Change in domestic network centrality, uncertainty, and the foreign divestment decisions of firms

Abstract

We investigate the role of domestic interfirm networks for the foreign divestment decisions of firms. We argue that firms’ foreign operations risk being divested when a firm becomes more central in its domestic network. Positive changes in firm centrality at home facilitate access to information about new business opportunities, but they may also lead firms to consider reconfiguring their value chain activities and resources across locations. The resulting opportunity costs of maintaining foreign operations could subsequently lead to their divestment. Moreover, we argue that the positive association between an increase in firm centrality in the domestic network and foreign divestment is stronger under higher uncertainty, as pursuing new business opportunities at home becomes more appealing. We distinguish between firm-specific uncertainty and domestic market uncertainty. We test and get support for our hypotheses using foreign subsidiary data from U.S. firms in the ICT industry.