The reaction of foreign firms to institutional changes: The case of German direct investment in Turkey

Abstract

Dynamic institutional changes, and their impact at the actor level, are largely neglected in research on the role of institutional change in foreign direct investment (FDI). To fill this research gap, we analyze to what extent formal and informal institutional factors influence the investment decisions and strategies of managers. Internationally, since the protests in 2013 against the increasingly authoritarian Turkish government, there has been a growing perception of increasing uncertainty for FDI. This uncertainty poses investment risks for foreign firms based on a series of political developments and regional conflicts such as civil protests, an attempted military coup, and the war in Iraq and Syria. From an institutional perspective, we analyze how the perception of risk, based on formal institutional dynamics, influences the strategies of German firms operating in Turkey. We aim to find out how managers of these firms perceive and cope with these institutional risks. The paper is based on a quantitative telephone survey (n = 147), and 30 qualitative interviews with managers and experts in Turkey. We find that embedded German firms with long-term investment relationships in Turkey, rely on both formal and informal institutions to respond to risks arising from shocks at a formal institutional level.