Danger from a distance: Executives' social distance and multinationals' responses to host‐country terrorist attacks

Abstract

AbstractResearch SummaryThis article examines whether and under what conditions multinational enterprises (MNEs) are likely to divest a subsidiary exposed to host‐country terrorist attacks. Drawing on construal level theory from social psychology, we propose that the association between subsidiaries' exposure to host‐country terrorist attacks and MNEs' likelihood of divesting these subsidiaries depends on their executives' social distance from the event host country. Based on a sample of Fortune US 100 MNEs and their foreign subsidiaries from 2003 to 2014, we find that on average, MNEs are more likely to divest their subsidiaries when their exposure to host‐country terrorist attacks increases; however, the effect is only prominent in host countries to which MNE executives are socially proximate.Managerial SummaryMNEs confronting terrorism threats in a host country sometimes respond by divesting subsidiaries exposed to the threats even when the high opportunity costs of divestment render this response irrational. We argue that the MNEs' divestment response may not be driven by rational economic calculations but by their executive’ subjective threat perceptions. We investigate how top executives’ subjective threat perceptions, as a function of their social distance from the event host country, influence MNEs’ divestment decisions. We find that on average, MNEs do tend to divest their subsidiaries when they are exposed to a high terrorism threat in a host country; however, they are much less likely to do so when their top executives are socially distant from the focal host country.