Changes in Political Affinity and Firms' Subsidiary Investments

Gilbert Kofi Adarkwah, Christopher Albert Sabel, Flladina Zilja

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Abstract

Firms’ foreign investments are to a large extent influenced by the political environment in their foreign locations. A recent stream of literature has focused on the bilateral relations between countries as antecedents of multinational firms’ new investments. So far, this literature has not examined changes in existing investments due to the ongoing development of political relations. Thus, we investigate the effect of changes in countries’ bilateral political affinity on multinational firms’ foreign subsidiary investments. Political affinity is defined as the extent to which countries have similar national interests in global affairs. We argue that firms' decision to increase or decrease subsidiary investments is significantly influenced by political risk embedded in the political relationship between home country and subsidiary country. Changes in political affinity between a firm's home and subsidiary country can lead to increased subsidiary coordination costs and heightened expropriation risk. Analyzing 1606 US public firms and their ties to 142 different subsidiary countries from 2000 to 2015, we find that a positive (negative) change in political affinity leads to an increase (decrease) in firms' foreign subsidiary investment. We further explore these effects, finding that a more stable (unstable) political environment in the foreign location positively (negatively) moderates these effects.
Original languageEnglish
Title of host publicationProceedings of the Eighty-first Annual Meeting of the Academy of Management
EditorsSonia Taneja
Number of pages1
Place of PublicationBriarcliff Manor, NY
PublisherAcademy of Management
Publication date2021
DOIs
Publication statusPublished - 2021
EventThe Academy of Management Annual Meeting 2021: Bringing the Manager Back in Management - Online
Duration: 29 Jul 20214 Aug 2021
Conference number: 81
https://aom.org/events/annual-meeting

Conference

ConferenceThe Academy of Management Annual Meeting 2021
Number81
LocationOnline
Period29/07/202104/08/2021
Internet address
SeriesAcademy of Management Proceedings
ISSN2151-6561

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