International Investment Decisions Research Articles

How Socially Responsible Firms Make International Investment Decisions?

How Socially Responsible Firms Make International Investment Decisions?

Nonlinear relationships between the participation index and key financial assets: A quantile regression analysis

The Participation Index is essential for assessing market sentiment, investor confidence, and financial market direction. Gold, known for its historical role in protecting wealth and providing a stable asset during economic instability, plays a key role in investment portfolios as an alternative guarantee against financial market fluctuations. The USD and EUR are key current currencies in global economics, affecting international trade, financial transactions, and investment decisions. The purpose of this study is to analyze the complex relationships between the Participation Index (KAT) and three significant financial assets: gold, the US dollar (USD), and the Euro (EUR) using Quantile Regression analysis. Daily data between 16.11.2021-08.08.2023 were used in this study. According to the results; the impact of the euro exchange rate on the "KAT" variable exhibits a positive relationship, which increases as the quantile level rises. The impact of the exchange rate of the United States Dollar (USD) on the variable defined as "KAT" indicates a positive relationship, which intensifies as the quantile level rises. The relationship between gold prices and the "KAT" variable shows a positive strengthening impact as the quantile level increases, and these effects demonstrate a high level of statistical significance.

Multi-scale dependence and risk contagion among international financial markets based on VMD-Vine copula-CoVaR

ABSTRACT Considering the frequency domain and nonlinear characteristics of financial risks, we propose a VMD-Vine copula-CoVaR framework to study the dependence structures and risk spillovers among international financial markets at different time scales. Furthermore, a mean-variance optimization technique has been applied to evaluate the performance of the optimal cross-market portfolios. The empirical results show that: (1) The R-Vine copula is superior to the C- and D-Vines; (2) Compared with the Asian stock markets, the European stock markets are more correlated with each other. The correlations between the markets at the long-term scale are greater than those at the short- and medium-term ones; (3) The optimal pair copulas are combined with the CoVaR to estimate the systemic spillover risks among the markets. The downside and upside spillover risks across the markets are not always symmetric. Moreover, the ΔCoVaRs at the medium-term scale are the highest and the lowest at the short-term one; and (4) The optimal cross-market portfolio constructed by our framework perform better than the benchmarks by annualized return, Sharpe ratio, and maximal drawdown. The findings have direct implications for portfolio managers and investors to prevent extreme risks and take better international investment decisions based on the knowledge of optimum portfolio.

Behavioural finance perspective in theory of international portfolio investment

Behavioural theory has become a driving force for relaunching and rethinking the conceptual foundations of conventional economic theory, giving impetus to the study of behavioural economics, including behavioural finance and the theory of international portfolio investment. The theory of international portfolio investment justifies the benefits of international diversification of investment portfolios and the possibility of generating returns in different markets. However, international investment practice and empirical research show that investor behaviour is often non-rational, and investment decisions are influenced by psychology, emotions, and cognitive biases. The purpose of this paper is to compare traditional and behavioural finance and study the implications of behavioural finance in modern portfolio theory. It has been established that classical finance is based on neoclassical economics and assumes that people are rational, risk-averse, have complete information, and are focused on utility maximisation. In contrast, behavioural finance assumes that people can be rational, but in most cases, their behaviour is better explained by emotions and psychology. Investors do not always make decisions that are consistent with utility maximisation. The paper emphasizes that modern portfolio theory is based on the efficient market hypothesis, which behavioural finance rejects, as it assumes that investors' behaviour may be non-rational and influenced by psychological and behavioural factors that affect decision-making. It was revealed that today, there is no single theory of behavioural finance, but there are several theoretical concepts that describe investor behaviour from the perspective of behavioural theory. Among the most influential are the behavioural capital asset pricing model, behavioural portfolio theory, adaptive markets hypothesis, behaviourally modified asset allocation, and goal-based investing. International investment decisions and the formation of international investment portfolios are influenced by investors' behavioural biases, among which the most researched and influential are home bias, which refers to investors' preference for domestic investments, and cultural differences, which can influence risk perception and investment preferences.

International production chains and the pollution offshoring hypothesis: An empirical investigation

Most analyses of the impact of heterogeneous environmental policy stringency on the location of industrial firms have considered the relocation of entire activities – the well-known pollution haven hypothesis. Yet international enterprises may decide to only offshore a subset of their production chain – the so-called pollution offshoring hypothesis (POH). We introduce a simple empirical approach to test the POH combining a comprehensive industrial mergers and acquisitions dataset, a measure of sectoral linkages based on input-output tables and an index score of environmental policy stringency. Our results confirm the impact of relative environmental policy stringency on firms’ decisions to engage in cross-country M&As. Our findings also indicate that environmental taxation have a stronger impact on international investment decisions than standards-based policies. Further, we find that transactions involving a target firm operating in a sector upstream of the acquirer are more sensitive to environmental policy stringency, especially when that sector is highly pollution-intensive. This empirical evidence is consistent with the pollution offshoring hypothesis.

