The institutional environment for multinational investment

TLDR

Political hazards raise the risk of opportunistic expropriation, and while partnering with host firms can mitigate this risk, higher contractual hazards diminish the protective benefit of joint ventures. The study examines how the impact of political hazards on entry mode choice depends on a firm’s exposure to expropriation risks from potential joint‑venture partners. The authors employ a two‑stage bivariate probit model to test these hypotheses using data on 3,389 overseas manufacturing operations of 461 firms across 112 countries.

Abstract

This article posits that the effect of political hazards on the choice of market entry mode varies across multinational firms based on the extent to which they face expropriation hazards from their potential joint-venture partners in the host country (the level of contractual hazards). As political hazards increase, the multinational faces an increasing threat of opportunistic expropriation by the government. Partnering with host-country firms that possess a comparative advantage in interactions with the host-country government can safeguard against this hazard. However, as contractual hazards increase, the potential benefit to the joint-venture partner of manipulating the political system for it's own benefit at the expense of the multinational increases as well, thereby diminishing the hazard-mitigating benefit of forming a joint venture. A two-stage bivariate probit estimation technique is used to test these hypotheses on a sample of 3,389 overseas manufacturing operations by 461 firms in 112 countries.