Abstract
Even though country risk plays a key role in the internationalization process, its impact on foreign direct investment is not yet fully understood. This study advances existing research by deploying prospect theory to analyse firm variance in risk-taking. We employ prior success to evaluate three types of risk encountered in host countries: downside, alternating, and upside risk. The results of an event-history study of 795 manufacturing firms confirm the generally negative effect of host country risk but support the notion of prospect theory that prior success induces a bias on foreign location choices: prior success encourages investors to choose host countries with high downside or upside risk, whereas it discourages them from choosing locations with high alternating risk.
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