When Iron Turns to Dust: The Influence of Role Models on Emerging Market Entry
under Varying Degrees of Risk
Wm. Gerard Sanders
Rice University
McNair Hall 351
Houston, TX 77004
Email: [email protected]
Tel: +1 713 348 6307
Anja Tuschke
University of Munich
Ludwigstr. 28 RGB
D-80539 München, Germany
Email: [email protected]
Tel: +49 89 2180 2770
This Version: September 2011
Please do not cite without permission
When Iron Turns to Dust: The Influence of Role Models on Emerging Market Entry
under Varying Degrees of Risk
Abstract
Host country risk negatively affects FDI, yet high levels of investment are still seen in many
risky emerging markets. We take an institutional perspective and investigate how prior market
entries by role models in the form of a) trusted partners within intercorporate board networks and
b) prominent home-country firms help to provide legitimacy to risky emerging market entry and
thereby mitigate local market risks. To test our predictions, we study the entry patterns of large
German firms into 21 former Warsaw Pact countries after the fall of the Iron Curtain in 1990.
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Theory suggests a variety of reasons why firms will invest in foreign countries, such as to
gain access to new and not yet saturated markets (Caves, 1971; Davidson, 1980; Gripsrud &
Benito, 2005), to strengthen their strategic position by securing scarce resources like labor and
knowledge (Hitt, Shimizu, Uhlenbruck, & Bierman, 2006; Chen & Chen, 1998), to increase
efficiency by reducing transaction costs (Anderson & Gatignon, 1986; Meyer, 2001), and to
stabilize a competitive position by reacting to competitors‟ behavior (Knickerbocker, 1973;
Baum & Korn, 1996; 1999; Gimeno et al., 2005). However, the foreign expansion process is
fraught with risk and uncertainty stemming from a number of issues including lack of experience
operating in the target country (Aharoni, 1966; Johanson & Vahlne, 1977). These problems are
exacerbated when it comes to emerging economies, which are characterized by extremely high
levels of socioeconomic volatility and institutional differences relative to developed countries
(Hoskisson, Eden, Lau, & Wright, 2000; Meyer & Peng, 2005; Peng, 2003; Uhlenbruck & De
Castro, 2000; Wright, Filatotchev, Hoskisson, & Peng, 2005; Xia, Boal, & Delios, 2009). One
consistent finding is that such hazards reduce the likelihood of entry (Delios & Henisz, 2003;
Henisz & Delios, 2001; Uhlenbruck, Rodriguez, Doh, & Eden, 2006).
A process-oriented perspective of foreign direct investment (FDI) suggests that firms
learn from their experiences with prior investments in related markets, which reduces the
uncertainty that would otherwise preclude or significantly reduce the likelihood of entry (Hitt et
al., 2006; Johanson & Vahlne, 1977; Meyer & Peng, 2005). However, a firm may not be able to
rely on first-hand experience when it seeks to enter an emerging market so different or novel that
prior foreign investments provide little guidance. Nevertheless, increasing numbers of
multinational corporations are choosing to make large investments in newly emerging markets,
many of which continue to experience significant economic volatility, policy hazards, and weak
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legal institutions. For instance, Fienberg and Gupta (2009) report that FDI into developing
countries has grown at a compounded annual rate of 15 percent since 1985, a rate that far
exceeds the growth in GDP in these economies. This leads us to two questions motivating this
study. First, how do firms that lack requisite experience in newly emerging markets overcome the
disincentives to enter such markets? Second, to what extent does the prior experience of trusted
and prominent role models encourage entry despite high levels of risk?
While economic perspectives provide important insights into the triggers of FDI, recent
work has suggested that foreign market entry is also influenced by the social context in which
firms operate. A small but important body of literature has begun to explore how vicarious
learning from business partners with relevant foreign market experience affects entry choices
(Delios & Henisz, 2000; Guillén, 2002; Martin, Swaminathan, & Mitchell, 1998). We build upon
this work by focusing on how firms model their first entry decision in newly emerging markets
after prior entry moves of relevant role models. We focus on two types of role models that may
influence investment decisions in emerging and novel markets: a potential entrant‟s board
network partners and prominent firms in its home market. We specifically investigate how the
experiences of these role models help to mitigate the risks associated with emerging markets.
While both forms of social cues may be influential, the theoretical mechanisms are different and
their influence may vary across different levels and types of risk.
We test our predictions using a sample of German firm entries into 21 former Warsaw
Pact countries between 1990 and 2003. After the fall of communism, a whole new set of markets
was made available to foreign multinational firms. However, uncertainty regarding the viability
of such investments was particularly high because only few sources of reliable information were
available to companies considering entry in these countries (Meyer, 2001).
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Analyzing first market entries into emerging markets our paper contributes to several
important areas of study. First, we assess how the focal firm‟s decision to explore the
opportunities of newly emerging and highly risky markets is influenced by different types of role
models. Specifically, we unpack the sources of influence of trusted peer firms in the firm‟s
intercorporate board interlock network and contrast these with the alternative role models of
potentially credible but more distant actors, such as the observation of prominent firms. Second,
as risk varies across markets and over time we theorize that alternative role models are likely to
have varying degrees of influence depending on the degree and type of uncertainty facing the
firm. For instance, some role models may be more adept at reducing business risk while others
may be more potent to combat other types of uncertainty, such as political risk. Third, our
analysis starts with the fall of the Iron Curtain in 1990 and captures the firms‟ entry decisions
into markets where they don‟t have a history of prior investments. Focusing on the firms‟ first
entries into the markets under study enables us to provide a more fine-grained picture of ways to
gain legitimacy for risky decisions and to reduce the uncertainty surrounding foreign expansion
strategies.
Theory and Hypotheses
The great majority of global economic activity occurs in the large developed economies
of North America, the European Union (EU), Australia, Japan, and New Zealand (Peng, 2000).
However, the growth potential of these markets is limited compared to that available in emerging
and transition economies. In addition, emerging economies have opened the door to potentially
new, low cost factor inputs and nascent customer bases. Consequently, there are considerable
economic incentives to enter emerging markets.
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Aggressive growth by western firms into emerging markets must be tempered by
recognition of concomitant risks. Emerging markets are often associated with turbulent
institutional change (Hoskisson et al., 2000; Peng, 2003). Moreover, the cyclicality of some
emerging markets is much more pronounced than that of established markets (McCarthy, Puffer,
& Simmonds, 1993). Consequently, the opportunities of emerging markets are counterbalanced
with correspondingly elevated levels of risk.
