The influence of firm- and industry-level characteristics of Fortune Global 500 firms on Foreign Direct Investment activity into countries at high risk of terrorism
Master’s Thesis: Final Version
MSc. Business Administration - International Management University of Amsterdam Business School
Student: Dieuwertje Vos Student number: 11412089 Supervisor: Dr. Niccolò Pisani Second reader: Dr. Mashiho Mihalache
STATEMENT OF ORIGINALITY
This document is written by Dieuwertje Vos who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
ABSTRACT
The threat of terrorism is causing problems on a global scale nowadays and having such an impact on security and stability, it can influence global investment decisions. Firms can suffer from risks if they have to operate in terrorism endangered environments. Previous research has focused on terrorism and international business but findings are still limited. Therefore, this study tries to gain a deeper understanding on the role terrorism plays in international business. The purpose of this research is to analyze to what extent firm- and industry-level characteristics of Fortune Global 500 firms contribute to the likelihood of investment into countries at risk with regard to terrorism. Data from the Fortune Global 500 was retrieved via the database Orbis. A logistic regression analysis has been conducted and shows, contrary to the hypothesis, a significant negative relationship for firms operating in a natural resource intensive industry and the likelihood to invest into a country at high risk of terrorism. The possible moderating effect of the internationalization strategy has been researched but the results do not provide evidence. Concluding, this study contains academic relevance by providing a deeper understanding on the relationship between Fortune Global 500 firms and investment in countries at high risk of terrorism. Finally, implications for managers in charge of global expansion are provided and limitations for this study and future research suggestions are given.
Keywords: terrorism; Fortune Global 500; internationalization strategy; investment motives;
TABLE OF CONTENTS
List of Figures ... 5
List of Tables ... 5
CHAPTER 1: INTRODUCTION ... 6
CHAPTER 2: LITERATURE REVIEW ... 8
2.1 Theoretical foundations on the internationalization of firms: multinational enterprises and foreign direct investment ... 8
2.1.1 Internationalization strategies ... 8
2.1.2 Internationalization motives ... 11
2.1.3 Entry modes ... 12
2.2 Internationalization and political risk ... 14
2.2.1 FDI and political risk ... 14
2.2.2 Political risk: terrorism ... 16
2.3 Terrorism and international business ... 17
2.3.1 Previous research on terrorism and international business ... 17
2.3.2 International business in high-risk countries with regard to terrorism ... 20
2.3.3 Terrorism in high-risk countries... 21
2.3.4 FDI into high-risk countries ... 22
2.4 FDI from the Fortune Global 500 firms into high-risk countries ... 24
2.5 Research gap ... 25
CHAPTER 3: THEORETICAL FRAMEWORK ... 26
3.1 International business in terrorism-endangered countries ... 26
3.2 Development of hypotheses ... 26
3.2.1 Firm-level characteristics: firm size... 26
3.2.2 Industry-level characteristics: foreign direct investment motives ... 28
3.2.3 Internationalization strategy: global/regional strategy ... 29
3.3 Conceptual model ... 32
CHAPTER 4: METHODS ... 33
4.1 Sample and data collection ... 33
4.2 Variables and measures ... 34
4.2.1 Dependent variable ... 34
4.2.2 Independent variables ... 34
4.2.3 Moderating variable ... 35
4.2.4 Control variables ... 35
4.3 Statistical analyses and results ... 36
4.3.1 Descriptive statistics ... 36
4.3.3 Effect of the moderating variable internationalization strategy ... 41
CHAPTER 5: DISCUSSION ... 44
5.1 Academic relevance ... 45
5.2 Managerial implications ... 46
5.3 Limitations and future research ... 47
CHAPTER 6: CONCLUSION... 49
ACKNOWLEDGEMENT ... 51
REFERENCES ... 52
APPENDICES ... 57
APPENDIX A: Top 10 countries at high risk of terrorism ... 57
APPENDIX B: Fortune Global 500 (in alphabetical order) ... 58
APPENDIX C: Overview of firms and variables analyzed in the study ... 61
List of Figures Figure 1. Conceptual model ... 32
List of Tables Table 1. Operationalization of variables ... 36
Table 2. Means, standard deviations and correlations for the variables ... 38
Table 3. Logistic regression analysis ... 39
Table 4. Moderating effect: firm size as independent variable ... 42
CHAPTER 1: INTRODUCTION
The world is becoming increasingly connected. More countries than ever are importing and exporting goods. The MGI Connectedness Index from McKinsey ranks 319 countries according to their in- and outflow of goods and services, finance, people and data (Manyika, Lund, Bughin, Woetzel, Stamenov & Dhingra, 2016). Although connectivity can bring economic prosperity to a country or region, it is not entirely risk-free. An example of the risk of connectivity is terrorism. Terrorism is defined as ‘‘the threatened or actual use of illegal force and violence by a non-state actor to attain a political, economic, religious, or social goal through fear, coercion, or intimidation’’ (Institute for Economics and Peace, 2017: 6).
