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

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 non-controllable risk (e.g., political instability). In contrast, firms’ potential slack reduces relative risk propensity regarding controllable risk, yet amplifies the tendency to take non-controllable risk. We suggest that these counterbalancing effects might help explain observation that risk-taking in FDI location decisions is influenced by firm experience and context. The study provides a new understanding of why firms exhibit heterogeneous responses to host country risks, and the varying effects of institutions

Operationalizing psychic distance: A revised approach

Psychic distance, as described in the Uppsala internationalization model, is based on the impediments to information flows between a country market and a firm. The greater the impediments, the longer is the distance. The operationalization of psychic distance in empirical investigations is most commonly accomplished through the estimation of perceived “differences” between countries because it is argued that differences account for impediments to knowledge flows. However, this process is highly flawed. This article responds to the many calls for an improvement in the understanding and operationalization of psychic distance. It does so not only by holding to the original definition but also by accounting for wider measures than the differences between the firm's home country and the target country. The author identifies 15 variables from the literature and discusses the relationship between the variables and psychic distance. Using these variables, he constructs an index that measures psychic distance and then applies it to measure distances between 25 country combinations. Finally, he compares the results with actual exporter behavior. A close, negative correlation exists between the psychic distance index and firms' actual selection of export markets