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Experience, Equity and Foreign Investment Risk: A PIC Perspective

Abstract

We analyze foreign investment risk-mitigating effects of host-country policy stability, firm experience and equity stakes using an empirical context largely ignored by international business (IB) research: project investment companies (PICs). PICs permit cleaner separation of individual investment project risk from the parent firm, which may otherwise pool risk characteristics from managing multiple projects across different industries and countries. PICs also permit potentially unbiased, prospective risk assessment at the time of a project’s initial announcement based on the mix of debt and equity funding the project. Consistent with previous IB research, our analyses of 396 PICs announced in 53 countries from 1990–2006 indicate that investment risk measured as the percentage of equity-to-total capital funding a PIC decreases with greater host-country policy stability, lead-investor experience in the host country, and lead-investor equity stakes. But contrary to previous IB research, we find that lead-sponsor experience and equity stakes reduce investment risk less as host-country policy stability decreases. From a PIC perspective, investor experience and equity stakes are complements to (not substitutes for) host-country policy stability. Our PIC-based evidence re-invigorates research and related practice and policy debates about how investor experience and equity holdings affect foreign project decisions and suggests new avenues for future work.

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Notes

  1. Kleimeier and Megginson (2000) describe how these jumbo loans are split up among lending syndicates created for individual project investments. They also describe interest rates paid on loans for several prominent deals in the 1990s. For example, the project-financed Eurotunnel investment launched in 1990 included jumbo loans worth more than US$13 billion with an average spread above the London Interbank Offered Rate (LIBOR) of about 175 basis points (1.75 interest rate percentage points).

  2. These 53 countries are Algeria, Argentina, Australia, Austria, Bolivia, Brazil, Bulgaria, Canada, Chile, China, Colombia, Costa Rica, Egypt, El Salvador, France, Germany, Ghana, Greece, Guatemala, Honduras, Hungary, Iceland, India, Indonesia, Ireland, Italy, Mexico, Morocco, Netherlands, New Zealand, Norway, Panama, Peru, Philippines, Poland, Portugal, Romania, Russia, Singapore, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Tunisia, Turkey, United Kingdom, United States, Uruguay, Venezuela, and Zambia.

  3. These 59 countries include the 53 listed in footnote 2 above and six others: Belgium, Ecuador, Finland, Japan, Malaysia, and Mauritius.

  4. We obtain results consistent in sign and significance using an alternative measure of Policy Stability – Henisz’s (2000) “polcon” measure. These results are available from the authors.

  5. In addition to the results reported in these columns of Table 2, we obtain consistent results after the inclusion of additional controls for prior industry experience and prior global experience leading PICs. We measure such experience different ways, including number of PICs led and the natural logarithm of their dollar value. These results are available from the authors.

  6. LS Equity2 is the same measure used for the preliminary graphical evidence shown in Fig. 3. .

  7. These first-stage probit results are not reported in Table 2 but are available from the authors.

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James, B.E., Vaaler, P.M. Experience, Equity and Foreign Investment Risk: A PIC Perspective. Manag Int Rev 57, 209–241 (2017). https://doi.org/10.1007/s11575-016-0294-7

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Keywords

  • Foreign investment risk
  • Project investment companies
  • Experience
  • Equity
  • Policy stability