According to a business survey from the World Investment Report 2017, 75% of executives believe that terrorism will lead to a decrease in foreign direct investment (FDI) on a global level (UNCTAD, 2017). FDI is defined as:
‘‘an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate)’’ (based on OECD, 1996 in UNCTAD, 2017: 3).
FDI is an important driver for economic integration between countries (OECD, 2008). The business survey conducted by UNCTAD (2017) examined corporate and external factors that could possibly influence future FDI activity globally. The outcomes reflect the opinions of executives on global investment prospects and risks such as climate change, migration, technological change, social instability and natural disasters. Among these risk factors, terrorism received the highest score from sampled executives, which indicates that the executives believed that terrorism is the strongest potential factor that could negatively
influence the degree of FDI activity. Only 3% of the executives believed that terrorism could lead to an increase in FDI activity.
Previous research has focused on the relationship between FDI and terrorism. However, no previous research has focused specifically on the relation between the FDI activity of the world’s largest firms (Fortune Global 500 firms) and terrorism. Therefore, this study fills a gap in the literature by addressing the following research question: How do firm- and industry-level characteristics affect the likelihood of firms to invest in countries that rank highly on the terrorism risk index?
The first and second hypotheses that are tested in this research concern the influence of firm-level and industry-level characteristics on the likelihood of companies to invest in countries with a high risk of terrorism. The third and fourth hypotheses focus on the moderating effect of internationalization strategy. This moderating effect is tested separately for the relationship between firm-level characteristics and the likelihood to invest in the most terrorism-endangered countries and between industry-level characteristics and the same dependent variable. A regression analysis is used to test the hypotheses in this research. This study contributes to the international business and terrorism literature by providing further insight into the specific characteristics that influence investment decisions for firms. Furthermore, the study of moderating effect can provide a more profound understanding for managers considering the appropriate type of internationalization strategy to use when dealing with expansion issues in terrorism-endangered environments. The following chapter discusses the relationship between FDI activity into countries at high risk of terrorism and the investment decisions of Fortune Global 500 firms. Chapter two subsequently provides a comprehensive review of the previous research on these topics.
CHAPTER 2: LITERATURE REVIEW
This chapter provides an overview of theoretical foundations regarding the internationalization of firms, with a specific focus on the internationalization strategies regarding how and where firms enter foreign markets. This chapter also discusses the reasons why firms invest, including the choice of different investment motives, in foreign countries. Furthermore, this chapter introduces an explanation of political risk regarding internationalization, concentrating in particular on terrorism as a form of political risk. Previous literature on the relationship between terrorism and international business is subsequently discussed, with specific attention given to Fortune Global 500 firms and their investment choices. Finally, this section identifies the research gap that the research question of this thesis intends to address.
