The Impact of Political Risks on Entry Mode Choices in Emerging Markets

• In Event: Political Risk and Foreign Direct Investment

Abstract

This paper aims to analyze the impact of different types of political risks on strategic entry mode choices by traditional and emerging market multinationals as they extend their operations internationally. Offering many untapped opportunities, emerging markets have become priority for international business expansion. Yet, previous research and ample recent developments in many emerging countries demonstrate that the main risks that foreign firms encounter in emerging markets are associated with various types of political events triggered by government and non-government actions. As companies attempt to explore novel opportunities in emerging markets, identification and management of political risks become a higher priority for international business while political risks have continuously evolved in terms of their origins and impacts on business. One of the traditional approaches that foreign companies employ to effectively overcome some of the problems arising in emerging markets is choosing an entry mode that can optimize the operations and performance across two main dimensions, the level of managerial control and resource commitments (e.g., wholly-owned subsidiary, contractual arrangement). Variations in politico-economic institutions, and other political risks, created diversity across business environments that impacted firms’ entry-mode choices and the performance of their subsidiaries. Existing international business theories explain that investors might prefer to use international joint ventures (IJVs) known as low control entry mode instead of wholly-owned subsidiaries (WOSs) in countries characterized by high levels of opportunism and uncertainty. Yet, these theories lack comprehensive explanations about the changed nature of political risks generating nuanced forms of opportunistic behavior and uncertainty in emerging markets along with their impact on entry decisions of foreign investors. This paper aims to fill this gap by providing a novel interdisciplinary theoretical framework to explain when and under what conditions different types of political risks cause companies to choose a specific entry mode in emerging markets. We utilize a four-pronged mixed-methods approach to collect data at several levels of analysis (individual, firms, city, country): (1) semi-structured interviews with local and foreign companies in 9 cities across Tunisia and Turkey (TT); (2) semi-structured interviews with public officials at local chambers of commerce (LCC) in the same cities; (3) surveys of foreign and local companies across TT; and (4) large-sample public surveys distributed randomly across 24 Tunisian governorates and 81 Turkish provinces. The data from surveys and interviews provide a strong and unique knowledge base to study nuanced forms of political risks and their impact on entry mode choices of traditional advanced multinationals, by identifying and categorizing different types of political risks that international business encounter in emerging markets. Examining entry choice in its relation to diverse political risks will not only contribute to our understanding of FDI dynamics, but also shed light on other globalizations processes driven by international business. The increased vulnerability of large companies to political risks is manifested in more frequent disruptions to supply chains, the adverse effects of which can spread across host and home countries. The resilience of a whole economy depends on the resilience of its firms in a global environment where the importance of political risk assessment, management, and adaptation transcends the business universe and holds strategic importance for states and other actors.

Authors

• Tatiana Vashchilko, University of Calgary

• Andreea Stefania Mihalache-O'Keef, Roanoke College