سرمایه گذاری مستقیم خارجی در بازارهای در حال ظهور و دستاوردهای ارزشی کارفرمایان

We investigate the shareholder wealth effects of 306 foreign direct investment (FDI) announcements by UK firms in seventy-five emerging markets (EM). Our results show that acquirers enjoy highly significant gains during the announcement period of FDI. Perhaps surprisingly, the highest gains are accrued to acquirers investing in countries with high political risk and high corruption ratings. The type of asset acquired has also a significant effect on the gains of acquirers’ shareholders, with the highest gains accrued to acquirers of physical assets. Also, investments in physical assets in EM with a high corruption rating elicit the highest gains. We contend that UK firms following resource-seeking strategies in EM with a high corruption rating are facilitated access to resources on favorable terms and this is viewed positively by the market participants. Our results are robust to alternative model specifications and the endogenous choice to expand internationally.

Reflecting the importance of foreign direct investment (FDI) in shaping the modern corporation, a voluminous literature has emerged investigating whether FDI undertakings create or destroy value for the shareholders of participating firms (Bruner, 2004 and Sudarsanam, 2010).1 The majority of earlier studies document mixed evidence related to the impact of FDI undertakings on acquirers’ returns, which primarily reflect information about the quality of FDI, numerous costs and benefits associated with individual transactions, and several other important elements (i.e., country risks, mode of entry) that affect the likelihood of future success of the FDI.2 Numerous studies also attempt to further explore the major determinants of such variation on the distribution of acquirers’ returns and have revealed the significant impact of several transaction-, country-, and firm-specific factors.3 Despite such findings, a new and important aspect to outward investment is the substantial increase of FDI flows into emerging markets (EM), which adds significantly to the level of complexity of FDI success in generating future cash flows for the firm. Along these lines, academic literature in international business and finance discusses the associated costs and benefits for firms undertaking FDI in EM. These can include strategic, behavioral, and economic benefits, lower costs, new and rich sources of inputs/resources, and fast growing markets which provide enormous market opportunities (Barbopoulos et al., 2012, Berry, 2006 and Erel et al., 2012). To some extent, these benefits are seen by an internationally expanding firm as outweighing the institutional hazards (country risk and corruption), political and structural uncertainties, impact on firm overall strategy, weak legal institutions and government interference of many EM countries (Hoskisson, Eden, Lau, & Wright, 2000). As a result, the costs and benefits of FDI in EM should be directly reflected in the announcement period returns of the acquiring firms. Existing literature on the shareholder wealth effects of FDI in EM is limited and available evidence on whether shareholders of acquiring firms benefit from the international business expansion is mixed. There have only been a few studies focusing on FDI in EM with the majority of them concentrating solely on one country, for example China (Gupta, McGowan, Misra, & Missirian, 1991) or one region, for example Africa (Owhoso, Gleason, Mathur, & Malgwi, 2002). There have been calls to take a broader research agenda encompassing all EM regions to consider inter-regional differences on the same basis as studies on developed-market FDI (Hoskisson et al., 2000). Moreover, as yet there have been little attempts to integrate theories from international business literature with theories from the finance literature in the specific realm of the market reaction to FDI announcements. Our study aims to fill these gaps by examining the short term market reaction to FDI in EM to capture shareholders’ perception regarding the future performance of the firm influenced by the FDI announcement.4 A suitable sample to undertake this research is represented by UK firms investing in EM.5 We extend the existing literature in a number of directions. Firstly, in order to capture a wide range of geographical, political and cultural diversity conditions we consider the EM regions of Africa, Asia, Eastern Europe, Latin America and the Middle East. Secondly, we combine key international business and variables supported by theories from the finance literature; in particular what benefits the firm's shareholders accrue and what factors are relevant in determining the market reaction to these announcements. Since prior research suggests that corruption affects FDI flows ( Egger & Winner, 2005) and high corruption is characteristic of EM ( Abed & Gupta, 2002) we incorporate corruption, a time-varying variable not previously investigated within the context of wealth effects of FDI. 6 In addition to corruption, we include a time-varying political risk index. The remaining variables include a cultural distance variable, and a variable that captures the type of asset investment in the FDI (tangible or intangible). The type of asset invested via FDI could be important in EM where there could be higher probability of political extraction than in developed economies. Connected to this we include a variable which captures the strategic aim of the firm in the FDI, i.e. resource or market seeking ( Brouthers, Gao, & McNicol, 2008). Resource-seeking FDI involves obtaining resources from the host country which are either unavailable in the home country or too costly to obtain in order to achieve cost minimization. Market-seeking FDI involves investing in a host country in order to directly serve that market with local production and distribution. In our research on EM we would argue that this distinction is particularly important in understanding the market reaction to FDI as they can, for instance, provide access to vital raw materials or large new previously untapped markets. The UK colonial past in many EM, particularly in Africa, Asia and the Middle East and to a lesser extent in Latin America, provides also a useful cultural background to study the wealth