2.1 Theoretical foundations on the internationalization of firms: multinational enterprises and foreign direct investment
2.1.1 Internationalization strategies
For many years firms have been investing and expanding their operations abroad, creating more and more multinational enterprises. According to Coase (1937, in Buckley & Casson, 2009: 1564), a multinational enterprise (MNE) is “a firm that owns and controls activities in two or more different countries.” Peng, Sun, Pinkham and Chen (2009) found that there are significant differences between the strategies of firms that operate in one country and firms that operate in multiple countries. Furthermore, there is a difference between the domestic strategy and international strategy of a firm. The strategies of domestic firms can be explained via the resource-based view (RBV) or industry-based view (IBV). The resource-based view explains that a firm can create competitive advantage through its resources. Barney (1991) argued that for firms to be able to achieve this competitive advantage, they must have resources with several characteristics: valuable, rare, inimitable and non-substitutable. The industry-based view, introduced by Porter (1980 in Peng et al., 2009), states that to achieve a competitive
strategy, a firm needs to locate its position in the industry according to five competitive forces: threat of new entrants, bargaining power of buyers, rivalry between existing competitors, the threat of substitute products and the bargaining power of suppliers (Porter, 1980). The forces can differ among industries from mild to intense. Therefore, in Porter’s industry-based view, the success and competitive advantage of a firm is based on its position in an industry. Moreover, the underlying economic and technological characteristics define the strength of the five forces of an industry.
A third view, the institution-based view, explains the difference between a domestic strategy and an international strategy. The institution-based view integrates both the RBV and IBV views, including firm-specific resources and capabilities and industry-based competition. Moreover, a third component is added: institutional conditions and transitions. The institution-based view argues that firm performance relies on a combination of three pillars: industry, resource and institution (Peng et al., 2009). Thus, the broader context of a firm must be taken into account.
Early research on MNEs and internationalization demonstrates three different perspectives (Buckley & Casson, 2009). Firstly, the economic perspective examines the national market primarily by using trade theory and following international capital movements. The second perspective was introduced by Hymer (1976, in Buckley & Casson, 2009), who analyzed the monopoly of firms. Hymer believed in the monopolistic advantage that is specific to a firm, such as its technological advantage. In order to apply Hymer’s monopolistic advantage theory, two conditions must be fulfilled. The MNE needs to have an advantage over the local firm, which is possible via the possession of firm-specific advantages (FSA). FSAs can help a firm to overcome liability of foreignness (LOF). LOF refers to the costs of doing business abroad as a result of the lack of knowledge of the local market a foreign firm might face compared to local firms (Zaheer, 1995 in Buckley & Casson, 2009). The second condition
that has to be met is that the market needs to be imperfect; MNEs cannot be seen as price takers in intermediate or factor markets (Hymer 1960, in Buckley & Casson, 2009).
The third perspective on internationalization is internalization theory (Coase 1937, in Buckley & Casson, 2009), which focuses on the boundaries of firms and how they change. Rational action explains that markets will be internalized if the benefits are higher than the expected costs. If transaction costs are too high, a firm will internalize these transactions within the firm. Moreover, internalization theory distinguishes between operational internalization, such as product flow, and knowledge internalization. Knowledge internalization involves the flow of knowledge from research and development.
Internationalization can also be examined according to different scopes or levels. The macro or global level, which looks at the growing economic interdependence between countries, tackles issues regarding governance mechanisms and includes both informal and formal rules. The country-level considers account trade and investment stocks. Meanwhile, according to Rugman and Verbeke (2005), internationalization should be explored selectively, for example at the scope of the firm level. Rugman and Verbeke (2005) also emphasized the transaction cost economics approach (TCE). The TCE framework explains MNE expansion patterns through considering three different factors. The first factor is the determination of the firm’s boundaries, which includes the choice of the geographic scope of the firm activities and the choice of entry mode. The second factor is the interface with the external environment, which involves the choice of whether all customers and suppliers are treated in the same or in a different way. Finally, the third factor is the internal design of a firm. The internal design consists of the structure of the affiliate network of a firm. The TCE approach is a general model regarding internationalization of firms. However, Rugman and Verbeke (2005) adopted a specific strategy focused on the geographic scope from a regional perspective. Thus, their strategy for internationalization paid special attention to the regional strategies of MNEs.