Recognizing the risk and opportunities associated with emerging markets, we begin with
the widely accepted assumption that local market risk discourages FDI. Research has focused on
how such hazards reduce the likelihood that firms will enter a particular market (Delios &
Henisz, 2003; Henisz & Delios, 2001; Uhlenbruck et al., 2006). Given a choice, firms generally
eschew uncertainty (Cyert & March, 1963; Thompson, 1967). Yet, as firms expand and move
into new geographic arenas, they cannot avoid being confronted with new sources of uncertainty
associated with entry into institutional environments and markets that are at variance with their
accustomed routines (Henisz & Delios, 2001; Hoskisson et al., 2000; Kobrin, 1979; Peng, 2000).
Research has illuminated a number of risk factors that increase the uncertainty of local
markets and consequently act to deter entry. For instance, political risks make firms hesitant to
enter some markets (Kobrin, 1979) and observed levels of capital and technological investments
are lower in such markets (Delios & Henisz, 2003; Henisz & Delios, 2001; Oxley, 1999).
Likewise, business risks such as underdeveloped economic institutions, inflation, restrictions on
currency convertibility, and problems with transportation and communication increase the
uncertainty of entry success and consequently reduce market attractiveness (Peng, 2000; 2003).
Consistent with this research, we expect that local market risk will predict which emerging
economies receive the greatest interest from foreign firms. While all emerging markets are
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inherently risky relative to opportunities in more developed economies, there is significant
heterogeneity among emerging markets. Consequently, we expect that local market risk will
have a strong negative effect on the propensity for foreign firm entry and propose the baseline
assumption that the likelihood of entering a specific emerging market is negatively associated
with the risk of that market.
Role Models
A few important economic perspectives have dominated the FDI literature on the motives
for entry into new markets (Caves, 1971; Davidson, 1980; Gripsrud & Benito, 2005; Hoskisson
et al., 2000; Peng, 2000). For instance, strengthening strategic positioning through the
acquisition of resources (Hitt et al., 2006; Chen & Chen, 1998), reducing transaction costs
(Anderson & Gatignon, 1986; Meyer, 2001), and reacting to competitors‟ behavior
(Knickerbocker, 1973; Baum & Korn, 1996; 1999; Gimeno et al., 2005) are but a few
economically motivated rationales supporting new market entry. However, foreign market entry
is also influenced by the social cues within the firms‟ environment. For instance, firms learn
vicariously from the experiences of their peers and such learning can affect entry choices (Delios
& Henisz, 2000; Guillén, 2002; Martin, Swaminathan, & Mitchell, 1998). Thus, we now turn to
developing hypotheses about how firms may look to trusted and credible firms for social cues
about risky markets. We focus specifically on two relevant social cues: firms within the
intercorporate board network and credible but rather anonymous signals of prominent firms in
the domestic environment.
Board interlocks. Board interlocks, which are established when an individual affiliated
with one firm serves on the board of another firm, have strong and wide ranging effects on firms‟
strategic actions and decisions. One of the primary mechanisms driving the influence of board
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interlocks is information (Mizruchi, 1996). Interlocks provide points of information conductivity
between organizations. Another process that relies less on learning per se is simple mimetic
isomorphism (Haunschild, 1993). In both perspectives, it is assumed that information flowing
through board network connections is relatively inexpensive, reliable, and focused on high-level
strategic issues (Haunschild & Beckman, 1998). By exposing the focal firm to the decisions and
actions of other firms board networks can induce mimetic behaviors. In fact, research has shown
the positive influence of board interlocks on a variety of major corporate investments such as
acquisitions (Haunschild, 1993; 1994) and savings banks entry into new product and geographic
markets (Haveman, 1993).
Board ties to firms with experience in specific emerging markets allow the focal firm to
gain rich and fine-grained information about opportunities and challenges in these markets.
Especially in the case of a first entry into a newly emerging market – in which the focal firm
cannot rely on internal information – board ties to experienced peers should be relevant as they
allow managers to seek advice and counsel from trusted sources. For instance, the work of
Westphal (1999) demonstrates that CEOs seek advice on major strategic initiatives from external
members of their board. In line with that, external board members with experience in a specific
emerging market can provide vivid, first-hand information on how to set up operations in that
market. In addition, focal firm managers who serve on the boards of experienced peers have
opportunities to absorb relevant information regarding emerging markets. The board interlock
social context thus provides a ready and able cadre of possible role models and advisors who
possess knowledge about emerging markets and should be a particularly robust source of
information about expansion into new markets for inexperienced firms. Consequently, firms that
are tied to other organizations with first-hand experience in specific emerging markets should be
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able to learn about opportunities, risks, and operating procedures in those markets to a greater
extent than firms without such sources of vicarious learning available.
Besides providing information, prior entries of trusted peer firms mitigate risk through
conveying legitimacy on the focal firm‟s international expansion strategy (DiMaggio & Powell,
1983; Scott, 1985). Under conditions of high uncertainty, managers‟ perception of what is a
legitimate course of action is highly influenced by the extent to which strategies have been
executed by other organizations. As managers seek firms upon which to model a decision, like
entering newly emerging markets, trusted and experienced board network partners become likely
role models. For instance, external board members who have experience with setting up
operations in specific emerging markets are likely to agree with a strategy that imitates their own
market entry decisions. This predisposition to support the focal firm‟s subsequent entry into
these markets grants legitimacy to the decision in boardroom discussions and may safeguard the
focal firm‟s management in the case of failure.
In summary, ties to other firms in the intercorporate board networks provide
opportunities to learn about board partners‟ experiences and bestows legitimacy to risky
decisions not readily afforded to firms outside the network. This logic leads to the following
hypothesis:
H1: The likelihood that a firm enters an emerging foreign market is positively associated
with the number of board network ties to other firms with experience entering the same
emerging market.
Prominent Firms. To mitigate risk of entering newly emerging markets, the focal firm
may also rely on signals provided by prior FDI decisions of firms beyond those to which they are
connected by board interlocks. In this vein, extant literature has focused on imitation within the
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focal firm‟s home country and industry (Henisz & Delios, 2001; Henisz & Macher, 2004). For
instance, Gimeno et al. (2005) found for the U.S. telecommunications industry that firms are
likely to imitate a competitor‟s entry decision if one or both parties have a high market share in
the domestic market. Although we believe that intra-industry imitation is important, it is hard to
distinguish whether it is triggered by the focal firm‟s quest for legitimacy or by other, more
traditional economic and competitive reasons. However, if firms scan the environment for
signals about FDI in emerging markets beyond reacting to competitive behavior within their
industry, role models from outside their own industry should also influence their investment
decisions.
