Strategic Management Journal
Strat. Mgmt. J., 27: 1123 – 1140 (2006) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.561
Received 14 March 2003; Final revision received 20 April 2006
SHAREHOLDER VALUATION OF FOREIGN
INVESTMENT AND EXPANSION
HEATHER BERRY*
The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, U.S.A.
This study analyzes when different foreign investment location choices are value creating for firms
at different stages of international expansion. I argue that because direct investment in developing countries is riskier than in advanced countries, shareholders may not value a firm’s investment in developing countries until that firm has experience from previous international investments and capabilities to better manage and hedge the higher levels of risk and uncertainty. Using a panel of
191 U.S. manufacturing firms and their foreign investments over a 20-year period (1981 – 2000), the empirical results show that firm investments in advanced and developing countries are valued differently by shareholders, depending on the firm’s prior international expansion, the firm’s capabilities and experiences, and the knowledge intensity of the firm’s industry. These results highlight the importance of considering firm location decisions, prior experiences, and resources when analyzing. Copyright 2006 John Wiley & Sons, Ltd.
INTRODUCTION
A number of studies have examined whether a firm’s multinational operations are value creat- ing or value destroying for firms. Studies that focus on the positive aspects for firm perfor- mance argue that firms have opportunities to gain greater returns from their intangible assets and market power, from spreading risk, from sub- sidizing poorly performing operations and from seeking less expensive inputs abroad (Doukas and Travlos, 1988; Ramaswamy, 1992; Sullivan, 1994; Morck and Yeung, 1991; Bodnar, Tang, and Wein- trop, 1999; Berry and Sakakibara, 2006). Studies that focus on the negative aspects have argued that increased coordination and management costs,
Keywords: performance; foreign direct investment; loca- tion
∗ Correspondence to: Heather Berry, The Wharton School, Uni-
versity of Pennsylvania, 2022 Steinberg Hall – Dietrich Hall, Philadelphia, PA 19104-6370, U.S.A.
E-mail: [email protected]