An additional strategy that can be used by a firm to expand abroad is the internationalization strategy introduced by Johansson and Vahlne (1977 and 1990 in Rugman & Verbeke, 2005). The strategy is also called the Scandinavian or Uppsala model. It provides a clear explanation of a gradual approach by which MNEs can expand internationally using a path-dependent process of several stages of internationalization. The strategy takes into account the risks of operating in a foreign country and the costs of learning in a new environment (Rugman, Verbeke & Nguyen, 2011). The theory suggests that due to psychic distance, MNEs first start to enter markets that are geographically close and only engage in resource commitments that are not too high. Psychic distance applies to countries that are culturally distant from the home country. A firm will start expanding to a nearby country in order to reduce the risk of operating in an unknown environment. In this way, the firm engages in experiential learning, gaining knowledge and experience. The firm will then eventually be able to expand to markets that are more (psychically) distant and to engage more complex resource commitments.
2.1.2 Internationalization motives
There are several reasons why firms expand abroad. The early theories in international business explain that there is a need for international sales because firms have firm-specific advantages (FSAs), which enable them to increase results in various ways (Rugman & Verbeke, 2005). For example, knowledge in a firm can be transferred to other countries. FSAs can either be location-bound (LB), which means that the firm-specific assets are connected to a certain geographical area, or non-location-bound (NLB), meaning that the assets are easily transferable across different locations. There are also country-specific advantages (CSA), which relate to the importance of a location to expand internationally.
According to Blonigen (2005), MNEs are increasingly engaging in foreign direct investment (FDI). In his eclectic paradigm, Dunning (1988) introduced three types of advantages that influence FDI: ownership, location and internalization advantages (OLI). The ownership advantages can be divided into two categories: assets (tangible and intangible) and transactional advantages, including the coordination of the affiliate network. Location advantages describe the idea that certain countries have an advantage compared to others because they possess specific assets such as expert knowledge or natural resources. Dunning (1988) distinguished four different motives for FDI into certain locations that influence the location of value-added activities by MNEs: resource seeking, market seeking, efficiency seeking and strategic-asset seeking. Resource seeking involves the availability, price and quality of natural resources in a certain location. Market seeking focuses on selecting a location with the aim to expand to new markets. Efficiency seeking involves the choice of a location for cost-related issues such as (cheap) labor and materials. Finally, strategic-asset seeking explains why MNEs invest in locations for the availability of knowledge-related assets. There has been a gradual shift from natural resource-seeking and efficiency seeking to market seeking and strategic asset-seeking (UNCTAD, 2017). Another insight regarding FDI determinants comes from Blonigen (2005). He highlighted different determinants that affect MNEs’ choice of FDI activity, including exchange rates and taxes.
2.1.3 Entry modes
The specific approach that a firm chooses to adopt to enter a foreign country is called the entry strategy (Hill, Hwang & Kim, 1990). The entry strategy can have a large impact on the success of the operations of a firm in a new foreign market. The hierarchical model by Pan and Tse (2000) explains different entry modes, divided into equity and non-equity modes (Pan & Tse, 2000). Non-equity modes can be further divided into two categories: exports (e.g., direct/indirect export) and contractual agreements (e.g., licensing, R&D contracts).
Equity-based entry modes involve either joint ventures (JVs) or a wholly owned subsidiary (WOS). A WOS can be a greenfield (i.e., companies built from scratch) or an acquisition. Brouthers and Hennart (2007) further distinguished four types of entry. Firstly, ownership mode can be either shared or full ownership. Secondly, establishment mode can be a greenfield or an acquisition. In total, this produces four possibilities for MNEs to enter a foreign country: greenfield JV, greenfield WOS, partial acquisition or a full acquisition.
