Policy risk, strategic decisions and contagion effects: Firm‐specific considerations
| Date | 01 March 2017 |
| Author | Daniel J. Blake,Caterina Moschieri |
| Published date | 01 March 2017 |
| DOI | http://doi.org/10.1002/smj.2509 |
Strategic Management Journal
Strat. Mgmt. J.,38: 732–750 (2017)
Published online EarlyView 12 April 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2509
Received 9 January 2015;Final revisionreceived 12 January 2016
POLICY RISK, STRATEGIC DECISIONS AND
CONTAGION EFFECTS: FIRM-SPECIFIC
CONSIDERATIONS
DANIEL J. BLAKE*and CATERINA MOSCHIERI
Department of Strategic Management, IE Business School, Madrid, Spain
Research summary: In this article, we investigate the rm-specic environment and its impact on
rm strategyfocusing on adverse changes in the policy environment and their effect on divestitures.
Weargue that experiencing a negative change in the rm-specic policy environment causes rms
to reassess their exposure to policy risk and their ability to manage their policy environment,
making them more likely to divest. Operationalizing negative shifts in the rm-specic policy
environmentthrough formal policy disputes between rms and governments, we nd that following
a dispute, rms are more likely to divest both in the country where the dispute occurs and in
other countries in the same region. However, the impact of disputes on divestitures is rm specic,
applying only to rms directly involved in a dispute.
Managerial summary: What is the impact of change in the rm-specic environment on rm
strategy? We argue that when rms directly experience a negative change in their policy
environment that is specic to them, they negatively reassess their exposure to policy risk and
their ability to manage their policy environment, which makes them more likely to undertake a
divestiture. We analyze formal disputes between rms and governments that arise from adverse
changes in policy and nd that, following a dispute, rms are more likelyto divest in the country
where the dispute occursand in other countries in the same region. However,the impact of disputes
on divestitures is rm specic as it applies only to rms directly involved in a dispute. Copyright
© 2016 John Wiley & Sons, Ltd.
INTRODUCTION
A key element of effective strategic management
is the ability to evaluate, account for, and respond
to the external environment of the rm. Research
on environmental characteristics and the impact of
environmental shifts on rm strategy and perfor-
mance has focused primarily on the macro environ-
ment, that is, factors that apply broadly across rms
operating in a particular country or industry. For
example, researchers have investigatedhow a coun-
try’s municence of production factors, physical
Keywords: divestiture; expropriation; policy risk; uncer-
tainty; corporate strategy
*Correspondence to: Daniel Blake, IE Business School,
c/ Maria de Molina, 11, 28006 Madrid, Spain. E-mail: Daniel.
Blake@ie.edu
Copyright © 2016 John Wiley & Sons, Ltd.
infrastructure, and legal institutions tend to shape
rms’ strategies and their outcomes, such as diversi-
cation, boundary decisions, and performance (e.g.,
Steensma and Corley, 2001). Yet, whether by virtue
of rm attributes or through rms’ actions, the
external environment often varies across individ-
ual rms even within the same country or indus-
try (e.g., Beckman, Haunschild, and Phillips, 2004;
Boddewyn, 2005; Delios and Henisz, 2000). Thus,
while macro environmental features undoubtedly
shape rm behavior, it is plausible that so too do the
aspects of the environment that are rm specic.
