Policy Risk, Political Capabilities and International Investment Strategy: Evidence from the Global Electric Power Industry

Guy L. F. Holburn, Bennet A. Zelner
2008 Social Science Research Network  
Whereas conventional wisdom holds that policy risk-the risk that a government will opportunistically alter policies to expropriate a firm's profits or assets-deters foreign direct investment (FDI), we argue that multinational firms vary in their response to host-country policy risk as the result of differences in organizational capabilities for assessing and managing such risk, which are shaped by the home-country policymaking environment. Specifically, we hypothesize that firms from home
more » ... rms from home countries with weaker institutional constraints on policymakers, or more intense policy competition among interest groups divided along economic or ethnic lines, will be less sensitive to host-country policy risk in their international expansion strategies. Moreover, firms from sufficiently risky or contentious home-country environments will seek out riskier host countries for their international investments, in order to leverage their political capabilities and attain competitive advantage. We find support for our hypotheses in a statistical analysis of the FDI location choices of multinational firms in the electric power industry during the period 1990 -1999, the industry's first decade of internationalization. * Author order is alphabetical and does not reflect relative contribution. We are grateful to
doi:10.2139/ssrn.1092298 fatcat:qtiv6mlj4zbwfnuo6uj5bz3ydy