effects of FDI for UK firms. Finally, the mode of entry into the foreign market is an important element that enters our empirical analysis, given that different entry modes affect FDI performance ( López-Duarte & García-Canal, 2007). Based on a sample of 306 announcements of FDI by UK firms in seventy-five EM countries over the sixteen-year period (from 1993 to 2008) our results show that there are benefits to EM international expansion for UK firms as on average they experience a highly significant shareholder wealth gain around the announcements of FDI. This indicates a positive perception of the FDI on future cash flows of the firm. More specifically, our contribution lies in identifying the interaction of the most relevant factors that should be considered important when assessing the merits of investing in EM. Our main findings are as follows: first, perhaps surprisingly, we find that the announcement period returns to be higher for FDI in EM countries with high political risk or high corruption ratings. This finding can be more fully understood when we consider the other factors that are significant in explaining the market reaction. Second, we show that the type of asset invested in, or acquired, has a bearing on the shareholder wealth effect. Investment in, or acquisition of tangible (physical) assets leads to significantly higher abnormal returns as opposed to intangible (non-physical) assets or agreements, even in EM with a high political risk rating. There is also a significant interaction effect between the type of asset investment and corruption. In fact, investments involving the acquisition of physical assets in EM with a high corruption rating elicit the highest gains. Our explanation for this result regarding a high level of host country corruption takes a strategic focus. Specifically, resource seeking FDI in a host country with high corruption rating elicits higher announcement period returns than a market seeking FDI as firms are facilitated access to valuable resources at a favorable price and thus FDI can create resource allocation efficiencies in EM with underdeveloped economic and legal frameworks. We also find evidence suggesting that cultural differences play an important role in the market reaction to announcements of FDI in EM. Lastly, our results confirm that the FDI mode entry plays an important role in shaping the announcement period returns of acquirers. Overall, our findings have practical implications for both managers and shareholders in terms of the choice of location and strategy; since EM attract sizeable amounts of FDI and investors require an enhanced understanding of factors that have an impact on FDI strategies. Our contribution lies in identifying the important role of corruption, political risk, and asset investment type and the significance of the type of strategy in consideration of these factors. Importantly, the assertion of Hoskisson et al. (2000) that the transition and transformation to market economies can be accompanied by political and structural uncertainties, regulatory interference and corruption, should not discourage investment in EM since the shareholder wealth gain is greater for FDI in countries with a high political risk or corruption rating, especially when the FDI is resource-seeking. The remainder of this paper is organized as follows. The first section provides a theoretical background and the development of our hypotheses. The next section describes our sample and outlines the event-study research method we employ in our analysis. This is followed by a presentation of the findings, discussion based on the findings, and a robustness section before concluding with a discussion and implications of the results.

In this paper we integrate theories from the international business and finance to investigate the determinants of short term shareholder wealth effects around FDI announcements by UK firms in EM. Our analysis concentrates primarily on the wealth effects of time varying political risk and corruption levels of the host country, cultural distance between the UK (home market) and the host market, as well as strategic issues (type of asset acquired, resource or market seeking strategy, method of entry in the foreign market) on the distribution of acquirers’ announcement period returns. Our results confirm that UK firms experience a highly significant shareholder wealth gain from FDI in EM. We show that our results based on market-model based event study are robust to an alternative specification using BHAR and standardization procedures. The positive wealth effect is higher for UK firms investing in Africa and is insignificantly negative for firms investing in the Middle East (and negative for China). However, our contribution to international business and finance literature lies in identifying the interaction of the most relevant factors and strategic issues that should be considered important when assessing the merits of investing in EM. This has practical implications for both managers and shareholders, since EM attract sizeable amounts of FDI from abroad and investors require an enhanced understanding of factors that have an impact on the strategies of firms investing in EM. Firstly, we find using both of our standard measures of political risk and corruption need not deter a manager from investing in EM. Indeed, we have found short-term abnormal returns to be significantly higher when investing in an EM with a high political risk rating or corruption rating. This would appear to be in line with the argument that corruption can act as a ‘helping hand’ and prior literature showing that a high political risk rating has a non-negative or positive effect on shareholder wealth for foreign firms. However this surprising finding is more understood when we consider some of the other significant factors in our analysis. We find that when firms invest in countries with a high corruption rating using a resource-seeking strategy, they enjoy the highest announcement period gains. This evidence could act as an explanation as to why this particular grouping display the greatest gains for shareholders, since it is plausible that firms are facilitated access to valuable resources at a favorable price from EM countries with lower standards/less regulations on corruption which is viewed