IDEAS home Printed from https://ideas.repec.org/a/eee/iburev/v31y2022i6s0969593122000592.html
   My bibliography  Save this article

CEO compensation, governance structure, and foreign direct investment in conflict-prone countries

Author

Listed:
  • Lee, Hyoungjin
  • Park, Junmin
  • Chung, Chris Changwha

Abstract

Despite the apparent risks associated with an investment in conflict-prone countries, these countries still attract substantial investment from multinational enterprises (MNEs). Combining prospect theory and agency theory on principal–principal conflict, this study examines how CEO compensation affects investment decisions in conflict-prone countries. Using a panel dataset of 1036 privately owned Chinese MNEs from 2010 to 2019, we find that undercompensated CEOs are more likely to invest in conflict-prone countries as a means of compensating for the lack of remuneration. This effect, however, is contingent on the governance structures of their firms. We argue that the presence of more independent directors on boards makes undercompensated CEOs more likely to invest in conflict-prone regions. In contrast, the presence of more supervisors on boards makes undercompensated CEOs less likely to invest in such regions.

Suggested Citation

  • Lee, Hyoungjin & Park, Junmin & Chung, Chris Changwha, 2022. "CEO compensation, governance structure, and foreign direct investment in conflict-prone countries," International Business Review, Elsevier, vol. 31(6).
    • Handle: RePEc:eee:iburev:v:31:y:2022:i:6:s0969593122000592
    DOI: 10.1016/j.ibusrev.2022.102031
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0969593122000592
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ibusrev.2022.102031?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Andrew Delios & Witold J. Henisz, 2003. "Political hazards, experience, and sequential entry strategies: the international expansion of Japanese firms, 1980–1998," Strategic Management Journal, Wiley Blackwell, vol. 24(11), pages 1153-1164, November.
    2. Liu, Yi & Li, Yuan & Xue, Jiaqi, 2011. "Ownership, strategic orientation and internationalization in emerging markets," Journal of World Business, Elsevier, vol. 46(3), pages 381-393, July.
    3. Martin J. Conyon & Lerong He, 2016. "Executive Compensation and Corporate Fraud in China," Journal of Business Ethics, Springer, vol. 134(4), pages 669-691, April.
    4. Guy L. F. Holburn & Bennet A. Zelner, 2010. "Political capabilities, policy risk, and international investment strategy: evidence from the global electric power generation industry," Strategic Management Journal, Wiley Blackwell, vol. 31(12), pages 1290-1315, December.
    5. Rodion Skovoroda & Shaun Goldfinch & Karl DeRouen & Trevor Buck, 2019. "The Attraction of FDI to Conflicted States: The Counter-Intuitive Case of US Oil and Gas," Management International Review, Springer, vol. 59(2), pages 229-251, April.
    6. Michael R. M. Abrigo & Inessa Love, 2016. "Estimation of panel vector autoregression in Stata," Stata Journal, StataCorp LP, vol. 16(3), pages 778-804, September.
    7. Igor Filatotchev & Roger Strange & Jenifer Piesse & Yung-Chih Lien, 2007. "FDI by firms from newly industrialised economies in emerging markets: corporate governance, entry mode and location," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 38(4), pages 556-572, July.
    8. Joon Mahn Lee & Jung Chul Park & Timothy B. Folta, 2018. "CEO career horizon, corporate governance, and real options: The role of economic short‐termism," Strategic Management Journal, Wiley Blackwell, vol. 39(10), pages 2703-2725, October.
    9. Ashby, Nathan J. & Ramos, Miguel A., 2013. "Foreign direct investment and industry response to organized crime: The Mexican case," European Journal of Political Economy, Elsevier, vol. 30(C), pages 80-91.
    10. Kim Claes & Balagopal Vissa, 2020. "Does Social Similarity Pay Off? Homophily and Venture Capitalists’ Deal Valuation, Downside Risk Protection, and Financial Returns in India," Organization Science, INFORMS, vol. 31(3), pages 576-603, May.
    11. Meyer, Klaus E. & Thein, Htwe Htwe, 2014. "Business under adverse home country institutions: The case of international sanctions against Myanmar," Journal of World Business, Elsevier, vol. 49(1), pages 156-171.
    12. Conyon, Martin J. & He, Lerong, 2011. "Executive compensation and corporate governance in China," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1158-1175, September.
    13. Mike W. Peng, 2004. "Outside directors and firm performance during institutional transitions," Strategic Management Journal, Wiley Blackwell, vol. 25(5), pages 453-471, May.
