Research Summary: We conduct a historical analysis of the multinational corporations’ strategy of creating connections with a host country’s elite as a way of legitimizing its operations in contexts characterized by long‐term political, social, and economic changes. We argue that the success or failure of these strategies depends on (a) the perceived legitimacy of these connections among a host country’s society during times of change and (b) the capability of the multinational’s political connections to shield it from challenges arising when the host country’s social structure is undergoing deep transformations. We outline and follow a business historical approach that combines the theoretical frameworks of international business, strategy, organizational theory, and political science to analyze multinationals operating in Chile’s energy and telecommunications sectors from 1932 to 1973. Managerial Summary: Western multinationals face hard challenges when trying to legitimize their operations vis‐à‐vis the host country’s societies in emerging and underdeveloped countries. One strategy developed by multinationals to neutralize potential challenges to their legitimacy has been to establish connections with influential members of the host country’s elites. We study how this strategy fares in host countries that are undergoing dramatic political and economic changes. We first argue that overtly maintaining open connections with an elite that is viewed as a relic of an illegitimate past can become a liability. And, second, that highly visible connections are more likely to become a liability in times of political and social change than less visible ones. We illustrate our arguments with a historical study of the strategies followed by American telecommunications and oil multinationals in Chile.

Research Summary: This article studies two interrelated questions. First, why did business groups in emerging markets thrive and prevail after pro‐market reforms were implemented in their countries? And, second, what type of adaptation strategies can multinational corporations develop in order to be competitive in economies dominated by business groups? By conducting an archive‐based historical network analysis of business groups in Chile during periods of major economic and political transitions, we maintain that business groups were created in periods of protectionism as a way to navigate economies with strong state participation or inefficient markets. In this process, these groups endogenously created an economy with market imperfections resulting from the dominance of these business groups. This means that the transition toward more open markets did not necessarily create more competitive environments and that elites in emerging economies were unwilling to abandon the advantages of having links between their businesses. Multinationals entering this economy adapted by becoming business groups themselves and creating links with other business groups. In sum, strategies devised as means to reduce market imperfections created new imperfections that incentivized the business groups to retain their structure and forced multinationals to become business groups. Managerial Summary: Large diversified conglomerates known as business groups dominate the markets of emerging economies. These groups have survived important changes taking place in their own countries, including the abandonment of an import substitution industrialization model for an open market one or changes from military regimes to democratic ones. This article explores two aspects related to these transitions most emerging economies have gone through. First, why did some business groups survive despite the fact that many of them were created and grew during protectionist times? And, second, what strategies have multinational corporations developed when operating in economies dominated by those powerful business groups? We show, first, that some business groups survived the transition by rearranging the type of links they had with each other, and, second, that multinationals competing in economies dominated by those business groups opted for becoming business groups themselves.

The literature on multinational corporations argues that a foreign firm can legitimize its activities, improve its reputation in a host country, and reduce the risk of hostile actions by the host government (including expropriation) by approaching and incorporating influential members of the domestic elite in its business. By using the concept of obsolescing political legitimacy, we argue that this legitimating strategy can lead to a loss of reputation and eventual illegitimacy when the host country undergoes significant social and institutional changes. When these changes take place, the domestic society can perceive that the multinational benefited from a previous social and institutional order increasingly considered as illegitimate. Under these circumstances, the new order will question the legitimacy of the multinational's operations, increasing the risk of expropriation. We illustrate our hypothesis with the case of the political strategies of the International Telephone and Telegraph Company (ITT) in Chile in the twentieth century.