Research suggests that formal affiliations with prominent peers grant some legitimacy to
firms (Baum & Oliver, 1991; Chen, Hambrick, & Pollock, 2008; D‟Aveni, 1990; Higgins &
Gulati, 2006; Podolny, 1993). We argue that prominence also attracts imitation from
disconnected and unaffiliated firms because firms seek the legitimating protection of prominent
peers when considering risky decisions. Therefore, we expect that prominent home-country firms
– for instance firms with a history of growth and success – function as role models (DiMaggio &
Powell, 1983; Burns & Wholey, 1993; Haveman, 1993). The focal firm can increase the
legitimacy of its foreign expansion strategy by imitating the market entry decisions of these role
models. This view is based on the argument that imitation results from a status-driven process
(Kraatz, 1998). Consequently, imitation is often targeted at prominent firms, not only because
such firms are more visible but also because the success and status of such firms conveys
legitimacy to their actions (DiMaggio & Powell, 1983). As such, prominent organizations are
viewed as providing a normative roadmap to legitimacy (Haveman, 1993; Miner & Haunschild,
1995).
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Managers‟ perceptions of market risk are influenced by what prominent firms have
previously done. If large and successful firms have entered a risky market, other firms will
process that information and make inferences that the market is less risky than objective data
may suggest. For instance, focal firm managers may perceive that prominent firms can tap into
superior channels of information that provide a more fine-grained picture on that market‟s risk.
In addition, prior investments by prominent firms may reasonably be expected to reduce the local
market risk in the future as those early prominent firms begin to influence local institutions. For
instance, Luo (2001) states that host countries are increasingly willing to consult with prominent
foreign firms when crafting new regulations that affect investment conditions. In addition,
Desbordes and Voday (2006) show that large multinational firms have enough political power to
use legal means to change government regulations in emerging markets. Such influence
strategies will likely have spillover effects for subsequent market entries by other companies.
Consequently, prior entries by prominent firms should provide particularly credible signals under
conditions of high levels of market risk.
The imitation of prominent prior entrants is rational because it provides a signal not only
to the focal firm„s decision makers but also to its stakeholders that the entry into such a market is
a legitimate strategic choice. Consequently, the focal firm‟s market entry decision will be
received more favorably by board members, analysts, and shareholders if the market in question
has already been entered by some prominent firms as well. Moreover, from the decision-makers
viewpoint, should such an entry strategy be unsuccessful, failing in the company of prominent
firms provides a safety net that reduces managerial culpability (Kraatz, 1998).
In summary, we argue that prior market entry decisions by prominent (i.e. especially
large and successful) home-country firms will have a positive influence on the focal firm‟s
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market entry decision. As a consequence, a risky market that has attracted an entry by a
prominent firm will subsequently be more likely to attract additional investments than another
market that has the same level of objectively determined risk. Stated formally,
H2: The likelihood that a firm enters an emerging foreign market is positively
associated with the number of prominent firms that have already entered the same
emerging market.
Risk Mitigation
To this point, we have argued that imitating the behaviors of role models reduces the
perceived risk firms face with respect to emerging market entry. However, not all emerging
markets are equally risky. Consequently, should the social cues available through observing and
imitating both trusted board network partners and prominent peers reduce a firm‟s uncertainty
with respect to market entry, the effects should vary by local market risk. To shed additional
light on the institutional logic behind the risk mitigation effects of emerging market entry
imitation, we explore how different levels and types of uncertainty influence a firm‟s mimetic
behavior. Specifically, we focus on the uncertainty caused by market risk that relates to the
general quality of a market‟s local business climate and its political conditions.
As uncertainty increases, firms narrow their search (Cyert & March, 1963) and rely more
on social cues to make decisions (Festinger, 1954; Pfeffer & Salancik, 1978; Haunschild &
Miner, 1997). Consequently, firms may base some of their own decisions about a particular
strategy not only on a traditional analysis of technical factors but also on whether and to what
extent other firms engage in the same strategy. According to institutional theory, this reliance on
social cues from other actors increases at higher levels of uncertainty (DiMaggio & Powell,
1983). Thus, uncertainty doesn‟t eliminate the consideration of technical factors but rather
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2
increases the importance of social factors (DiMaggio & Powell, 1983; Haunschild & Miner,
1997).
Our previous arguments suggested that social cues are important sources of information
that help firms reduce the uncertainty of entry decisions into emerging markets. Consequently,
these cues should be particularly potent when the risk of emerging market entry is relatively
high. Under legitimacy considerations, it is precisely when uncertainty is at its greatest that
organizations are most prone to imitate the entry decisions of board network partners and role
models. Thus, while high levels of market-specific risk may reduce the rate at which firms enter
new markets, it is in this uncertain context that the influence of trusted and prominent prior
entrants is particularly helpful for the focal firm. This logic leads to the following hypotheses:
H3a: Market risk will moderate the effect of board network ties to firms with
experience entering emerging markets, such that the effect of board member
experience on focal firm emerging market entry will be stronger in markets with
higher levels of risk.
H3b: Market risk will moderate the effect of prior entry by prominent firms with
experience entering emerging markets, such that prior entries by prominent firms
in emerging markets will have a stronger influence on focal firm entry in markets
with higher levels of risk.
We argued that the level of risk has a positive impact on the focal firm‟s
probability to imitate prior market entry decisions of network partners and prominent
peers. Both role models help to reduce the uncertainty surrounding entry decisions in
emerging markets, bestow legitimacy on these decisions, and provide a “safety net” for
the focal firm‟s management in case of failure. Although both role models are important,
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we expect that the relative importance of board network ties and prominent firms may
also depend on the type of risk.
In the case of high levels of business risk, the focal firm faces uncertainty about
the host country‟s overall business climate including factors like bureaucratic hurdles,
access to trained workforce, communication, and transportation. In the light of these
factors, rich first-hand information on the business climate should be especially valuable
for the focal firm. Compared to the credible but rather anonymous signals provided by
the market entries of prominent firms, board network ties have been shown to transmit
fine-grained information (Mizruchi, 1996). Haunschild (1994) demonstrated for instance
that uncertainty positively influenced the transfer of knowledge about acquisition
premiums through trusted board interlocks. Likewise we expect that boardroom
discussions help managers of the focal firm to learn which hurdles to expect in a specific
host country and how to overcome these hurdles. Consequently, under high levels of
business risk, prior entry decisions of board network partners should have a particularly
strong impact on the focal firm to follow suit.
With respect to high levels of political risk, prior entries of prominent firms may
be more influential than those of board network partners. One reason for this argument is
that business risk and political risk are inherently different. Whereas firms are able to
mitigate the consequences of elevated levels of business risk if they know whom to talk
to and what to do if problems occur, they are less able to develop coping strategies in the
case of high levels of political risk. Rather, they profit from a detailed assessment of
relevant political risk factors. This assessment may be indirectly provided by the market
entry decisions of prominent firms. Thus firms are likely to take advantage of the efforts
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of prominent firms‟ political influence (e.g. Desbordes & Voday, 2006) and follow in
their wake as they enter risky political waters. Prominent firms are likely viewed as
having superior access to the home and the host country governments, thereby being
better able to both assess and influence the political constraints of potential host markets.