positively in the short-term by the market. It is also possible that some firms can create resource allocation efficiencies in EM with underdeveloped economic and legal frameworks. This is important to managers considering different FDI target destinations, each with varying levels of political risk and corruption, and considering what type of strategy they wish to follow. Clearly, the message for managers is that location choice and strategy do matter. Secondly, we show that the type of asset invested in, or acquired, has a bearing on the shareholder wealth effect. Investment in, or acquisition of, ‘hard’ assets leads to significantly higher abnormal returns relative to investment in intangible assets or agreements. This is more so in EM with a high political risk rating where there is a higher potential for adverse governmental actions. There is also a significant interaction effect between the type of asset investment and corruption. Investments involving the acquisition of physical assets in EM with a high corruption rating elicit the highest gains. Possible reasons for this result can be related to the structure of a firm's asset holdings; hard, physical assets are not easily extractable by corrupt officials, or because physical assets do not suffer to the same extent as intangibles with regards to enforcement of intellectual property rights. We find no evidence to suggest that cultural differences between the UK (home market) and the host country play an important role in determining the distribution of the acquirers’ market reaction to announcements of FDI in EM. This also implies that, in the face of globalization, or the type of legal system do not play an important role in the wealth effect. This transfer of ideas and information on a global scale could lead to a reduction in cultural barriers and reduce the importance of traditional beliefs about cultural distance. There is also the possibility that, in the face of globalization, Hofstede's cultural dimensions have changed over time. However we do find that whether the FID target country was a former UK colony had a positive relation with the market reaction. Other important results obtained are the mode of entry in the foreign market, as well as the impact of several other firm-specific factors such as the size of the acquiring firm. We contend that the analysis of the above factors on the distribution of acquirers’ returns during the announcement period of FDI adds significantly to the existing literature of international business and finance, particularly the importance on the impact of shareholder wealth of resource seeking strategies when firms invest in countries with a high corruption rating. 5.2. Implications, limitations and future research On the whole, our results help to explain varying wealth impacts on the announcement of FDI in EM and make a contribution to prior research by identifying the integration of key international business and finance factors impacting on shareholder benefits, including corruption which had not been previously investigated. These results lead to an enhanced understanding of the decision of expanding into EM. It is conceivable that managers choose to announce FDI based on considerations that are correlated with political risk, corruption, or asset type. For example, managers could be reluctant to announce FDI in corrupt countries until it is finalized or managers could be cautious and delay announcement about investing in tangible assets until they have eliminated the risk of expropriation. Consequently, FDI announcements could be a bigger surprise when investing in corrupt countries, or in tangible assets. Further research could account for multinational financing strategies of firms expanding into highly politically risky countries, which is a crucial consideration for firms. For example, a firm can mitigate political risk by raising local debt with the effect of reducing the net assets of the subsidiary and thus the likelihood of expropriation. Although expropriation has become somewhat a past occurrence, the firm could also use local debt for other reasons, such as to reduce the impact of exchange controls. A clear limitation in this empirical paper is the use of secondary data and proxies. Our surprising findings that the highest abnormal returns are for FDI in EM countries with high political risk and corruption rankings (using established proxies) requires further study and analysis. Corruption and political risk proxies are difficult to measure and the scale used can be problematic. For instance the corruption index could be serving as a proxy for other issues, such as greater institutional barriers to imports, or greater dependence on foreign suppliers of physical capital rather than corrupt behavior and there are differences between high levels of corruption and low levels. Also there is a possible time dimension to this relation as the political risk and corruption rating refers to a particular point in time but returns are determined by the anticipation of future cashflows. There is the possibility that the market anticipates political and corruption rankings will improve in the future. We would also suggest case studies and interviews as a possible further route to further investigate negotiations and the managers’ perspective on how the acquisitions of physical assets for resource seeking purposes are determined. Empirically, it would be interesting to test the robustness of our results for more outward FDI countries. For example, we discount cultural distance between UK and host country in our results, but cultural distance between UK and host country relative to some competitor outward FDI firm in a country with differing cultural distance might be a factor. These arguments affect FDI flows but the gains at the micro level have not been fully documented. It would be interesting to investigate whether the form of financing the FDI has any impact on the wealth effect of the announcement. In addition, future research can seek to investigate corporate governance issues, which could influence the decision to undertake FDI. Finally this is a short term study and shareholders who anticipate future profits could be disappointed. Therefore future research should consider a longer term analysis of corporate performance and FDI in EM.