Policy uncertainty and behavior of foreign firms in emerging economies

Abstract

PurposeThis study aims to examine how foreign and domestic firms react to policy uncertainty in an emerging economy. In addition, the study investigates if older foreign firms better adapt to policy uncertainty than newer entrants.Design/methodology/approachThe study uses pharmaceutical sales data on India’s cardiovascular segment for January 2011–May 2016. The authors use fixed fixed-effects panel data regression to measure the market reactions of foreign and domestic firms faced with policy uncertainty.FindingsWhile domestic and foreign firms react similarly to anticipated policy changes, foreign firms react more adversely to policy uncertainty. Among foreign firms, early entrants respond less adversely than new entrants.Research limitations/implicationsForeign firms are able to cope with anticipated policy changes in similar vein as the domestic firms by way of a priori reading of the host country’s regulatory landscape. The foreign firms’ response to policy uncertainty is significantly different from domestic firms. The difference between the market response of foreign and domestic firms decreases over time.Practical implicationsThe authors' findings demonstrate that adaptability is the key for new foreign firms to face policy uncertainty. Foreign firms can respond to policy changes, especially the unanticipated ones by imbibing local practices.Social implicationsThe authors' findings suggest that enhanced policy uncertainty hurts foreign firms more adversely than domestic firms, and newer foreign firms are more hurt with policy uncertainty than the existing ones. Such uncertainty could also have unintended consequences for consumer welfare.Originality/valueThe authors' study uses two natural experiments in the same industry within short periods of time. The comparison offers key insights on the differences in domestic and foreign firm responses to the two types of policy uncertainty.