MNEs are important for globalization because they can help to establish more economic interdependence between national markets, thereby forging bonds (Rugman & Verbeke, 2004). In business terms, globalization means that MNEs spread their activities globally. The three regions that constitute the largest portion of global business activities are North America, the European Union and Asia. These three regions are called the “triad”. The triad as a whole holds significant power because the three regions share similarities such as low macroeconomic growth, similar technological infrastructure and homogenization of demand. Because of these shared commonalities, trade is easier between countries within the triad. Although many MNEs seem to operate on a global level, in reality few “global” firms operate in markets spanning the entire world. This is because most of the 500 largest MNEs spread their activities in their home region of the “triad”. Therefore, international business has to deal with the fact that markets are neither fully isolated nor integrated (Ghemawat, 2003).
Instead of talking about globalization, Ghemawat (2003) introduced the concept of “semi-globalization”. When markets are not fully integrated, there is a space left in between the markets, which can be referred to as semi-globalization. Location specificity plays a central role in semi-globalization (Dunning, 2009). The location advantages derive from the OLI paradigm consisting of ownership, location and internationalization advantages. Location-specificity means that there are location-specific assets that can lead to a competitive advantage for the MNE. MNEs unsurprisingly look for locations that offer the best economic and
institutional facilities. Furthermore, according to Zaheer and Nachum (2011), a location can be an important resource for an MNE because MNEs can differ in location capability. The possession of firm-specific location capability means that MNEs can derive benefits from activity in particular locations combined with international activity.
2.2 Internationalization and political risk
2.2.1 FDI and political risk
FDI leads to more international (economic) integration, which has both advantages and disadvantages. Several types of risks of expanding abroad constitute disadvantages that must be taken into account when considering the internationalization of a firm. Meldrum (2000) distinguished different types of risks for investments in a certain country, including economic, transfer, exchange-rate, location or neighborhood, sovereign and political risk. Singh (1999) conducted research on political risk and FDI flow. He found that results from several studies have demonstrated that political risk can influence decisions to invest in another country, while results from other studies have demonstrated that investments are not affected by political instability. Further research from Singh (1999) revealed that the qualitative index of political risk is a determinant for FDI flows for countries that have always had high-FDI flows. This has a negative outcome for countries that have not had high FDI flows. Moreover, political risk can be a major risk for FDI because it can have an impact on safety and profitability of the investment (Sethi & Luther, 1986). Foreign investors are therefore generally not attracted to entering countries with high political risks (Lee, 2017).
Political risk can result from different sources and can have an impact on business decisions. The multidimensional nature of political risk means that risk for foreign firms can derive from a combination of factors including the political, economic and sociocultural spheres. Political factors derive from power or authority relationships and are therefore more obvious risks, but economic and sociocultural factors can also lead to political risk. An example
of a disadvantage of a political risk is the threat of terrorism. Research by Busse and Hefeker (2007) found that government stability, internal and external conflict, corruption and ethnic tensions, law and order, democratic accountability of government and the quality of bureaucracy are factors that determine foreign investment flows. Moreover, a study analyzing 90 developing countries between 2003 and 2012 conducted by Witte, Burger, Ianchovichina and Pennings (2017) found that political conflict is negatively related to total and non-resource-related greenfield FDI.
