Volatility of Political Affinity and Subsidiary Investments

Abstract

We investigate the effect of volatility in political affinity on multinational firms’ foreign subsidiary investments. We extend prior work that focuses on the level of political affinity and argue that volatility in political affinity equally affects multinational firms’ foreign investments. While research showed that levels of affinity are positively related to multinational firms’ investment, we argue that volatility negatively affects subsidiary investment as it increases environmental uncertainty for multinational firms in foreign locations. Further, we show that the interplay of the level and the volatility of affinity and firms’ experience in high-volatility countries affects overall investment, providing greater insight into multinational firms’ investment patterns. Analyzing 1,078 U.S. public firms and their subsidiaries in 106 countries from 2000 to 2015, we find support for our hypotheses.