain, foreign country corruption and multi-stakeholder initiatives intervene in the legitimacy value of social performance and thus influence partner selection.

Practical recommendations

For the multinational, our study suggests that a nonmarket strategy that reflects social performance can serve to address host-state socio-political legitimacy concerns. Multinationals that manage their social performance may appear more attractive as collaborators, given their mix of market capabilities and resources. From a policy perspective, states increasingly involved in commercial partnerships would do well to consider the legitimacy demands of numerous and diverse stakeholders. This is especially true as states are challenged to juggle their different roles as regulators, commercial enterprises, and societal benefactors. By showcasing the legitimacy benefits of actively managing social performance for corporations, we hint at the significant possibilities that could accrue to states managing theirs.