In contrast, resource-related greenfield FDI is not negatively associated with political conflict. This result can be explained by the fact that the resource sector achieves profitability from natural-resources extraction. Political violence such as terrorist attacks and assassinations therefore does not have an effect on the location choice of an MNE. Furthermore, research by Demirbag, Tatoglu and Glaister (2007) on the factors that could influence perceptions of the performance of western FDI in Turkey found that political risk does not influence the performance of affiliates. MNEs can have foreign affiliates which can be defined as:
‘‘an incorporated or unincorporated enterprise in which an investor, who is resident in another economy, owns a stake that permits a lasting interest in the management of that enterprise (an equity stake of 10 per cent for an incorporated enterprise or its equivalent for an unincorporated enterprise).’’ (UNCTAD, 2017).
According to Tobin and Rose-Ackerman (2011), political risk can, however, influence the flow of capital to developing countries. In response, governments tend to adopt innovative institutions such as the Bilateral Investment Treaty (BIT) to increase the FDI flow to developing countries.
2.2.2 Political risk: terrorism
Political risk can be defined as “the complications that businesses may face as a result of political decisions and activities of governments or other bodies” (Bremmer, 2005; Howell & Chaddick, 1994; Simon, 1982 in Czinkota, Knight, Liesch & Steen, 2010: 833). According to Czinkota et al. (2010), political risk differs from terrorism. Czinkota et al. (2010) argued that political risk is related to individual countries and that it might as well be characterized as government-policy uncertainty or political uncertainty. Moreover, political risk can be predicted, while terrorist actions cannot be predicted. However, conflict and (political) instability can have a considerable impact on terrorism. A concrete example of this is the Arab Spring (Institute for Economics and Peace, 2017): a movement against the governments in the Middle East and North Africa (MENA) region beginning in December 2010. The start of this tumult was the Tunisian Revolution. The movement then spread to neighboring countries, ultimately impacting a total of 20 countries. Moreover, the Arab Spring led to an increase in deaths from terrorism. The countries most severely impacted by terrorism due to the Arab Spring were Tunisia, Egypt, Yemen, Libya and Syria.
Terrorism is an important topic in today’s globalizing world. Over the last 15 years, eight out of nine regions in the world have seen an increase in events and threats regarding terrorism (Institute for Economics and Peace, 2017). This includes the regions South Asia, Middle East and North Africa, North America, Sub-Saharan Africa, Asia-Pacific, South America, Russia and Eurasia, Europe and Central America and the Caribbean. Moreover, terrorism has become more complex due to globalization, religious fundamentalism and the availability of weapons of mass destruction (Czinkota et al., 2010). Since the 1980s, terrorism has changed because of new factors (Enders & Sandler, 2006; Hoffman, 2006; Wernick & Kundu, 2008 in Czinkota et al., 2010); the new terrorism is more violent and attacks can cause more damage and deaths.
2.3 Terrorism and international business
2.3.1 Previous research on terrorism and international business
According to Czinkota and Ronkainen (2009 in Kolk, Kourula & Pisani, 2017), terrorism has been rising in importance with regard to international business. Extensive research has been conducted on the relationship between terrorism and international business. For example, one study regarding the impact of terrorism on the business environment demonstrated the impact of terrorism in business sectors from the equities market, to aviation, tourism, insurance and corporate security (Larobina & Pate, 2009). The study revealed that all these business sectors face economic costs due to terrorism. A more recent study by Kolk et al. (2017) provided an overview of studies on international business and peace. The topic “peace” includes themes regarding terrorism such as business and conflict, MNEs’ responses to conflict, employees’ reactions to conflict, and MNEs and terrorism. Kolk et al. (2017) highlighted research by Czinkota and Ronkainen (2009), who examined issues/trends in the international business environment that demonstrate that terrorism has increased in importance. Kolk et al. (2017) also reviewed a study from Branzei and Abdelnour (2010), who contended that terrorism can influence enterprise activities. Terrorism discourages entrepreneurship because it can lead to less engagement and less economic motivation. Moreover, terrorism can scare foreign investors away due to the effect on the environment where firms will have to operate (Lee, 2017). The effect of terrorism on the environment includes, among many other tragedies, the destruction of infrastructure.