    14. Tatiana Kostova & G Tomas M Hult, 2016. "Meyer and Peng’s 2005 article as a foundation for an expanded and refined international business research agenda: Context, organizations, and theories," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 47(1), pages 23-32, January.
    15. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    16. Lien, Yung-Chih & Piesse, Jenifer & Strange, Roger & Filatotchev, Igor, 2005. "The role of corporate governance in FDI decisions: Evidence from Taiwan," International Business Review, Elsevier, vol. 14(6), pages 739-763, December.
    17. David J Sharp & Stephen B Salter, 1997. "Project Escalation and Sunk Costs: A test of the International Generalizability of Agency and Prospect Theories," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 28(1), pages 101-121, March.
    18. Lin, Bing-Xuan & Lu, Rui, 2009. "Managerial power, compensation gap and firm performance -- Evidence from Chinese public listed companies," Global Finance Journal, Elsevier, vol. 20(2), pages 153-164.
    19. Xiaonian Xu & Yan Wang, 1997. "Ownership structure, corporate governance, and corporate performance : the case of Chinese stock companies," Policy Research Working Paper Series 1794, The World Bank.
    20. Chen, Gongmeng & Firth, Michael & Gao, Daniel N. & Rui, Oliver M., 2006. "Ownership structure, corporate governance, and fraud: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 424-448, June.
    21. Michael N. Young & Mike W. Peng & David Ahlstrom & Garry D. Bruton & Yi Jiang, 2008. "Corporate Governance in Emerging Economies: A Review of the Principal–Principal Perspective," Journal of Management Studies, Wiley Blackwell, vol. 45(1), pages 196-220, January.
    22. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    23. Mike W. Peng & Sunny Li Sun & Lívia Markóczy, 2015. "Human Capital and CEO Compensation during Institutional Transitions," Journal of Management Studies, Wiley Blackwell, vol. 52(1), pages 117-147, January.
    24. Trevor Buck & Xiaohui Liu & Rodion Skovoroda, 2008. "Top executive pay and firm performance in China," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 39(5), pages 833-850, July.
    25. Muzychenko, Olga & Liesch, Peter W., 2015. "International opportunity identification in the internationalisation of the firm," Journal of World Business, Elsevier, vol. 50(4), pages 704-717.
    26. Barnes, Paul & Oloruntoba, Richard, 2005. "Assurance of security in maritime supply chains: Conceptual issues of vulnerability and crisis management," Journal of International Management, Elsevier, vol. 11(4), pages 519-540, December.
    27. Chengguang Li & Ilgaz Arikan & Oded Shenkar & Asli Arikan, 2020. "The impact of country-dyadic military conflicts on market reaction to cross-border acquisitions," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 51(3), pages 299-325, April.
    28. Hu, Helen Wei & Cui, Lin, 2014. "Outward foreign direct investment of publicly listed firms from China: A corporate governance perspective," International Business Review, Elsevier, vol. 23(4), pages 750-760.
    29. Clarke, Donald C., 2003. "Corporate governance in China: An overview," China Economic Review, Elsevier, vol. 14(4), pages 494-507.
    30. Abadie, Alberto & Gardeazabal, Javier, 2008. "Terrorism and the world economy," European Economic Review, Elsevier, vol. 52(1), pages 1-27, January.
    31. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    32. Caroline T Witte & Martijn J Burger & Elena I Ianchovichina & Enrico Pennings, 2017. "Dodging bullets: The heterogeneous effect of political violence on greenfield FDI," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(7), pages 862-892, September.
    33. Buckley, Peter J. & Chen, Liang & Clegg, L. Jeremy & Voss, Hinrich, 2016. "Experience and FDI Risk-taking: A Microfoundational Reconceptualization," Journal of International Management, Elsevier, vol. 22(2), pages 131-146.
    34. Czinkota, Michael R. & Knight, Gary A. & Liesch, Peter W. & Steen, John, 2005. "Positioning terrorism in management and marketing: Research propositions," Journal of International Management, Elsevier, vol. 11(4), pages 581-604, December.
    35. Su, Yiyi & Xu, Dean & Phan, Phillip H., 2008. "Principal—Principal Conflict in the Governance of the Chinese Public Corporation," Management and Organization Review, Cambridge University Press, vol. 4(1), pages 17-38, March.
    36. Hansen, Bruce E., 1992. "Testing for parameter instability in linear models," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 517-533, August.
    37. Stoyan Tenev & Chunlin Zhang & Loup Brefort, 2002. "Corporate Governance and Enterprise Reform in China : Building the Institutions of Modern Markets," World Bank Publications - Books, The World Bank Group, number 15237.