A study on equity home bias using vine copula approach

The study investigates if the mean-downside risk optimization technique for asset allocation can shed new light on the equity home bias puzzle. We propose a combined EGARCH-EVT-C-vine copula approach to properly capture the stylized properties of asset return series and estimate the downside risk appropriately by CVaR. Using weekly stock price data from 12 countries including seven G7 countries and five BRICS countries, we estimate international portfolio allocations based on mean-CVaR optimization model and compare the results to the mean–variance allocations. The study has been done from the perspective of US investors. The results of the study suggest that the US equity home bias is overestimated by the mean–variance approach. The mean-CVaR model helps to factor in the additional risk that investors face in international portfolio diversification and provides a plausible empirical explanation for the equity home bias phenomenon. The findings of the study have direct implications for portfolio managers and investors for taking better international investment decisions based on the knowledge of optimum portfolio.

Legal distance moderation in the inter-partner technology distance on cross-country equity investments: A multilevel analysis of the information & communication technology sector

The ICT (information & communication technology) sector has increased inter-firm equity investment across countries, and scholars have explicated the role of technological distance or institutional distance to explain the equity size. This study extends the framework to integrate the legal distance (institutional) as a moderator between the technological distance (orientation) and the equity size in cross country investment decisions. Empirically, little is known about whether the legal distance between the home and host countries of high technology firm influences its equity decisions. This study addresses this question using equity deals in the ICT sector during a critical period (2007–2009). Multilevel analysis is based on 51,198 inter-firm equity deals, 120 home countries, 154 host countries, 19,712 equity investing firms and 32,987 equity target firms. This robust analysis offers sever insights. First, the inter-firm technological proximity predicts higher equity than the inter-firm technological distance. In other words, the technology strategy firm invests equity more than a non-technology firm. Second, the inter-legal distance (home-host) between partners predicts lower equity than the inter-legal proximities between the investor and target. Third, the inter-legal distance moderates the technological orientation, predicting that the effect of technological distance decreases the coefficient by 49%, and the effect of the legal distance coefficient increases by 49%. This study contributes to the international business equity investment decision in the high technology sectors to manage uncertainty. The study contributes to institutional contingencies in this field by integrating them with technological contingencies. In addition, it rests on a robust methodology (multilevel) for the academic audience and managerial implications for the business audience.

Decision-Making Process in Foreign Investment Choices

Abstract This exploratory investigation aims to develop a managerial decision model that assist international firms and investors in selecting the right valuable foreign country for their international operations. Two comparative and rich-information case studies were purposefully selected from among Arabian large firms. Additionally, six international investment decisions were investigated within these two cases and data were collected by in-depth interviews, follow-up interviews and questionnaire instrument. Within and cross-case analyses were undertaken in the current investigation. The findings demonstrated that a methodical and international experience-based strategic decision-making process was adopted to attain a profitable foreign country choice. The decision process comprised five critical managerial phases; that is, (1) analysis of internationalization drivers, (2) searching and development of location determinants and country alternatives, (3) obtaining adequate and related-information about potential countries, and, ultimately, assessment for these alternatives, (4) selection of a final beneficial foreign country choice, and, finally, (5) effective implementation of the selected country choice. The research findings provide theoretical and practical implications to the internationalization of firms as well as international investment. Further, it provides significant methodological contributions to international business research in relation to an effective multiple case study approach to capture elements of the international market selection process.

The value relevance of research and development expenditures: a comparative analysis of Korean, Japanese, Chinese, and US manufacturers

Research and development (R&D) expenditures are generally thought to increase a firm's market value. This study examines the nonlinear value relevance of R&D expenditures from 2006 to 2015 for manufacturers listed on capital markets in Korea, the USA, Japan, and China. In this regard, the study uses a nonlinear validation method based on an analytical model that adds R&D investment variables to a corporate valuation model. The results indicate that Korean and Japanese firms experience an increase in corporate value when they make R&D expenditures but if the firms exceed their R&D expenditure limits, corporate value falls. In US and Chinese firms, R&D expenditures prompt a dramatic rise in corporate value when such expenditures are initially set to exceed certain limits, although R&D activities reduce corporate value in their early stages. Such findings have practical relevance for international investment decisions.