Other firms from the same home country may try to profit from the more fine-grained
information on the political risk in specific markets by imitating the market entry
decisions of their prominent peers. This logic leads to the following hypotheses:
H4a: Prior market entries of board network partners have a stronger influence on
the focal firm to enter that same market under high levels of business risk than
under high levels of political risk.
H4b: Prior market entries of prominent firms have a stronger influence on the
focal firm to enter that same market under high levels of political risk than under
high levels of business risk.
Data and Methods
Sample
To test our theory we examined initial market entries of large, listed German
stock corporations into 21 former Warsaw Pact countries for the 14-year period between
1990 and 2003. The firms under study are all from former West Germany because
Eastern German firms were not publicly listed and lacked the competitiveness to become
part of the index of large listed German companies (DAX) during the period of under
study.
Against the background of the Cold War between the Soviet Union and its allies
on one side and western nations on the other side, it was virtually impossible for firms
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5
from West Germany to engage in FDI in Warsaw Pact countries before the fall of
communism in 1990.1 As both sides were largely concerned about the containment of
each other in Europe, contact was sparse and German firms had only very little
information on the business climate and political institutions behind the Iron Curtain.
After 1990, former Warsaw Pact countries began to transition into more democratic
economies. In this process, these markets underwent large and often unpredictable
changes rendering the already scarce information less reliable.
To collect information on FDI of German firms in the countries under study, we
contacted the IR departments of all firms under study and asked them to provide a
complete record of the market entry history in former Warsaw Pact markets. To verify
answers and to fill in missing data, we analyzed the reports of all major German
newspapers on foreign direct investments of the firms under study for the years 1989
through 2003 (search terms in the online data based were e.g. “FDI” “direct investment”,
“market entry”). In addition, we compared our data with information on foreign direct
investments as provided by the “Handbook of German Listed Companies”. After
completing these steps, we asked the firms‟ IR departments to correct or confirm our
information. Despite this extensive data collection effort, we still had some missing
values or seemingly inconsistent data points in our sample that needed to be addressed.
As firms are required to file foreign direct investments with their local court„s registration
1
The countries under study are Armenia, Azerbaijan, Belarus, Bulgaria, Czech Republic, Estonia, Georgia,
Hungary, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Romania, Poland, Russia, Slovakia, Tadzhikistan,
Turkmenistan, Ukraine, and Uzbekistan.
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office, we contacted the respective courts and completed our data with information from
the original filings. This exhaustive data collection effort allowed us to reconstruct the
complete history of direct investments into former Warsaw Pact countries for 82 German
firms between 1990 and 2003.
To obtain reliable data on market characteristics we referred to statistics published
by the United Nations, the International Labor Organization, and the Statistical Office of
the European Community. Data on the market risk were acquired from BERI S.A., a
commercial provider of data for business risk and political risk. In a sensitivity analysis
we also used the 2010 version of the political constraint index (POLCON III) depicted by
Henisz (2002) with updated data provided on his website. Firm-level variables were
collected from annual reports.
Variables
Dependent variable. To capture a firm‟s first market entry into a specific former
Warsaw Pact country we used an indicator variable that took the value 1 in case of entry
into a specific market and 0 otherwise. Following the definition of market entry by the
IMF and OECD and in line with prior literature (e.g. Hennart & Park, 1993; Chang,
1995; Barkema, Bell, & Pennings, 1996; Gimeno et al., 2005), market entry was
ascertained if a firm entered with a wholly owned facility or acquired at least 10 % of
ordinary shares of a host country firm.
Independent variables. To capture the local market risk of the 21 host countries
under study, we used two risk indices provided by BERI S.A. The first index (business
risk) is based on fifteen criteria measuring the general quality of a country‟s business
climate and the degree to which nationals and foreigners are granted equal treatment.
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7
Examples for these criteria are policy continuity, enforceability of contracts, degree of
privatization, bureaucratic delays, currency convertibility, access to loans and capital,
communication, and transportation. The criteria are rated by a panel of approximately
105 experts around the world who are executives in banks, other corporations,
governments, or institutions.
The second index (political risk) comprises six internal causes of political risk,
two external risk causes, and two risk symptoms. Internal causes of political risk are for
instance a fractionalization of the political spectrum, coercive measures used to retain
power, and corruption. The external risk causes are the country„s importance to a major
hostile power and negative influence of political forces within the region. Finally, the two
symptoms of political risk are a market‟s political instability and societal conflict. The
assessment of the criteria is provided by a panel of experts who are trained in political
science and/or have diplomatic careers. Besides evaluating present political conditions,
the experts also weigh in on the changes they expect over one, five, and ten years.
In the BERI indices, risk scores range from zero to 100, with higher scores
indicating a more favorable (i.e., less risky) business and political environment. To make
the interpretation of the results more intuitive, we reversed scores by subtracting the
original values from 100 so that the index increases as risk increases. We updated the
values on business and political risk annually for each country in our sample.
We used two variables to capture the effect of role models. To measure the
influence of board interlock ties, we computed the number of board ties to firms that
have already gained experience with entering a specific market under study. As our
sample is comprised of German firms, board ties are established within a two-tier board
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structure. German firms have a management board (akin to the top management team in
Anglo-American firms) and a supervisory board (akin to the board of directors). Whereas
the management board is in charge of making strategic decisions, like entering a foreign
market, the supervisory board monitors these decisions and provides advice. In contrast
to the governance structure of Anglo-American firms, members of a firm‟s management
board – including the CEO – cannot be on the supervisory board of their own firm (Scott,
1985). Board ties can therefore be created in one of three ways. First, a tie is created
when a focal firm manager sits on the board of another firm that has gained experience
with entering specific markets. Second, a tie is created when the manager of another
experienced firm sits on the focal firm‟s board. Finally, a tie can be created when an
outside director sits on both the focal firm‟s board and the board of another firm with
experience entering specific markets. In line with prior literature, our measure of board
ties is the sum of all three forms of ties to experienced firms (Beckman & Haunschild,
2002; Geletkanycz & Hambrick, 1997; Haunschild & Beckman, 1998). As the number of
experienced board ties changes with respect to different markets and over time, we
collected information on ties on a market-by-market basis for each firm and each year
under study. To allow for comparisons between variables, we standardized the measure
for board ties with experienced partners (mean = 0, standard deviation =1).
The second role model indicator is a variable that captures prior market entries of
prominent firms. Prominence is a function of visibility and success (Burnes & Wholey,
1993; Haveman, 1993). Therefore, we were interested in prior market entry decisions by
especially large and successful firms. To capture this effect we treated a firm as
prominent if it was among the top quartile of large firms (measured as a moving two-year
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average of log number of employees) or successful firms (measured accordingly as
moving two-year average of return on assets). For each year, we calculated how many
large and successful firms had already entered a particular emerging market. Prior entry
by successful firms and prior entry by large firms are highly correlated. Consequently, we
created a composite measure by adding the market entries of large and successful firms
and dividing it by two. For ease of interpretation the measure for prominent firms was
standardized. In robustness checks described later, we used alternative specifications for
this measure and our results remained consistent.