    38. Driffield, Nigel & Jones, Chris & Crotty, Jo, 2013. "International business research and risky investments, an analysis of FDI in conflict zones," International Business Review, Elsevier, vol. 22(1), pages 140-155.
    39. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    40. Chang Hoon Oh & Jennifer Oetzel, 2017. "Once bitten twice shy? Experience managing violent conflict risk and MNC subsidiary‐level investment and expansion," Strategic Management Journal, Wiley Blackwell, vol. 38(3), pages 714-731, March.
    41. Chunxin Jia & Shujun Ding & Yuanshun Li & Zhenyu Wu, 2009. "Fraud, Enforcement Action, and the Role of Corporate Governance: Evidence from China," Journal of Business Ethics, Springer, vol. 90(4), pages 561-576, December.
    42. Michael R.M. Abrigo & Inessa Love, 2016. "Estimation of Panel Vector Autoregression in Stata: a Package of Programs," Working Papers 201602, University of Hawaii at Manoa, Department of Economics.
    43. Wen-Ting Lin & Kuei-Yang Cheng, 2013. "The effect of upper echelons’ compensation on firm internationalization," Asia Pacific Journal of Management, Springer, vol. 30(1), pages 73-90, March.
    44. Klaus E. Meyer & Saul Estrin & Sumon Kumar Bhaumik & Mike W. Peng, 2009. "Institutions, resources, and entry strategies in emerging economies," Strategic Management Journal, Wiley Blackwell, vol. 30(1), pages 61-80, January.
    45. Liu, Xiaohui & Lu, Jiangyong & Chizema, Amon, 2014. "Top executive compensation, regional institutions and Chinese OFDI," Journal of World Business, Elsevier, vol. 49(1), pages 143-155.
    46. Witte, Caroline T. & Burger, Martijn J. & Pennings, Enrico, 2020. "When political instability devaluates home-host ties," Journal of World Business, Elsevier, vol. 55(4).
    47. Klaus E Meyer & Mike W Peng, 2016. "Theoretical foundations of emerging economy business research," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 47(1), pages 3-22, January.
    48. Anthony P Cannizzaro, 2020. "Social influence and MNE strategic response to political risk: A global network approach," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 51(5), pages 829-850, July.
    49. Shi, Haina & Xu, Haoping & Zhang, Xin, 2018. "Do politically connected independent directors create or destroy value?," Journal of Business Research, Elsevier, vol. 83(C), pages 82-96.
    50. Michael R Czinkota & Gary Knight & Peter W Liesch & John Steen, 2010. "Terrorism and international business: A research agenda," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 41(5), pages 826-843, June.
    51. Scott D. Graffin & Timothy D. Hubbard & Dane M. Christensen & Eric Y. Lee, 2020. "The influence of CEO risk tolerance on initial pay packages," Strategic Management Journal, Wiley Blackwell, vol. 41(4), pages 788-811, April.
    52. Izzet Sidki Darendeli & T L Hill, 2016. "Uncovering the complex relationships between political risk and MNE firm legitimacy: Insights from Libya," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 47(1), pages 68-92, January.
    53. Li, Yi & Cui, Lin, 2018. "The Influence of Top Management Team on Chinese Firms’ FDI Ambidexterity," Management and Organization Review, Cambridge University Press, vol. 14(3), pages 513-542, September.
    54. Igor Filatotchev & Mike Wright, 2011. "Agency Perspectives on Corporate Governance of Multinational Enterprises," Journal of Management Studies, Wiley Blackwell, vol. 48(2), pages 471-486, March.
    55. Henisz, Witold J, 2000. "The Institutional Environment for Multinational Investment," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 16(2), pages 334-364, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yingna Wu & Liang Ding & Xuan Song & Jun Chen, 2023. "Top Management Team Heterogeneity and the Performance of Cross-Border M&A," SAGE Open, , vol. 13(2), pages 21582440231, June.
    2. Pooja Thakur-Wernz & Helena Barnard & Marianne Matthee, 2024. "Knightian uncertain violence and the challenge of FDI-assisted development: policy recommendations where civilian lives are at risk," Journal of International Business Policy, Palgrave Macmillan, vol. 7(3), pages 356-390, September.
    3. Zeng, Xiaoming & Chen, Hao & Yin, Yanzhao & Liu, Youjin, 2024. "CEOs’ financial work experience and firms’ outbound investments," Journal of Multinational Financial Management, Elsevier, vol. 74(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lee, Hyoungjin & Chung, Chris Changwha, 2022. "Go small or go home: Operational exposure to violent conflicts and foreign subsidiary exit," Journal of World Business, Elsevier, vol. 57(6).
