Risk Planning, Takeover, and Stabilizing Performance in Transition Economies

• Published date: 01 May 2016
• DOI: http://doi.org/10.1002/jsc.2060
• Date: 01 May 2016

RESEARCH ARTICLE

Strat. Change 25: 269–284 (2016)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2060

Copyright © 2016 John Wiley & Sons, Ltd.

Strategic Change: Briengs in Entrepreneurial Finance

Strategic Change

DOI: 10.1002/jsc.2060

Risk Planning, Takeover, and Stabilizing Performance

in Transition Economies1

Walter Amedzro St‐Hilaire

ExpertActions Group and Ottawa University, Canada

The tunneling effect of multicriteria analysis is highly signicant for all shades of

capital.

External direct investment in transition markets has been considered the most

eective way of the exploitation of host economy (according to the dependency

school). However, nowadays, this is perceived as a change agent for the growth of

host economies due to being a bundle of capital, technology, and managerial

eciency. e policymakers of host economies are designing policy tools to fulll

the need of domestic economies by using capital. e process is facilitated by

developing mechanisms to channel technology in technology‐decient industries,

capital in capital‐decient industries, and managerial eciency in eciency‐

decient industries. e industrial performance gets improved by infusing specic

scarce resources in the decient industry of the same. e scarce resources required

for growth of a specic industry have been considered as the basis for the classi-

cation of capital, and accordingly, three categories of capital have been identied

based on the priority of scarce factors to be infused in an industry.

e classication is further supported by policy documents of the host‐

economy government, which is used for designing policy tools. ese policy tools

are helpful in infusing desired components of capital in a specic industry. e

process of infusing these factors is interplay of demand (as per need of industry)

and supply (competitive advantage of investors). In this research work, the shades

of capital have been dened from the perspective of the home economy with

competitive advantages in terms of technology, capital, and eciency (competi-

tiveness) in a specied industry. Accordingly, three shades of capital are considered:

technology, capital, and competitiveness.

Two dierent sets of rms (i.e., foreign and nonforeign) are operating with

dierent shades of capital. MFC rms (i.e. major foreign corporation aliates)

benet in terms of access to internal capital markets, using pool of talents, exper-

tise and fund of external leading to reduction cost of capital and improvement in

1 JEL classication codes: G29, G39, L19, M16, M19, M21.

Once protability, asset

utilization, and growth

opportunity are controlled, the

tunneling effect of the

multicriteria analysis becomes

highly signicant in the rms,

irrespective of the shades of

capital.

270 Walter Amedzro St‐Hilaire

Copyright © 2016 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

performance. ese features of multicriteria analysis

are expected to have a propping eect; however, a

tunneling eect is also reported in transition economies

(Bertrand et al., 2002; Silva et al., 2006). External invest-

ment is another important aspect of transition economies

(Khanna and Rivkin, 2001) since they possess the major-

ity of the productive asset. Against this background, the

research question is dened as whether multicriteria

analysis of investment has a propping eect or tunneling

eect on rms with dierent shades of capital in transition

economies.

e eect of multicriteria analysis of investment on

dierent shades of capital has been analyzed in transition

economies. e analysis has used a dataset from emerging

markets, and it is observed that multicriteria analysis has

a tunneling eect in competitiveness‐shaded foreign direct

investment (FDI) capital is highly signicant. In technol-

ogy‐shaded and capital‐shaded capital, a multicriteria

analysis tunneling eect is signicant after controlling for

value‐enhancing factors like protability, growth oppor-

tunity, and asset utilization.

is article consists of seven sections. e second section

discusses dierent shades of capital linked to the policy

framework adopted by transition governments. e third

section deals with the eect of these shades of capital on

excess value created by rms. is discussion is further

extended to analyze the eect of multicriteria analysis on

excess value created by rms with dierent shades of capital.

is section concludes with a presentation of hypotheses.

e fourth section deals with a dataset, while the fth section

covers the methodologies used for analysis. e last section

presents results and discussion, followed by conclusions.

FDI policy framework

More often, transition governments intend to open spe-

cic industries in a regulated environment. Allowing

external direct investment for a specic industry is a criti-

cal decision for transition governments, and there is a

separate list, known as a negative list, that covers all the

industries where it is prohibited. e purpose of transition

governments to make a domestic industry competitive in

international markets gets served through spillover eects.

A transition government’s investment policy focuses

on a combination of restrictions in three dimensions for

any given industry (i.e., capital ow restriction, ownership

restriction, and repatriation restriction). e rationale

behind these three forms of restrictions is provided in the

policy documents of the government. ese restrictions

are meant to channel the ow of FDI with capital, tech-

nology, and managerial implications to industries that

require them. For instance, in industries where huge

capital investments are required and where there are

limited or no domestic players, restrictions are not imposed

in the rst two dimensions (i.e., capital and ownership),

with a limited restriction on the third dimension. In such

identied industries or sectors, a foreign investor can

directly invest without prior government permission and

also have full ownership, but repatriation or exit is not

allowed in the rst three years of operation.

e above‐mentioned policy instruments adopted by

transition governments are summarized in Table 1. In the

following sections, an attempt is made to elaborate on

the rationality of these policy instruments in light of the

need of industries and characteristics of investors as men-

tioned in the policy document. ese policy documents

explicitly mention the objective of opening a specic

industry for FDI and the policy instrument used. Accord-

ingly, this study presents the discussion on rationality of

policy instruments in subsequent sections based on

restrictions imposed. e industries can be categorized

based on the restrictions imposed into ve categories:

1. Industries with capital restriction (no ownership

restriction)

2. Industries with capital and repatriation restriction

3. Industries with ownership restriction (no capital restriction)

4. Industries without any restriction (neither ownership

nor capital)

5. Industries with both capital and ownership restriction