Legal Family and Infrastructure Voids as Drivers of Regulated Physical Infrastructure Firms' Exposure to Governmental Discretion

Abstract

Firms operating in regulated physical infrastructure industries such as electricity, water or telecommunications do not always avoid the risks associated with governmental discretion when choosing a foreign country to invest in. We develop a theoretical framework based on the organizational capabilities view to account for the boundary conditions of this riskseeking behavior: countries with a similar legal system as the one of the home country and 2 with high infrastructure voids. An empirical analysis using panel data on the international expansion of Spanish listed firms from 1986 to 2008 confirmed our hypotheses.

Political risk in private participation projects: The effects of political discretionality and corruption

“…Second, we also contribute to the literature on political risk and FDI by showing empirical evidence of the simultaneous risk‐averse and risk‐tolerant behavior of companies investing in private participation projects. Several studies have shown that political risk is a factor that deters investments (Henisz, ; Henisz & Delios, ), but recent contributions to the field have also highlighted that it can be a source of opportunities (Fernández‐Méndez et al, ; García‐Canal & Guillén, ; Holburn & Zelner, ; Kwok & Tadesse, ; Oliver & Holzinger, ) and even some companies pursue a proactive approach toward political risk trying to obtain competitive advantages in risky locations (Akbar & Kisilowski, ; Jiménez, Benito‐Osorio, Puck, & Klopf, ; Liu, Gao, Lu, & Lioliou, ). Our results combine both perspectives and show that political risk is a complex multidimensional phenomenon that might involve different components that companies might find either as attractors or as challenges.…”

“…As previously mentioned, recent literature building on the resource and capabilities‐based view of the firm (Barney, ; Wernerfelt, ) and the nonmarket strategy literature (Doh, Lawton, & Rajwani, ; Hillman et al, ) has found that some MNEs are able to develop political capabilities that allow them to interact with authorities in a more favorable way for their own interests. Although various studies have shown empirical evidence of this phenomenon, the effect has been found to be mostly characteristic of certain given industries (Henisz & Zelner, ; Holburn, ; Holburn & Zelner, ; Lawton et al, ; Lawton & Rajwani, ) or as a feature of specific MNE's nationalities (Fernández‐Méndez et al, , ; García‐Canal & Guillén, ; Jiménez et al, ; Jiménez & Delgado, ). In contrast, the majority of empirical studies have found that MNEs tend to conduct less FDI in countries where authorities can easily and unilaterally modify the agreed conditions governing the firm's entrepreneurial activity or where the protection of property rights is lower (Bengoa & Sánchez‐Robles, ; Henisz & Zelner, , ; Kapuria‐Foreman, ).…”

“…This kind of projects are typically very large and require the deployment of many physical assets which are subject to the potentially damaging effects of political risk. At the same time, infrastructures are usually highly regulated sectors, which means that firms in these sectors need to interact frequently with authorities and, in turn, are more likely to develop and employ political capabilities (Fernández‐Méndez, García‐Canal, & Guillén, , ; Jiménez, Luis‐Rico, & Benito‐Osorio, ). Furthermore, emerging countries are frequently characterized by institutional voids in terms of underdeveloped institutions and frequent environmental shifts (Khanna & Palepu, ) and lack of intermediaries to analyze market information, facilitate transactions, and provide signals of credibility (Gao, Zuzul, Jones, & Khanna, ; Khanna & Rivkin, ).…”

Political discretion and corruption: the impact of institutional quality on formal and informal entrepreneurship

“…Political discretion refers to the ability of the government to unilaterally modify the "rules of the game": that is, the rules governing the various aspects that affect the behaviour and performance of firms, such as tariffs, conditions for entry into the sector, taxes, etc. (Henisz, 2000;García-Canal and Guillén, 2008;Fernández-Méndez et al, 2015). When political discretion is high, rule by law is substituted for rule of law.…”

Power transitions in the host country and the survival of subsidiaries in infrastructure industries

“…Following this approach, host governments and foreign multinationals can maintain relationships based on cooperation aimed at getting win-win situations (Luo, 2001(Luo, , 2004. In fact, infrastructure firms are used to deal with governments and develop relational capital with them (Fernández-Méndez, García-Canal, & Guillén, 2015;Hillman & Hitt, 1999;Luo & Zhao, 2013), as they have a greater exposure to governments' actions and policies in comparison to firms from other industries (Bonardi, 2004;García-Canal & Guillén, 2008;Hillman, 2003).…”