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Investor Response to Environmental Risk in Foreign Direct Investment

Author

Listed:
  • Anthony Goerzen

    (Queen’s University)

  • Stephen Sapp

    (Richard Ivey School of Business, University of Western Ontario)

  • Andrew Delios

    (NUS Business School, National University of Singapore)

Abstract

The theory of internalization suggests that proprietary assets—usually in the form of advertising and/or marketing capabilities—are the key to understanding a firm’s ability to create value in foreign markets. We show that the capacity of a multinational corporation (MNC) to create value in a foreign direct investment (FDI) can also result from the use of an alternative proprietary asset; that is, the skills and management expertise that are acquired through the accumulation of various forms of foreign experience. The value creation comes from the extension of an MNC’s experience-based capabilities to the host country to mitigate country-level risks. This experience can moderate the negative influence of environmental risk to create value for a firm and its investors. In our sample of 305 FDIs, we find that Japanese MNCs that had direct or indirect experience in a host country showed greater abnormal returns in a FDI, particularly where environmental risk was high.

Suggested Citation

  • Anthony Goerzen & Stephen Sapp & Andrew Delios, 2010. "Investor Response to Environmental Risk in Foreign Direct Investment," Management International Review, Springer, vol. 50(6), pages 683-708, December.
    • Handle: RePEc:spr:manint:v:50:y:2010:i:6:d:10.1007_s11575-010-0058-8
    DOI: 10.1007/s11575-010-0058-8
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