Emerging market partners and reputational risk in the petroleum industry

Abstract

Research Summary This paper analyzes how reputational risk of petroleum companies from industrialized economies is affected by partnerships with companies from emerging markets with weaker regulatory standards. Using panel data analysis with company‐host country pair and year fixed effects, we find that increased collaboration with companies from corrupt countries is associated with an increase in negative attention regarding local pollution. This negative reputational effect is driven by collaboration in corrupt host countries where emerging market companies have a comparative institutional advantage. Looking into mechanisms, we find no effect of collaboration on environmental conduct or policy, which is inconsistent with the mechanisms implied by institutional theory. Our results instead indicate that partnerships provide access to institutional capabilities of emerging market partners, suggesting collaboration is transactional rather than transformative. Managerial Summary When an American multinational corporation starts collaborating with a Chinese multinational, what happens to the reputation of the American company? More generally, when a company from a home country with strict rules and institutions decides to collaborate with a company from a country with less strict institutions, does this carry a reputational risk? Using data on petroleum company collaboration, we find that collaboration with companies from corrupt countries has a reputational cost. Western companies incur this cost to access emerging market companies' comparative institutional advantage in corrupt host countries. Our results provide guidance on size of reputational costs from collaboration, discusses strategic use of such partnerships for new entrants, and points out potential negative implications for international policy to address corruption in oil producing countries.