Control variables. Based on prior research on FDI location choice, we included
control variables at the country, industry, and firm levels in addition to controlling for
unobserved time effects. All controls are lagged and have been ascertained to affect FDI
location choices by prior research.
At the country-level, we account for factors affecting the attractiveness and risk of
each foreign market. Larger markets have been shown to attract more foreign direct
investments (Davidson, 1980; Coughlin et al., 1991). To account for the host country‟s
market size we include GDP per capita. In addition, per capita GDP has also been used
as indicator for the overall quality of a market„s infrastructure (Ford & Strange, 1999). To
capture the growth of a market, we included a control for the growth in GDP per capita.
Both, size and growth of a foreign emerging market point to the attractiveness of a host
country for market-seeking foreign direct investments (Grubaugh, 1987).
Workforce availability is seen as an important factor for the appeal of a specific
host country (Coughlin et al., 1991). In countries with a comparatively high rate of
unemployment, the workforce is generally expected to have a higher appreciation for
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their jobs and to accept lower wages and longer hours of work (Billington, 1999). To
capture this notion, we included the rate of unemployment for each country and each year
under study.
A widely used country level control variable is geographic distance (Davidson,
1980; Terpstra & Yu, 1988; Ito & Rose, 2002). Distance is regarded as an indicator for
the riskiness of investment decisions, logistical challenges, and monitoring requirements.
In addition, focal firm managers generally have less familiarity with countries that are
further away. We measure geographic distance between the focal firm‟s headquarters in
Germany and the capital of the host country in log of kilometers.
On the industry level we controlled for the number of prior entries within the
industry. From an economic perspective, these entries may be the result of an industryspecific affinity for expansion into emerging markets or of a market‟s attractiveness for
firms in a specific industry. Against the background of an institutional perspective,
Henisz and Delios (2001) and Guillen (2002) show that firms imitate risky FDI decisions
of peers in their industry or business group. Besides prior industry entries we also
controlled for unobserved industry effects by creating a dummy variable for each of the
ten broad industry categories represented in our study. We used an adapted version of the
classification created by the Deutsche Boerse Group, an equivalent of the SEC in the U.S.
At the firm level, we controlled for firm size by including the log of the number of
employees. Firm size is related to factors that affect the ability to enter foreign markets
because larger firms tend to have greater financial and social resources, which influence
the propensity to enter foreign markets (Delacroix & Swaminathan, 1991). Additionally,
we controlled for firm performance by including the firm‟s ROA in all models. Profitable
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firms may be more capable of absorbing the costs and risks involved with entering a
foreign emerging market.
Firms that have already gained experience with prior market entries in one or
more former Warsaw Pact countries may have developed routines and processes enabling
them to successfully enter additional markets in the same region. Therefore we accounted
for the firm‟s years of experience in the region (i.e. the number of years since the first
market entry in any of the countries under study). In addition, firms‟ underlying
international orientation may affect the propensity to engage in foreign direct investment.
Therefore, we controlled for the firms‟ foreign sales ratio, measured as the ratio of
foreign sales to total sales.
We controlled for the firm‟s centrality within the board network structure. Firms
occupying a more central position within the board network have a greater exposure to
various sources of information (Davis, 1991; Tsai, 2001). Therefore, central firms could
receive legitimation for their market entry decisions independently of experienced board
ties. In addition, central firms enjoy a high status in the home country and have been
shown use this advantage to enter foreign markets at a higher rate than less central peers
(Guler & Guillén, 2010). Following Davis and Greve (1997) centrality was measured as a
firm‟s total number of board network ties – independent of the market entry experience of
its tied-to partners. Finally, institutional changes unfold to varying degrees and on
different timetables within each emerging market. To account for these unobserved
effects, we also include control variables for time using year dummy variables. Because
we model entry risk on a market-by-market, year-by-year basis, the year controls are
market specific.
22
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Analysis
A firm‟s decision to invest in a foreign emerging market is a dynamic process and
should, therefore, be studied using explicitly dynamic methods (Gimeno et al., 2005). In
line with prior research on foreign market entry decisions (Gimeno, 2004; Henisz &
Delios, 2001) we used an event history analysis. Specifically, we used a discrete-time
logit specification of event history with each spell corresponding to a year, and obtained
the results through maximum likelihood estimation (Allison, 1984).
Our sample includes 1,654 firm-country combinations, of which 404 ended with
an entry move. Each year (beginning in 1990) represents a spell, or time span, in which
firms may potentially engage in foreign direct investment. If a firm did not enter a
particular former Warsaw Pact country throughout the fourteen-year observation period,
the spell was right censored by the end of 2003. Spells were updated at the end of each
year to accommodate the annual time-varying covariates. This methodology enables us to
estimate the propensity of foreign entry for the same organization at multiple intervals,
and accounts for censored observations for firms that never engaged in foreign entry in a
specific country in the period of observation.
Our modeling procedure allows us to study the firms‟ first entry into each of the
21 countries. Once a firm entered a specific country in any given year, the next year‟s
risk set is diminished by the firm-country spells for which a market entry has already
occurred. This yielded a total of 19,901 firm-country-year spells (had no entries occurred
by any firms in any market in any year, the total firm-country-year spells would have
been 24,108). The model has the following form:
,
23
3
where
represents the logarithmic odds that firm j will enter foreign country i
at any point during time t; a represents the baseline hazard rate of entry occurring at any
time t; b1 represents the change in the log-odds for each one-unit increase in a timeinvariant covariate X1(ji); and b2 represents the change in the log-odds for each one-unit
increase in a time-varying covariate X2(jit-1). To account for the possible nonindependence of firm country spells, we used a robust variance estimator (Lin & Wei,
1989).
Results
Table 1 contains descriptive statistics and correlations. Please note that the mean
risk for the countries in our sample is 62.72 (with a median of 63) for business risk and
59.71 (median 59) for political risk throughout the study period. According to the
categorization of BERI, risk scores of 61 or higher are deemed as prohibitively high,
thereby indicating the high uncertainty surrounding the market entry decision under
study.
********Insert Table 1 about here********
Results for our analyses using the business risk measure of local market risk are
presented in Table 2. The table does not report the results for the dummy variables for the
years or industry categories. Most of the industry dummies are not significant. However,
firms in the automobile industry were more likely than other firms to invest in the region
under study.
