The institutional environment for multinational investment

This article posits that the effect of political hazards onthe choice of market entry mode varies across multinationalfirms based on the extent to which they face expropriation hazardsfrom their potential joint-venture partners in the host country(the level of contractual hazards). As political hazards increase,the multinational faces an increasing threat of opportunisticexpropriation by the government. Partnering with host-countryfirms that possess a comparative advantage in interactions withthe host-country government can safeguard against this hazard.However, as contractual hazards increase, the potential benefitto the joint-venture partner of manipulating the political systemfor it's own benefit at the expense of the multinational increasesas well, thereby diminishing the hazard-mitigating benefit offorming a joint venture. A two-stage bivariate probit estimationtechnique is used to test these hypotheses on a sample of 3,389overseas manufacturing operations by 461 firms in 112 countries.