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Risk propensity in the foreign direct investment location decision of emerging multinationals

Abstract

A distinguishing feature of emerging economy multinationals is their apparent tolerance for host country institutional risk. Employing behavioral decision theory and quasi-experimental data, we find that managers’ domestic experience satisfaction increases their relative risk propensity regarding controllable risk (legally protectable loss), but decreases their tendency to accept noncontrollable risk (e.g., political instability). In contrast, firms’ potential slack reduces relative risk propensity regarding controllable risk, yet amplifies the tendency to take noncontrollable risk. We suggest that these counterbalancing effects might help explain prior ambiguous findings on the relationship between experience, slack, and FDI decisions. The study provides a new understanding of why firms exhibit heterogeneous responses to host country risks, and the varying effects of institutions.

Résumé

Une caractéristique spécifique des multinationales des économies émergentes est leur tolérance apparente à l’égard du risque institutionnel du pays d’accueil. En mobilisant la théorie de la décision comportementale et des données quasi-expérimentales, nous constatons que la satisfaction de l’expérience domestique des dirigeants augmente leur propension relative au risque concernant le risque contrôlable (la perte de protection au niveau légal), mais diminue leur tendance à accepter le risque non-contrôlable (par exemple, l’instabilité politique). En revanche, le relâchement potentiel des firmes réduit la propension relative au risque concernant le risque contrôlable, mais amplifie la tendance à prendre un risque non-contrôlable. Nous suggérons que ces effets d’équilibrage pourraient expliquer les résultats antérieurs contradictoires concernant la relation entre l’expérience, le relâchement et les décisions d’investissements directs à l’étranger. L’étude fournit un nouvel éclairage sur les raisons pour lesquelles les firmes développent des réponses hétérogènes par rapport aux risques du pays d’accueil et sur les effets variables des institutions.

Resumen

Una característica diferenciadora de las multinacionales de economías emergentes es su tolerancia al riesgo institucional en el país anfitrión. Usando la teoría de decisión conductual y datos cuasi-experimentales, encontramos que la satisfacción de la experiencia doméstica de los gerentes aumenta su propensión al riesgo relativo en relación al riesgo controlable (perdida legalmente protegible), pero disminuye su tendencia a aceptar riesgos no controlables (por ejemplo, inestabilidad política). En contraste, la holgura potencial de la empresa reduce la propensión al riesgo relativo en relación al riesgo controlable, aunque amplifica la tendencia a tomar riesgos no controlables. Sugerimos que estos efectos de contrapeso podrían a ayudar a explicar los hallazgos ambiguos anteriores sobre la relación entre experiencia, la holgura, y las decisiones de IED. El estudio proporciona un nuevo entendimiento del por qué las empresas muestran respuestas heterogéneas a los riesgos del país anfitrión, y los diversos efectos de las instituciones.

Resumo

Uma característica que distingue multinacionais de economia emergente é a sua aparente tolerância para o risco institucional do país anfitrião. Usando a teoria da decisão comportamental e dados quase experimentais, descobrimos que a satisfação de gerentes com experiências domésticas aumenta sua relativa propensão ao risco em relação ao risco controlável (perda legalmente protegida), mas diminui sua tendência para aceitar riscos não controláveis (por exemplo, instabilidade política). Em contrapartida, a folga potencial das empresas reduz a propensão ao risco relativo em relação ao risco controlável, mas amplifica a tendência de assumir riscos não controláveis. Sugerimos que esses efeitos que se contrabalançam possam ajudar a explicar anteriores conclusões ambíguas sobre a relação entre a experiência, a folga e as decisões de FDI. O estudo fornece uma nova compreensão de por que as empresas apresentam respostas heterogêneas aos riscos do país anfitrião e os efeitos variados das instituições.

摘要

新兴经济体跨国公司的一个显著特征是对东道国制度风险明显的容忍。运用行为决策理论和准实验数据,我们发现管理者国内经验的满意度增加他们对可控风险(受法律保护的损失)的相对风险倾向,但减少他们对非可控风险(比如政治动荡)的接受度。相比之下,公司的潜在冗余减少可控风险的相对风险倾向,但扩大承担非可控风险的倾向。我们认为这些相互制衡的作用可能解释此前研究中关于经验、冗余和对外直接投资决策之间关系的含糊结论。本研究对为什么公司对东道国的风险呈不同反应,以及制度的不同影响提供了一个新认识。

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Acknowledgements

We thank JIBS editors Rene Belderbos and Ram Mudambi and four anonymous reviewers for valuable guidance. We also appreciate the helpful suggestions by Tim Devinney, Glenn Hoetker, and Hong Il Yoo. Earlier versions of this paper were presented at the AIB 2014 Vancouver meeting and the SMS 2014 Copenhagen conference. This research is partly funded by the Universities’ China Committee in London.

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Correspondence to Liang Chen.

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Accepted by René Belderbos, Consulting Editor, 14 October 2017. This article has been with the authors for five revisions.

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Buckley, P.J., Chen, L., Clegg, L.J. et al. Risk propensity in the foreign direct investment location decision of emerging multinationals. J Int Bus Stud 49, 153–171 (2018). https://doi.org/10.1057/s41267-017-0126-4

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Keywords

  • decision-making
  • country risk
  • heterogeneity
  • domestic experience
  • slack
  • quasi-experimentation