********Insert Table 2 about here********
Model 1 shows the results for the control variables. The effects of our control
variables conform well with prior literature. For instance, the attractiveness of an
24
4
emerging market – as captured by the growth in GDP and the rate of unemployment –
had a positive effect on the focal firm‟s likelihood of entry while the geographical
distance had a corresponding negative effect. Prior entries within the industry as well as
firm size and performance affect the focal firm‟s entry decision positively. In addition, a
firm‟s experience in the region and its foreign sales ratio had positive and significant
effects.
In line with our baseline hypothesis and echoing the results of prior research
(Henisz & Delios, 2001; Henisz & Macher, 2004), Model 2 reveals that local business
risk lowered firms‟ propensity to enter a specific foreign market (ß = -0.101, p < 0.001).
Model 3 presents the results for the main effects of the factors hypothesized to affect
emerging market entry. As predicted in H1 and H2, board ties to experienced firms (ß =
0.172, p < 0.001) and prior entries by prominent firms (ß = 0.254, p< 0.001) had positive
effects on the likelihood of market entry. A cursory comparison of the coefficients
suggests that signals provided by prominent firms were more influential for the focal
firm‟s market entry decision than signals of peers within the firm‟s board interlock
network. A Wald test based on marginal effects for ties to experienced board network
partners and entries by prominent firms further supports this result.
Model 4 reports traditional interaction effects between market risk and both risk
mitigators, i.e. ties to experienced firms and prior entries by prominent firms. Consistent
with our expectations, the effect of experienced board ties (ß = 0.033, p < 0.001) and
prominent firms (ß = 0.015, p < 0.05) became stronger as business risk increased. As the
inclusion of an interaction term in a non-linear model can lead to misleading conclusions
(Hoetker, 2007), in additional analyses we followed a procedure suggested by Shaver
25
5
(2007). In Models 5 and 6, we split the sample at the mean of market risk and assessed
the effects of both risk mitigators on the focal firm‟s market entry propensity for both
partial samples. The findings reveal that prior entry by board network ties and prior
entries by prominent firms were significantly stronger for markets with risk scores above
the mean. Specifically, the coefficient of board ties was 0.380 (p < 0.001) in the context
of higher business risk markets but 0.117 (p < 0.01) in the context of lower risk emerging
markets. Likewise, the coefficient of prominent firms was 0.345 (p < 0.01) for higher
business risk markets but 0.183 (p < 0.001) for lower risk emerging markets. We
conducted Wald tests based on the marginal effects of board ties and prominent firms
across subsamples with high and low levels of business risk and confirmed that the
differences between models were statistically significant.
Table 3 reports the results when political risk is used in lieu of business risk as the
indicator of local market risk. The results are consistent across both models. Political risk
reduces the likelihood of entry (ß = -0.103, p < .001), as reported in Model 2. Likewise,
both board ties (ß = 0.157, p < .001) and prominent firms (ß = 0.237, p < .001) had
positive effects on the likelihood of entry. Furthermore, both board ties and prominent
firm effects were stronger under conditions of higher levels of risk (Models 4-6). Again,
Wald tests based on marginal effects confirmed that the differences in effects across
higher and lower levels of risk were significant.
********Insert Table 3 about here********
As hypothesized in H4a and H4b the effect of board ties on market entry was
stronger under conditions of high levels of business risk (ß = 0.380, Table 2, Model 6)
than under conditions of high levels of political risk (ß = 0. 258, Table 3, Model 6).
26
6
Conversely, the effect of prominent firms was stronger under conditions of higher levels
of political risk (ß = 0.434, Table 3, Model 6) than under high levels of business risk
(ß=0.345, Table 2, Model 6). Wald tests based on marginal effects confirm that these
differences were statistically significant. These effects are illustrated in Figure 1.
********Insert Figure 1 about here********
Robustness Checks: To check the robustness of our model specification, we used
piecewise logistic regression and our results were unaffected. As a first market entry in
any European country is a relatively rare event, we also applied a rare event logit model
(King & Zeng, 2001) and found that the strength and significance of our results remained
unchanged. In addition, we tested the robustness of some of our measures. Recall that our
measure of prominent firm entries into emerging markets was a composite measure of
entries by especially large and successful firms. To verify the robustness of this measure,
we entered the count of market entries by large and especially successful firms in
separate models. The results of these analyses remained consistent and provide additional
support for our hypotheses. In further analyses we took into account that the focal firm‟s
imitation of prominent peers may be restricted to more recent entry into emergent
markets, rather than entry during any prior period. Accordingly, in another supplemental
analysis we included only those market entries of large and successful firms that
happened in the two prior years. Our results remained consistent and the impact of more
recent emerging market entries of prominent firms was considerably stronger than the
measure of prior entry across all years under study. Thus our reported results in Tables 2
and 3 may understate the effect of prominent firm entry.
27
7
To check the robustness of our risk measure, we substituted the data for political
risk as provided by BERI S.A. with data from Henisz„ (2002) POLCON index that
provides a yearly measure for a market‟s political constraints. Our results remained
consistent. In addition, we chose different cut-off points for business risk and political
risk. Splitting the sample at the median of market risk (instead of the mean) further
emphasized the importance of experienced board network partners under high levels of
business risk and of prior entries by prominent firms under high levels of political risk.
For instance, whereas the impact of prominent firms outweighed the impact of board ties
under low levels of risk, the latter became almost three times as important under high
levels of risk.
Discussion and Conclusion
This study investigated the effect of two different types of role models – trusted
board network partners and prominent firms in the home country – on entry patterns into
newly emerging markets in former Warsaw Pact countries. In line with prior literature,
we found that local market risk was a significant deterrent to entry; while the mean level
of market risk is very high, those countries with lower levels of risk received significantly
more FDI than higher risk markets. In such risky markets, the behaviors of trusted and
prominent peers are likely to become social cues that impact the focal firm‟s decision to
enter. Accordingly we found that prior entries by both, board network partners and other
prominent German firms significantly influenced entry patterns. These findings are
consistent with the idea that the choice of entry into risky emerging markets is not only
guided by economic and industry-specific considerations but that it is also strongly
28
8
influenced by a firm‟s quest for a reduction of uncertainty through the use of mimetic
strategies (Delios & Henisz, 2000; Guillen, 2002).
To get a more fine-grained picture of the firms‟ mimetic behavior we analyzed the
impact of different levels and types of market-specific risk on the imitation of prior entry
moves of board network partners and prominent firms. These analyses led to a number of
noteworthy results. As the level of market risk increases – either with respect to the
business climate or to political conditions – firms become even more prone to imitate role
models‟ behaviors. This finding points to the importance of imitation under high levels of
risk as suggested by institutional theory (DiMaggio & Powell, 1983). Although economic
characteristics have a significant impact on market entry decisions, social factors gain in
importance under higher level of market risk. Consequently, research on international
expansion strategies may be well advised to include economic and social factors into
their models.