How knowledge and uncertainty affect strategic international business investment decisions: Implications for cross-border mergers and acquisitions

Changes in country-level and global economic conditions create numerous challenges for firms expanding internationally. Country-level changes such as volatility in GDP growth, increasing regulations, and/or inflation may influence temporal periods of static or declining markets and often drive an inward contraction of focus. Conversely, global-level changes such as expanding markets often drive an outward expansion of focus as firms adjust to opportunities created by changing conditions. However, given increasing technological interconnectedness and global economic interdependencies, firms may better leverage their knowledge of such factors to improve international business investment decisions. We hypothesize how firms seeking international expansion adjust based on changes in their environment through both the frequency and value of their cross-border M&A (CB M&A) activity. Our findings from a sample of pre- and post-CB M&A activity using data on the 2008–2009 financial crisis outline how firms’ strategic international business decisions incorporate knowledge and uncertainty regarding country and global economic fluctuations.

Safety risk and international investment decisions

We identify and demonstrate the merit of a novel institutional factor, safety risk, which likely affects multinational corporations’ (MNCs’) international investment decisions. Safety risk refers to the extent to which security and physical well-being are endangered due to normalized aggression and criminality in society. Despite concerns from executives and policymakers, safety risk has attracted little research attention. We validate a safety risk measure and evaluate the construct’s effect on MNCs’ investments. The findings indicate that countries’ safety risk deters MNCs from investing. Further, in post hoc analyses, firms’ prior experiences with safety risk and countries’ private security investments moderated this relationship.

Exchange Rate Volatility: An Asymmetric Tale from Mozambique

This paper inspects how risk is affected by news sign and size within – depreciation, appreciation, stability – distinct exchange rate trends, and by volatility model choice, taking on various asymmetric Generalized Autoregressive Conditional Heteroskedasticity models to daily Mozambique New Metical against South Africa Rand, MZN/ZAR, exchange rate over January 2010 - December 2014. Our results show that risk measurement and asymmetry of shocks to volatility depend on exchange rate trend, being that estimating the full sample conceals the actual behaviour, and model choice, specifically the degree of nonlinearity and persistence. In particular, we find that when positive/negative news type matches the sign of the exchange rate trend, risk increases by more. Interestingly, this means that in times of appreciation the good news turns out to be bad, likely because they raise the fear of overvaluation, under monitoring in natural resource producers and exporting countries. The findings contribute to the growing concern on nonlinear economic policy design, exchange rate targeting and surely international trade and investment decisions, where an incorrect assessment exchange rate risk and asymmetry may lead to mispricing of assets, namely options, and eventual underestimation of measures, as Value at Risk, relevant for Basel agreement.

The impact of BRICS formation on portfolio diversification: Empirical evidence from pre- and post-formation eras

This paper aims at contributing to the international portfolio investment decisions among the emerging BRICS countries where individual and institutional investors seek diversification benefits and...

The Impact of BRICS Formation on Portfolio Diversification: Empirical Evidence from Pre- and Post-Formation Eras

This paper aims at contributing to the international portfolio investment decisions among the emerging BRICS countries where individual and institutional investors seek diversification benefits and to help in advocating policy changes and implementation as a response to the changing dynamics in these countries pre- and post-BRICS formation. Therefore, the context of this paper is aimed towards examining the short term causalities and long term integration among the BRICS stock market pre- and post-BRICS formation. The research applies the Augmented Dicker-Fuller (ADF) and Philips-Perron tests (PP) tests to analyze stationarity among the selected variables. The pre- and post-BRICS formation long-term linear relationship is investigated using Johansen and Juselius cointegration test while the Granger Causality is applied to assess the direction of the causality between the stock market indices. The study also extends the investigation by employing the impulse response function and variance decomposition to evaluate the reaction of each of the BRICS market to a shock from other BRICS stock markets. Weekly stock market indices of BRICS countries were used covering the period from January 2003 to December 2018. One key finding is that the degree of financial integration among the BRICS stock markets has moderately strengthened in the post-BRICS formation period compared to the pre-BRICS formation period. Another significant finding is that the Chinese stock market are mostly independent from other BRICS markets in the two aforementioned sub-periods, implying diversification benefits for the international investors both in the short and the long run. Further, the results also reveal a unidirectional causal relationship from the Russian stock market to its BRICS counterparts in both periods. Finally, the overall results show an increased responsiveness of stock markets in BRICS countries to shocks in each other after the formation of the bloc as compared to pre- formation period.

Market Pressure and Multinational Corporations’ Tax-Motivated Decisions: Evidence from an SEC Experiment

We examine the role of capital market pressure in firms' international tax-motivated decisions. We use two exogenous events to identify the relation: the temporary lifting of short selling restrictions for randomly selected pilot firms under SEC Regulation SHO (called Pilot firms) and the repatriation tax holiday under the American Jobs Creation Act that occurred in this time period. We document that the Pilot firms are more likely to respond to the tax holiday only when they have foreign losses or generally do not repatriate foreign earnings. We also find that Pilot firms repatriate more, on average. This evidence is consistent with managers generally facing a conflict between self-serving international investment decisions and value-enhancing tax-motivated investment decisions, but this situation is mitigated by greater monitoring by active short sellers that occurs when short-selling restrictions are absent.

