Risk and the strategy of foreign location choice in regulated industries

TLDR

Regulated‑industry firms react differently to macroeconomic and policy risks, reflecting heterogeneous risk attitudes. The study predicts that such firms avoid high macro‑uncertainty countries, favor governments with discretionary policymaking to negotiate favorable entry terms, that firms with partial state equity stakes are more risk tolerant, and that accumulated foreign experience reduces willingness to enter politically unstable markets. The authors analyze Latin American market entries of all listed Spanish regulated‑industry firms from 1987 to 2000 to test these predictions. © 2008 John Wiley & Sons, Ltd.

Abstract

Abstract We argue that firms in regulated industries react to macroeconomic and policy risks in sharply different ways. While they seek to avoid countries with high levels of macroeconomic uncertainty, we predict that they find it more attractive to expand into countries characterized by governments with discretionary policymaking capacities so as to be able to negotiate favorable conditions of entry. We also argue that firms are heterogeneous in their attitudes toward risk. We predict that firms in which the state holds a partial equity stake exhibit a more tolerant attitude. We also expect that as firms accumulate foreign experience, they develop an aversion toward further foreign entries into politically unstable markets. Support for these predictions is provided by an analysis of the Latin American market entries of all listed Spanish firms in regulated industries between 1987 and 2000. Copyright © 2008 John Wiley & Sons, Ltd.