Dynamics of entering politically risky foreign markets

Abstract

PurposeThe purpose of this paper is to examine the effects of political risk on firms' likelihood of foreign market entry and performance by adopting a strategic view of political risk and drawing upon the arguments of multimarket contact theory.Design/methodology/approachThis study estimates the location choice and performance of Japanese auto parts‐makers using panel regression models.FindingsThe study finds that firms with low multimarket contact in the home country and high multimarket contact in the host country are less likely to avoid politically risky host countries and that firms which entered politically risky host countries exhibit greater performance when the degree of multimarket contact with prior entrants is high.Research limitations/implicationsAlthough the research design raises a concern about the generalizability of the findings, this study highlights the strategic importance of politically risky markets and suggests the importance of considering competitive interactions with rivals in examining interdependent behavior in foreign direct investments.Practical implicationsInstead of consistently avoiding politically risky markets, managers should actively consider the potential strategic importance of these markets. A post‐entry strategy suggested by the findings is taking positive steps to leverage the benefits of multimarket contacts for managing subsidiaries in politically risky host countries.Originality/valueUnlike previous studies, this study emphasizes the strategic potential of politically risky markets and takes a view that firms have variable political risk tolerance. Furthermore, the authors' adoption of multimarket contact theory allows a novel approach to benchmarking against rivals for foreign entry decisions.