Evaluating Foreign Country Environments: Archival vs. Perceptual Measures Preet Aulakh and Ram Mudambi Temple University Prepared for presentation at the 3 rd IGMS Research Forum Philadelphia, PA

© Aulakh / Mudambi, Temple University, Introduction Institutions are a crucial determinant of business risk Country risk is one of the most important factors cited in MNC location decisions Measuring this risk is a profitable enterprise, e.g., ICRG

© 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

© Aulakh / Mudambi, Temple University, Country Risk – Perceptual Measures Such measures are subjective, focused and current Typically obtained from survey data Problems: Generalizability, reliability and validity

© Aulakh / Mudambi, Temple University, Archival vs. Perceptual measures PerceptualMeasure High RiskLow Risk Archival High Risk Match Divergence Type II Error Measure Low Risk Divergence Type I Error Match

© Aulakh / Mudambi, Temple University, 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

© Aulakh / Mudambi, Temple University, Data U.S. Fortune 500 Manufacturing Firms and affiliates Mail Survey – 257 responses (response rate of 35%) Usable data points = 220 representing 35 different countries

© Aulakh / Mudambi, Temple University, Measures Trade 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 Risk Archival: ICRG Indicator Perceptual: 6-item scale (  =.89)

© Aulakh / Mudambi, Temple University, Summary of Significant Results TRADE FDI Barriers Economic SizeBoth (+)Type II (-) ExperienceType II (-)Type II (+) Standard.Type II (+) Org.Struct.Type I (-) Comp.Int.Type II (+) Mkt.Vol.Both (+)

© Aulakh / Mudambi, Temple University, Multinomial Results for Trade Protection Base Case: Match Between Archival and Perceptual Measures

© Aulakh / Mudambi, Temple University, Multinomial Results for FDI Barriers Base Case: Match Between Archival and Perceptual Measures

© Aulakh / Mudambi, Temple University, Multinomial Results for Economic Risk Base Case: Match Between Archival and Perceptual Measures

© Aulakh / Mudambi, Temple University, Discussion