The importance of imitation under conditions of high levels of risk has not only
implications for future research but also for countries that want to attract foreign direct
investment. Because firms tend to imitate the market choices of tied-to partners and
prominent prior movers, countries can profit from well directed efforts to attract foreign
direct investment by firms that are central to another country‟s board network as well as
by large and successful companies. Entry decisions of these prior movers send a signal
about a market‟s attractiveness to other firms within the home country„s domestic market.
Even emerging markets with considerably high levels of risk become more attractive
after having been entered by at least one trusted board network partner or prominent first
mover. It should, however, be noted that the risk associated with an emerging market is in
29
9
general negatively associated with a firm‟s propensity to invest in this market.
Furthermore, we find that markets with a risk level above a certain threshold have not
been entered by any firm in our sample. Thus, some of the markets under study seem to
have a prohibitively high risk that keeps firms in our sample from engaging in foreign
direct investments. If the governments of these markets want to attract foreign direct
investment, they have to improve the overall business climate for foreign firms and lower
their political risk.
With respect to the imitation of prominent firms, we found strong support for the
institutional perspective.
Our findings also provide interesting insights into the type of social cues that
firms pay attention to given the nature of uncertainty they face. While our results suggest
that both sources of information are influential, learning from trusted and accessible
informants, like that available in board networks, appear most influential with respect to
uncertainty related to business risks. Conversely, more anonymous market signals, such
as that available through observation of prominent firms in the same organizational field,
seem to be more influential under conditions of high uncertainty associated with political
risk. This finding suggests that imitation is not only used as an efficient means to acquire
information but also as a way to gain legitimacy for foreign entry decisions. As Lu (2002)
suggested in a related context, it is likely that managers assume that imitating prior
foreign market entries of prominent firms will have a positive outcome. In addition, focal
firm decision makers are likely to expect that prominent firms who enter markets with
high degrees of political risk will make the necessary investments to improve local
institutions in a manner that will subsequently reduce political risk (Desbordes & Voday,
30
0
2006). Consequently, imitation of prominent prior movers might be regarded as safer bet
than entering untested emerging markets or markets entered by less prominent firms.
Future research might explore whether the effects of different types of social cues also
apply to other risky strategies.
Miller (1992) described five strategic moves that help firms to mitigate the risk
associated with international expansion and operation: Exercising control over the
environment, increasing a firm‟s flexibility, engaging in cooperation, imitating other
firms, and avoiding risk. Our results show that the latter two of Miller‟s (1992) strategic
moves apply to entry decisions in former Warsaw Pact countries. Our findings are
consistent with the idea that firms imitate prior movers in order to mitigate the risk
associated with international expansion.
The results of a number of control variables also add to our understanding of
emerging market entry. Our results show that a firm‟s own experience, such as prior
entries within the region and the foreign sales ratio, had a positive impact on FDI
decisions. The impact is larger with respect to markets that score high on either risk
index. However, even in the presence of firm experience, board ties to experienced
partners and prior entries by prominent firms still play an important role. Future research
may analyze whether prior experience complements or substitutes the social cue
legitimation effects of mimetic behavior. Furthermore, network centrality was
insignificant in all models. Research on US venture capital firms has found that the social
status derived from network centrality provides legitimation for foreign direct
investments (Guler & Guillén, 2010). While this may be the case for less risky
31
1
international expansion strategies, our results suggest that it is not the firm‟s position
within a network that facilitates a risky market entry decision; rather, it is the information
about prior entries by tied-to firms that bestows legitimacy on the firm‟s own decision to
enter the same markets.
Finally, it is worth noting that top management teams (TMT) who are among the
first to enter a foreign market run the risk of being held responsible for a failure. If the
same TMTs follow the advice of experienced board members, they may be less likely to
be blamed for possible failure. Ahmadjan and Robinson (2001) showed that TMTs could
profit from a “safety in numbers” effect. Our results suggest that the effect may be even
stronger if it isn‟t based on the sheer number of firms that imitate a specific strategy but
on prior decisions of role models.
Like all empirical research, our study has a number of limitations. First, our
sample comprises only the largest listed firms in Germany. Thus our findings may not generalize
to very small or young firms. Future research may address this issue and analyze risky market
entry decisions of less established firms. Second, while we expect our findings to generalize to
many kinds of uncertainty-laden strategies, we analyzed the influence of role models on risky
decisions in a specific context, i.e. German firms‟ market entry decisions in former Warsaw Pact
countries. It remains to be seen whether different types of role models show similar effects with
respect to other risky strategies.
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2
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37
7
Table 1
Descriptive Statistics and Correlations
Mean
Entry
Min
Max
1
0.020
0.00
1.00
1 Business risk
62.718
51.00
74.00
-0.11
2 Political risk
59.71
45.00
73.00
-0.10
3 Board ties*
4 Prominent firms*
0.000
-0.36
10.20
0.19
5 GDP per capita
6 GDP growth
7 Rate of unemployment
8 Geo distance (log)
0.000
-0.71
4.69
0.17
1.916
0.01
7.56
0.08
-1.326
-44.90
17.80
0.01
5.243
24.375
0.08
1.83
20.00
51.05
0.09
0.725
0.00
15.00
0.14
10 Employees (log)
9.543
4.80
13.09
0.05
12 Firm exp. in region
0.038
3.700
-0.32
0.00
0.42
14.00
-0.22
-0.30
-0.17
-0.34
-0.13
0.26
-0.13
9 Prior industry entries
11 Return on assets
2
0.00
0.00
13 Foreign sales ratio
0.465
0.00
0.89
0.02
14 Network centrality
11.690
0.00
78.00
0.05
-0.27
0.01
-0.03
-0.24
-0.06
* Standardized Values
N = 19,901; correlations greater than.02 are significant at p<.05.