Location strategy in cluster networks

This article investigates the location strategies of Canadian and Chinese multisite firms in international and domestic investment decisions at the metropolitan level. By integrating research from international business studies and economic geography, we combine knowledge-based understandings of multinational corporations and industrial clusters to develop propositions regarding the location strategies of multisite firms in cluster networks. It is argued that firms from clusters are more likely to adopt knowledge strategies than firms from other areas and that they tend to choose cluster locations that are specialized in the same or similar industries to achieve their knowledge goals – both in domestic and international investment decisions. We establish and analyze a database of 3500 investment cases within and between Canada and China to test our propositions. The results show that firms in knowledge-intensive industrial environments with substantial business experience are especially inclined to direct their investments to clusters. Consistent with our emphasis of the subnational as opposed to the national scale, we find that cluster-of-origin effects are more important than country-of-origin effects in explaining firms’ investment choices in clusters. These findings support the idea that multisite firms, particularly MNEs, leverage local knowledge pools by strategically locating affiliates across clusters.

What role does CEO vision play in the internationalization process of firms? Evidence from the banking sector in Africa

This study examines the cross‐border expansion of four major African banks from 1988 to 2014 in order to investigate the role of CEO vision in influencing their international investment decisions. The qualitative case study approach is complemented by a quantitative analysis that examines the multiple factors influencing internationalization patterns. The results from both types of analysis indicate that the vision of the CEO matters, and that it is a key factor in explaining the accelerated internationalization of three of the four banks examined in this study. These results stress the need for considering managerial decision making in international resource commitment decisions, particularly in an emerging market context, where a shared developmental vision might be shaping the behavior of the entrepreneurs.

Drivers of International Investment Decisions: The Role of Safety Risk

From an institutional theory lens, scholars evaluate how country risk factors affect firms’ international investment decisions. Despite notable advancements in understanding how the institution-based country risk factors–corruption, concentration of power, and institutional distance–affect investment decisions, in each of these areas, the literature is fragmented and the results are mixed. In this study, we introduce an understudied institutional risk factor, safety risk, which helps to resolve the equivocality in this literature. Furthermore, we test a comprehensive model of country risk factors to assess how they collectively affect firms’ location choices. We find that government- based corruption is an important antecedent of safety risk, and, in turn, safety risk deters investment. In addition, concentration of power moderates the corruption-safety risk relationship, and institutional distance moderates the safety risk-location choice relationship.

Monetary policy as a source of risk in international business financings and investments

Abstract This paper aims at explaining the volatility of two main macroeconomic variables (interest rate and exchange rate) that impact the cost of international capital and, consequently, the international financing decision. Firstly, the main economic theories are called to illustrate the relevant determinants of these variables from the perspective of demand and supply of capital sides. The state intervention through monetary policy is introduced to emphasize the alteration of these prices (the price of capital, the price of foreign currencies). The paper is presenting the role of these prices in international financing decision (based on the theoretical model used to estimate cost of international capital), their impact on the foreign direct investment decision and on the international portfolio investment decision. Finally, the paper describe the economic consequences of the monetary public intervention on the financing and investment decision in direct connection with the business cycle theory. The paper associates the monetary policy to the business cycles. The paper comments the unsound solutions proposed against the economic crises and that continued to harm negatively these prices generating the seeds for next international economic recession. The paper is a theoretical one, containing some very interesting research hypothesis and opening the paths for presumable further empirical researches.

On the Causal Relationship between Stock Markets Valuation and Foreign Direct Investment: A Conceptual Case of India

International business research has predominantly focused on how foreign direct investment relates to the asset-side of non-financial firm’s balance sheet, the finance-specific factors have been ignored to a great extent while studying the foreign direct investment decision. But since these factors are not merely a by-product of a firm’s competitive strength or weakness, they deserve attention when investment patterns are to be interpreted. Financial specific strategies are important to all firms but are particularly important to MNEs in emerging capital markets where the assumption that MNEs have no problems raising capital to engage in international investments doesn’t hold true. The major objective of this paper is to provide a review of the literature regarding the financial aspects of foreign direct investment. This review allows us to distinguish between two streams of studies. The first stream deals with the stock markets valuation effect on firms’ international investment decision while the other addresses the stock market reactions to foreign direct investment announcements. The latter is important to form a complete picture about the relationship between stock markets and foreign direct investment. Using a qualitative analytical method with an exploratory nature, and building on the case of India which has recently joined the top ten developing and transition economies as a source of foreign direct investment, this paper intends to suggest a conceptual framework where a causal relationship between stock market valuation and foreign direct investment announcements can be drawn.