International Relations Workshop with Benjamin Graham
DateNovember 3, 2014
4357 Bunche Hall
Presenter:Benjamin Graham, University of Southern CaliforniaTitle: “Political Risk and New Firm Entry”Abstract:This paper examines how political risk affects the type of multinational firms that enter a given country via foreign direct investment. It first distinguishes between three distinct types of political risk: policy risk, bureaucratic risk, and the risk of political violence. It then develops theory regarding the type of firm that can best mitigate each of these types of risk, and derives testable hypotheses regarding how a country’s political risk profile affects the size and entry mode of the foreign firms it attracts. I test these hypotheses using novel firm-level data from the U.S. Bureau of Economic Analysis that cover the full universe of U.S.-outward foreign direct investment from 1990 to 2009. I find that policy risk increases the proportion of inward investment that occurs via Greenfield investment rather via mergers or acquisitions, while bureaucratic risk (e.g. corruption and judicial inefficiency) shifts the population of entering firms toward larger multinationals. The risk of political violence has ambiguous effects.
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