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© Aulakh / Mudambi, Temple University, Country Risk – Archival Measures Such measures are objective, accessible and replicable Techniques typically involve examining multiple dimensions, e.g., Trade – measures of economy openness Government policy with respect to MNCs Economic – business cycles, growth rates Problems: Aggregation, non-currency, correspondence, ignores mitigating firm capabilities
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Evaluating Foreign Country Environments: Archival vs. Perceptual MeasuresPreet Aulakh and Ram MudambiTemple University
Prepared for presentation at the 3rd IGMS Research ForumPhiladelphia, PA
© Aulakh / Mudambi, Temple University, 2002 2
IntroductionInstitutions are a crucial determinant of business riskCountry risk is one of the most important factors cited in MNC location decisionsMeasuring this risk is a profitable enterprise, e.g., ICRG
© Aulakh / Mudambi, Temple University, 2002 3
Country Risk – Archival Measures Such measures are objective, accessible and replicableTechniques typically involve examining multiple dimensions, e.g.,
Trade – measures of economy opennessGovernment policy with respect to MNCsEconomic – business cycles, growth rates
Problems: Aggregation, non-currency, correspondence, ignores mitigating firm capabilities
© Aulakh / Mudambi, Temple University, 2002 4
Country Risk – Perceptual Measures
Such measures are subjective, focused and currentTypically obtained from survey data Problems: Generalizability, reliability and validity
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Archival vs. Perceptual measuresPerceptu
al Measure
High Risk Low Risk
ArchivalHighRisk Match
Divergence
Type II Error
Measure LowRisk
DivergenceType I Error
Match
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Conceptual Framework Firm Characteristics• Size• Country Specific Exp.• General Intl. Exp. Strategy/Structure • Standardization • Global Structure
Industry Factors• Growth Rate• Competitive Intensity• Market Volatility
Divergence (Type I and II Errors)• Trade Protection• FDI Barriers• Economic Risk
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DataU.S. Fortune 500 Manufacturing Firms and affiliatesMail Survey – 257 responses (response rate of 35%)Usable data points = 220 representing 35 different countries
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MeasuresTrade Protection
Archival: Trade Policy (Index of Economic Freedom)Perceptual: 4-item scale ( = .73)
FDI Barriers Archival: Capital Flows and FDI (Index of Economic Freedom)Perceptual: 4-item scale ( = .89)
Economic RiskArchival: ICRG IndicatorPerceptual: 6-item scale ( = .89)
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Summary of Significant ResultsTRADE FDI
Barriers Economic
Size Both (+) Type II (-)Experience Type II (-) Type II (+)Standard. Type II (+)
Org.Struct. Type I (-)Comp.Int. Type II
(+)Mkt.Vol. Both (+) Both (+)
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Multinomial Results for Trade ProtectionBase Case: Match Between Archival and Perceptual Measures
Independent Variable Type I Error Perceptual > Archival
Type II Error Perceptual < Archival
Intercept 2.02 (1.33) .86 (1.39) Firm Size .29 (0.12)** .25 (0.12)** Country Specific Experience -.02 (0.02) -.03 (0.02)*** General Intl.Experience -.01 (0.01) .01 (0.01) Standardization Strategy -.26 (0.20) -.18 (0.21) Organizational Structure .42 (0.43) .43 (0.45) Industry Growth Rate -.01 (0.01) .04 (0.24) Competitive Intensity -.21 (0.17) -.14(0.18) Market Volatility .53 (0.22)** .40 (0.22)***
Pseudo R- Square = .14 Model 2 = 27.23 (16 degrees of freedom), p < .05 (Numbers in parentheses are standard errors) * p < .01; **p < .05; ***p < .10
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Multinomial Results for FDI BarriersBase Case: Match Between Archival and Perceptual Measures
Independent Variable Type I Error Perceptual > Archival
Type II Error Perceptual < Archival
Intercept 2.77 (1.34)** 3.44 (1.43)** Firm Size .04 (0.11) .12 (0.12) Country Specific Experience -.01 (0.02) .01 (0.02) General Intl.Experience .02 (0.01) .01 (0.02) Standardization Strategy -.24 (0.19) -.03 (0.20) Organizational Structure -.78 (0.42)*** -.45 (0.43) Industry Growth Rate -.21 (0.18) -.27 (0.19) Competitive Intensity .05 (0.18) .54 (0.19)* Market Volatility .37 (0.21)*** .50 (0.19)**
Pseudo R- Square = .18 Model 2 = 34.83 (16 degrees of freedom), p < .01 (Numbers in parentheses are standard errors) * p < .01; **p < .05; ***p < .10
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Multinomial Results for Economic RiskBase Case: Match Between Archival and Perceptual Measures
Independent Variable Type I Error Perceptual > Archival
Type II Error Perceptual < Archival
Intercept -1.26 (1.27) -.43 (1.36) Firm Size -.06 (0.13) -.35 (0.14)* Country Specific Experience -.02 (0.02) -.01 (0.02) General Intl.Experience .02 (0.02) .03 (0.02)** Standardization Strategy -.06 (0.19) .43 (0.21)** Organizational Structure -.20 (0.40) .15 (0.42) Industry Growth Rate .12 (0.21) -.07 (0.22) Competitive Intensity .18 (0.16) .06(0.16) Market Volatility .08 (0.22) .13 (0.22)
Pseudo R-Square = .17 Model 2 = 30.15 (16 degrees of freedom), p < .05 (Numbers in parentheses are standard errors) * p < .01; **p < .05; ***p < .10
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Discussion
PERCEPTUAL RISK HIGH LOW
Unmitigated Mitigated Unmitigated Mitigated
HIGH (1) Risk
minimizing strategies
(2) Firm specific
capabilities Type I error
(3) Divergence ARCHIVAL
RISK LOW Type II
error (3)
Divergence (4) Managerial decisions