    2. Dimitrova, Anna & Triki, Dora & Valentino, Alfredo, 2022. "The effects of business- and non-business-targeting terrorism on FDI to the MENA region: The moderating role of political regime," International Business Review, Elsevier, vol. 31(6).
    3. Caroline T Witte & Martijn J Burger & Elena I Ianchovichina & Enrico Pennings, 2017. "Dodging bullets: The heterogeneous effect of political violence on greenfield FDI," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(7), pages 862-892, September.
    4. Pooja Thakur-Wernz & Helena Barnard & Marianne Matthee, 2024. "Knightian uncertain violence and the challenge of FDI-assisted development: policy recommendations where civilian lives are at risk," Journal of International Business Policy, Palgrave Macmillan, vol. 7(3), pages 356-390, September.
    5. Ruth V. Aguilera & Valentina Marano & Ilir Haxhi, 2019. "International corporate governance: A review and opportunities for future research," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(4), pages 457-498, June.
    6. Xu, Kai & Hitt, Michael A. & Brock, David & Pisano, Vincenzo & Huang, Lulu S.R., 2021. "Country institutional environments and international strategy: A review and analysis of the research," Journal of International Management, Elsevier, vol. 27(1).
    7. Jiangyong Lu & Bin Xu & Xiaohui Liu, 2009. "The Effects of Corporate Governance and Institutional Environments on Export Behaviour in Emerging Economies," Management International Review, Springer, vol. 49(4), pages 455-478, September.
    8. Peter J Buckley & Liang Chen & L Jeremy Clegg & Hinrich Voss, 2018. "Risk propensity in the foreign direct investment location decision of emerging multinationals," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(2), pages 153-171, February.
    9. Ning, Lutao & Kuo, Jing-Ming & Strange, Roger & Wang, Boya, 2014. "International investors’ reactions to cross-border acquisitions by emerging market multinationals," International Business Review, Elsevier, vol. 23(4), pages 811-823.
    10. Hyoungjin Lee, 2023. "Surviving the Time: CEO Tenure and Its Impact on Risky Foreign Direct Investment in Conflict-Prone Belt and Road Initiative Participant Countries," Sustainability, MDPI, vol. 15(17), pages 1-18, September.
    11. Zilja, Flladina & Benito, Gabriel R.G. & Boustanifar, Hamid & Zhang, Dan, 2023. "CEO wealth and cross-border acquisitions by SMEs," International Business Review, Elsevier, vol. 32(6).
    12. Estrin, Saul & Meyer, Klaus E. & Nielsen, Bo B. & Nielsen, Sabina, 2016. "Home country institutions and the internationalization of state owned enterprises: A cross-country analysis," Journal of World Business, Elsevier, vol. 51(2), pages 294-307.
    13. Sun, Sophia Li & Habib, Ahsan & Huang, Hedy Jiaying, 2019. "Tournament incentives and stock price crash risk: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 93-117.
    14. João Albino-Pimentel & Jennifer Oetzel & Chang Hoon Oh & Nicholas A. Poggioli, 2021. "Positive institutional changes through peace: The relative effects of peace agreements and non-market capabilities on FDI," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 52(7), pages 1256-1278, September.
    15. Jiménez, Alfredo & Lupton, Nathaniel C., 2021. "Terrorism hazard and infrastructure projects: The moderating role of home experience and institutions," Journal of Business Research, Elsevier, vol. 135(C), pages 721-730.
    16. Oh, Chang Hoon & Shin, Jiyoung & Oetzel, Jennifer, 2021. "How does experience change firms' foreign investment decisions to non-market events?," Journal of International Management, Elsevier, vol. 27(1).
    17. Ilhan-Nas, Tulay & Okan, Tarhan & Tatoglu, Ekrem & Demirbag, Mehmet & Wood, Geoffrey & Glaister, Keith W., 2018. "Board composition, family ownership, institutional distance and the foreign equity ownership strategies of Turkish MNEs," Journal of World Business, Elsevier, vol. 53(6), pages 862-879.
    18. Benischke, Mirko H. & Guldiken, Orhun & Doh, Jonathan P. & Martin, Geoffrey & Zhang, Yanze, 2022. "Towards a behavioral theory of MNC response to political risk and uncertainty: The role of CEO wealth at risk," Journal of World Business, Elsevier, vol. 57(1).
    19. Hu, Helen Wei & Cui, Lin, 2014. "Outward foreign direct investment of publicly listed firms from China: A corporate governance perspective," International Business Review, Elsevier, vol. 23(4), pages 750-760.
    20. Martin J. Conyon & Lerong He, 2016. "Executive Compensation and Corporate Fraud in China," Journal of Business Ethics, Springer, vol. 134(4), pages 669-691, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:iburev:v:31:y:2022:i:6:s0969593122000592. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/133/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.