In this article, we develop this notion of the
rm-specic environment and investigate its strate-
gic impact in the context of how changes in the
rm-specic policy environment affect an impor-
tant strategic decision: whether or not to undertake
Firm-specic Policy Risk and Divestitures 733
a divestiture. We argue that governments can alter
the policy environment for an individual rm in
ways that decrease the value of the rm’s assets,
operations, or returns. We contend that when this
occurs, the affected rm concludes that the gov-
ernment has demonstrated a willingness to pursue
negative changes to the rm’s policy environment,
leading the rm to revise upward its assessment
of the probability that the government will seek to
adversely alter its policy environment again in the
future. Moreover, as the rm failed to prevent or
resolve the change in its policy environment, we
expect that it will also revise downward its assess-
ment of its ability to manage its policy environment
successfully. As a result, we expect the rm to
respond to the negative shift in its rm-specic
policy environment by divesting from the country
where that shift occurred. We further theorize
an intra-rm contagion effect whereby a rm
experiencing a negative change in its rm-specic
policy environment in one country also revises
its assessment of its exposure to changes in its
policy environment in other politically, socially,
and economically similar countries, leading it to
be more likely to divest from these other countries
as well.
To empirically identify instances of adverse
changes in rm-specic policy environments, we
collected data on policy disputes between rms and
foreign countries. Since 1995, many of the world’s
leading rms, including ExxonMobil, REPSOL,
Vivendi, AIG, and Siemens have been involved in
disputes with a foreign country over investments
worth up to tens of billions of dollars. Analyzing an
original dataset of serious policy disputes between
rms and foreign host countries brought before
the World Bank between 1995 and 2012, along
with comprehensive divestiture data from Thomson
ONE, we nd that being a party to a dispute with a
government makes a rm more likely to divestfrom
the country where it is experiencing the dispute.
We also nd evidence of a contagion effect such
that experiencing a dispute with one country makes
a rm more likely to divest from other similar
countries. However, we do not nd evidence of
a spillover effect of policy disputes across rms.
The number of disputes experienced by other
rms in a country does not affect the focal rm’s
probability of divesting in that country. This result
indicates that when a government elicits a change
in the policy environment that is rm specic, only
affected rms react by divesting.
In this study, we make several contributions
to extant research in strategy. First, we illustrate
the potential for environmental changes and their
effects on strategic decisions to be rm specic. An
ongoing challenge for scholars seeking to explain
strategic decisions, such as divestitures, is that many
macro environmental characteristics (e.g., culture,
political and legal institutions, market size) can vary
little over time or are common to a large population
of rms. Thus, in many contexts, there may be
little variation in the macro environment that can
help explain differences in rm behavior. On the
other hand, rm-specic facets of the environment
are by denition heterogeneous across rms; they
may change more frequently, and they may have
rm-specic effects on strategy. Thus, focusing
on rm-specic dimensions of the environment
allows us to gain leverage over explaining how the
environment shapes rm strategies.
Second, while scholars have acknowledged that
the policy environment can vary across rms (e.g.,
Boddewyn, 2005; Boddewyn and Brewer, 1994),
few studies have operationalized and evaluated the
effects of changes in the rm-specic policy envi-
ronment on rm strategy employing econometric
analyses in a multi-country, multi-industry setting.
Researchers have either focused on the risk of
adverse policy shifts and individual rms’ abilities
to manage or dampen such risks (e.g., Henisz and
Delios, 2001; Holburn and Zelner, 2010), or they
have employed qualitative methods to investigate
rms’ responses to negative policychanges in a lim-
ited context, such as focusing on rms from a single
country (e.g., Maurer, 2013). This study’s analysis
of rms from multiple industries and multiple coun-
tries thus extends extant research into how rms
react to adverse changes in their policy environ-
ment. Furthermore, by focusing on divestitures as a
response to such changes, we are able to offer new
insights into how the policy environment and pol-
icy risk can shape corporate strategy with respect
to divestitures, which complements extant research
that has concentrated on location and entry mode
decisions (Henisz and Delios, 2001; Holburn and
Zelner, 2010; Jensen, 2003).
Third, we add to ongoing research on the deter-
minants of divestitures. Extant research has mainly
analyzed internal drivers of divestitures, and those
studies addressing the impact of external envi-
ronmental factors have typically focused on the
macro-country level (see Boddewyn, 1979; McDer-
mott, 2011; Moschieri and Mair, 2008). This macro
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 732–750 (2017)
DOI: 10.1002/smj
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