Terrorist activities can also be detrimental to the macro-economy in terms of growth, trade and stock markets. As such, terrorism can influence international business (IB) both directly and indirectly (Czinkota et al., 2010 in Kolk et al., 2017). Direct effects of terrorism on IB include deaths and the destruction of infrastructure. Indirect effects include a decline in buyer demand, greater IB transaction costs and a decline in FDI and new government
procedures due to general instability (Barth, Li, McCarthy, Phumiwasana, & Yago, 2006; Bouchet, 2004; Czinkota et al., 2004; Ketata & Mclntyre, 2008; Lenain, Bonturi, & Koen, 2002; Spich & Grosse, 2005, in Czinkota et al., 2010). As a result, terrorist attacks can make firms less interested in activities in countries that are possible targets of terrorist attacks (Czinkota et al., 2010).
In short, terrorism can have a dramatic effect on economies. Extensive research has been previously conducted on the FDI decisions of MNEs in relation to terrorism. Abadie and Gardeazabal (2008), for example, conducted research on terrorism and economic activity and found that higher levels of terrorist risk can lead to lower levels of net FDI positions. In addition, (risk of) terrorism can either reduce or enlarge the amount of FDI into a country. Filer and Stanišić’s study (2016) on the effect of terrorism incidents on capital flows found evidence that FDI flows are more sensitive to terrorism than other types of investment, such as portfolio investment and lending.
Many studies have also been conducted specifically and exclusively on terrorism. The Global Terrorism Index analyzed the impact of terrorism in 163 countries (Institute for Economics and Peace, 2017) using the Global Terrorism Database. This report revealed that most terrorism takes place in the MENA, South Asia and sub-Saharan Africa regions. The report outlined different types of attacks such as bombings and explosions, which made up 54% of the attacks in 2016 and the majority of attacks in the MENA region. Armed assaults accounted for 18% of the attacks, hostage taking and assassinations for 17%, and facility or infrastructure attacks for 6%.
The four deadliest terrorist groups at the moment are ISIL, Al-Qa’ida, the Taliban and Boko Haram (Institute for Economics and Peace, 2017). Firstly, ISIL stands for the Islamic State of Iraq and the Levant, and consists of fundamentalist jihadists (Silander, Wallace & Janzekovic, 2016). Beyond destroying an enormous part of Syria and Iraq, ISIL has grown into
an international community as well. It is currently seen as the deadliest terrorist group in the world (Institute for Economics and Peace, 2017). Secondly, the terrorist group Al-Qa’ida was founded as a group of elite Muslims to serve as an example for Afghan guerrillas in 1988 (Stenersen, 2017). Al-Qa’ida disconnected from Afghanistan during the civil war from 1992-1996, and the partnership between Al-Qa’ida and the Taliban started in 1996. Between 1999 and 2001, Al-Qa’ida maintained the same mission to support and inspire Islamic guerrillas; however, Al-Qa’ida had introduced new, more violent aspects including international terrorism. Only a small portion of elites contributed to supporting international terrorism in Afghanistan. The strategy of Al-Qa’ida focused both on international terrorism and organization building.
Another terrorist group that was active in Afghanistan was the Taliban. The Taliban, meaning “seeker of knowledge” in Persian, operated mostly in Afghanistan and was led by students and clerics (Crews & Tarzi, 2009). The Taliban has been fighting against the mujahedin (i.e., guerilla fighters) since 1994. In 1996 the Taliban took over the city of Jalalabad and from there it began to control nearly the whole country. Finally, the fourth largest terrorist group in the world is Boko Haram, an African jihadist movement (Thurston, 2017). Boko Haram started in Maiduguri, a city in Nigeria, in the beginning of 2000. This group was involved in the legal prohibition of Western-style education, forcing instead a fundamentalist version of Islam. Boko Haram opposed the Western-style education system including multiparty democracy, secular government, constitutionalism and man-made laws, as this was all seen as anti-Islamic. The first movement started between 1970-1990 in response to political instability and friction between Islam and politics. From 2001 until 2009 there was open preaching, and from 2010 until 2013, terrorism started to play a central role. Later in 2014, Boko Haram became even more extreme, notably kidnapping 276 schoolgirls. In 2015, Boko
Haram declared its affiliation to ISIL. The merge of these organizations produced an even greater increase in terrorism.
