The impact of political risk on FDI exit decisions

Ksenia Gonchar and Maria Greve

Economic Systems, 2022, vol. 46, issue 2

Abstract: Do political risks drive exit decisions by multinational companies (MNC)? What mechanisms can protect a multinational subsidiary in a host country that is characterized by weak institutions and high political risks? Using multinational plant-level data for Russia in the period 2000-2016 and applying the Cox proportional hazard model, we find significant effects from elevated host-country political risk when we compare the year of entry to the year of exit. MNCs are particularly sensitive to problems associated with law, order, and social conditions in Russia and the presence of the military in politics in the home country. Institutional similarity does not reduce the hazard of exits, and MNCs from high-risk countries exit less when home-country risk increases. Subsidiaries from countries that have imposed sanctions on Russia are less likely to exit, though sanctions interact with host-country risks, making them more severe. Being large and being part of a greenfield project help subsidiaries to build resistance against host-country political risks. These findings provide empirical evidence that support our conclusions regarding foreign direct investment volatility in countries with high risk.

Keywords: exit; foreign subsidiary; multinational company (MNC); political risk; Russia; survival; transition economy (search for similar items in EconPapers)
JEL-codes: E02 E61 F21 F23 L10 P26 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:46:y:2022:i:2:s0939362522000371

DOI: 10.1016/j.ecosys.2022.100975

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