Political power shift in host markets and firm asset retrenchment: Evidence from Chinese MNCs

Abstract

In this study, we examine how a shift in political power in host markets impacts the asset retrenchment decision of multinational firms. Drawing on the insights of resource-based, institutional and information asymmetry perspectives, we argue that political power transition increases the firm’s likelihood of asset retrenchment. Using Cox proportional hazard model on the sample of Chinese infrastructure industry firms, operating in 26 countries, we find a positive relationship between the shift in political power in the host market and firm’s likelihood of asset retrenchment. This relationship is found to be weaker when firms have prior experience operating in an institutionally similar environment, and the host country has higher economic dependence on the home country. We further examine the ‘policy uncertainty’ and ‘obsolescence of relational capital’ as possible channels through which a shift in political power may lead firms to retrench. We find support for the effectiveness of both channels.