Investor Response to Environmental Risk in Foreign Direct Investment

The theory of internalization suggests that proprietary assets—usually in the form of advertising and/or marketing capabilities—are the key to understanding a firm’s ability to create value in foreign markets. We show that the capacity of a multinational corporation (MNC) to create value in a foreign direct investment (FDI) can also result from the use of an alternative proprietary asset; that is, the skills and management expertise that are acquired through the accumulation of various forms of foreign experience.The value creation comes from the extension of an MNC’s experience-based capabilities to the host country to mitigate country-level risks. This experience can moderate the negative influence of environmental risk to create value for a firm and its investors.In our sample of 305 FDIs, we find that Japanese MNCs that had direct or indirect experience in a host country showed greater abnormal returns in a FDI, particularly where environmental risk was high.