0.06
3
4
5
6
7
8
9
10
11
12
13
14
-0.28
-0.30
0.32
-0.35
0.18
0.31
-0.36
0.09
0.01
0.25
-0.24
0.30
0.25
0.00
0.14
0.29
-0.29
-0.51
-0.46
0.02
-0.35
0.41
0.42
0.25
0.11
0.35
-0.34
0.02
0.22
-0.06
-0.06
0.00
-0.03
0.05
-0.10
-0.03
-0.06
0.00
-0.01
0.04
0.02
0.01
0.01
-0.17
-0.26
0.11
-0.13
-0.27
0.34
0.19
0.11
0.11
0.17
-0.07
0.05
-0.05
-0.08
0.11
0.04
0.04
0.13
0.27
0.10
0.38
0.08
0.25
-0.03
-0.02
-0.07
-0.06
0.03
-0.10
0.70
-0.18
0.03
-0.29
-0.01
0.07
Table 2: Impact of Role Models Under Varying Levels of Business Risk
Discrete time event analysis; robust standard errors in parenthesis
Model 1
Controls
Constant
GDP per capita
GDP growth
Rate of unemployment
Geographical distance (log)
Prior entries within industry
Employees (log)
Return on Assets
Firm experience in the region
(in years)
Foreign sales ratio
Network centrality
Industry
Year
-8.105
(0.82)
0.00
(0.05)
0.035
(0.01)
0.056
(0.01)
-0.098
(0.01)
0.191
(0.03)
0.351
(0.06)
2.222
(1.08)
0.076
(0.03)
0.51
(0.31)
0.001
(0.01)
Y
Y
***
***
***
***
***
***
*
**
*
Model 2
Business
risk
-2.075
(1.32)
-0.128
(0.05)
0.028
(0.01)
0.059
(0.01)
-0.08
(0.01)
0.175
(0.03)
0.348
(0.06)
2.227
(1.08)
0.079
(0.03)
0.558
(0.31)
0.001
(0.01)
Y
Y
+
**
**
***
***
***
***
*
**
*
Model 3
Role
models
-3.418
(1.36)
-0.137
(0.06)
0.028
(0.01)
0.034
(0.01)
-0.067
(0.01)
0.119
(0.03)
0.316
(0.06)
2.617
(1.15)
0.087
(0.03)
0.654
(0.32)
-0.006
(0.01)
Y
Y
Model 4
Interactions
**
**
**
**
***
***
***
*
**
*
-1.071
(1.47)
-0.108
(0.06)
0.025
(0.01)
0.021
(0.01)
-0.063
(0.01)
0.12
(0.03)
0.317
(0.06)
2.591
(1.14)
0.079
(0.03)
0.715
(0.32)
-0.008
(0.01)
Y
Y
*
**
+
***
***
***
*
**
*
Model 5
Split Sample
Low Risk
-0.107
(2.29)
0.019
(0.08)
0.021
(0.02)
0.052 **
(0.02)
-0.046 ***
(0.01)
0.077 **
(0.03)
0.289 ***
(0.07)
2.827 *
(1.35)
0.066 *
(0.03)
0.57 +
(0.36)
-0.007
(0.01)
Y
Y
Model 6
Split Sample
High Risk
-21.315 ***
(3.21)
-0.119
(0.10)
0.017 +
(0.01)
0.044 *
(0.02)
-0.076 ***
(0.02)
0.209 **
(0.08)
0.346 **
(0.11)
1.111
(1.97)
0.121 *
(0.07)
1.222 *
(0.65)
0
(0.01)
Y
Y
(Table 2 continued)
Model 1
Business risk
Model 2
-0.101 ***
(0.02)
Board ties
Prominent firms
Model 3
-0.075 ***
(0.02)
0.172 ***
(0.04)
0.254 ***
(0.05)
Board ties * business risk
Prominent firms * business
risk
N
chi2
19.901
496.959 ***
+ p < 0.10, * p < 0.05, ** p < 0.01, *** p < 0.001
19.901
598.23 ***
19.901
695.068 ***
Model 4
-0.116 ***
(0.02)
-1.677 ***
(0.43)
-0.658
(0.53)
0.033 ***
(0.01)
0.015 *
(0.01)
19.901
764.839 ***
Model 5
-0.137 ***
(0.04)
0.117 **
(0.04)
0.183 ***
(0.05)
Model 6
-0.006
(0.04)
0.38 ***
(0.11)
0.345 **
(0.11)
8.351
423.542 ***
11.550
4817.036 ***
Table 3: Impact of Role Models Under Varying Levels of Political Risk
Discrete time event analysis; robust standard errors in parenthesis
Model 1
Controls
Constant
GDP per capita
GDP growth
Rate of unemployment
Geo. distance
Entries within industry
Employees (log)
Return on Assets
Experience in the region
Foreign sales ratio
Centrality
Industry
Year
-8.105
(0.82)
0
(0.05)
0.035
(0.01)
0.056
(0.01)
-0.098
(0.01)
0.191
(0.03)
0.351
(0.06)
2.222
(1.08)
0.076
(0.03)
0.51
(0.31)
0.001
(0.01)
Y
Y
Model 1
***
***
***
***
***
***
*
*
+
Model 2
Political
risk
-2.697
(1.08)
-0.017
(0.05)
0.027
(0.01)
0.068
(0.01)
-0.074
(0.01)
0.153
(0.03)
0.351
(0.06)
2.216
(1.08)
0.081
(0.03)
0.624
(0.31)
0.001
(0.01)
Y
Y
Model 2
Model 3
Role models
*
**
***
***
***
***
*
**
*
-3.834
(1.11)
-0.056
(0.05)
0.027
(0.01)
0.044
(0.01)
-0.063
(0.01)
0.109
(0.03)
0.319
(0.06)
2.564
(1.14)
0.088
(0.03)
0.697
(0.32)
-0.006
(0.01)
Y
Y
Model 3
Model 4
Interactions
***
**
***
***
***
***
*
**
*
Model 5
Split sample
Low risk
-0.605
-4.425
(1.30)
(1.67)
-0.008
0.169
(0.05)
(0.08)
0.021 *
0.022
(0.01)
(0.02)
0.024 +
0.052
(0.01)
(0.02)
-0.058 ***
-0.049
(0.01)
(0.01)
0.106 ***
0.077
(0.03)
(0.03)
0.324 ***
0.317
(0.06)
(0.07)
2.495 *
3.371
(1.14)
(1.16)
0.084 **
0.087
(0.03)
(0.03)
0.75 *
0.664
(0.32)
(0.35)
-0.006
-0.005
(0.01)
(0.01)
Y
Y
Y
Y
Model 4
Model 5
Model 6
Split sample
High risk
**
-11.601
(3.90)
*
-0.056
(0.12)
0.034
(0.02)
**
-0.001
(0.03)
***
-0.086
(0.02)
*
0.241
(0.07)
***
0.357
(0.12)
**
-1.57
(3.10)
*
0.087
(0.07)
+
1.2
(0.78)
-0.002
(0.02)
Y
Y
Model 6
**
*
***
***
**
Political risk
-0.103 ***
(0.01)
Board ties
Prominent firms
-0.078 ***
(0.02)
0.157 ***
(0.04)
0.237 ***
(0.05)
Board ties * Political risk
Prominent firms *
Political risk
N
chi2
19.901
496.959 ***
19.901
668.716 ***
+ p < 0.10, * p < 0.05, ** p < 0.01, *** p < 0.001
19.901
747.579 ***
-0.136
(0.02)
-1.47
(0.37)
-1.215
(0.54)
0.03
(0.01)
***
***
*
-0.086 ***
(0.03)
0.104 *
(0.04)
0.148 **
(0.05)
0.052
(0.06)
0.258 **
(0.10)
0.434 **
(0.15)
***
0.026 **
(0.01)
19.901
754.27 ***
10.117
504.656 ***
9.784
329.986 ***
Figure 1
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