2.3.2 International business in high-risk countries with regard to terrorism
Previous research on countries at high risk of terrorism and the relation with IB has largely focused on organizational support from firms and the guidance of expatriates. For example, Bader, Berg and Holtbrügge (2015) studied expatriate managers who were assigned to countries endangered by terrorism. Findings from this research revealed that perceived organizational support can lead to a less-diminishing influence on work performance among expatriates sent to terrorism-endangered countries. An additional study by Bader and Schuster (2015) explored the relation between international business and international assignments in countries endangered by terrorism. The main focus of the study was the effect of expatriate social network characteristics on social wellbeing, and the countries incorporated in the study were Afghanistan, India and Pakistan. The researchers found that large and diverse networks have a positive influence on the psychological wellbeing of international expatriates. While the research of Bader et al. (2015) solely focused on the influence of employees in firms who were sent to terrorism-endangered countries, a further study analyzed the impact of terrorism on international business by addressing the implications of terrorist attacks on different types of FDI flow, including greenfield or mergers and acquisitions (M&As). According to Ouyang and Rajan (2017), M&As are the dominant form of FDI through which firms expand abroad in countries such as India. The results of their research demonstrated that the choice for expanding abroad does not only depend on the location-specific advantages of countries, but also the rise of terrorism, which influences the uncertainties and costs of doing business globally. The frequency and intensity of terrorist attacks reduce M&A flows.
2.3.3 Terrorism in high-risk countries
The four aforementioned terrorist groups have caused disadvantages for several countries due to their extreme terrorist attacks. This section provides a short background on the countries that are listed in the top 10 countries most impacted by terrorism. Data from the Global Terrorism Index (Institute for Economics and Peace, 2017) of 2016 indicated that the countries that score the highest in terms of impact from terrorism are Iraq, Afghanistan, Nigeria, Syria, Pakistan, Yemen, Somalia, India, Turkey and Libya. In 2002, a total of 245 terrorist attacks occurred in these 10 countries. In 2016, this number increased to 8,226 attacks, of which the 10 most fatal terrorist attacks were situated in Syria, Iraq, South Sudan and Afghanistan.
The first country that will be discussed is Iraq. For the last 13 years, Iraq has been the country that has suffered most under terrorism (Institute for Economics and Peace, 2017). In 2016, there were many attacks by ISIL, the deadliest terrorist group active in Iraq. The second country highly affected by terrorism is Afghanistan, within which 94% of terrorist activity was attributed to the Taliban in 2016. In addition, Nigeria had a severe period of terrorist attacks between 2013 and 2015 as a result of Boko Haram. Boko Haram caused a split between factions seeking to follow either ISIL or Al-Qa’ida. Meanwhile, Syria has known severe terrorism since 2011. Syria has seen a rapid growth of terrorist attacks since this time due to a civil war. In 2016, most of the terrorist attacks came from ISIL. In contrast, Pakistan has seen a reduced level of terrorism because of the decline of Tehrik-i-Taliban Pakistan (TTP). Since 2000, TTP was responsible for more than half of the killed people involving terrorism-related deaths. Due to Operation Zarb-e-Azb of the Pakistani Army, there were only 30% of deaths from terrorism caused by TTP, most of which came from suicide bombings. Other active groups in Pakistan are the Khorasan Chapter of the Islamic State, the Sunni jihadist group Lashkar-e-Jhangvi and several Baloch nationalist groups.
In Yemen, most attacks come from ISIL groups and Al’Qa-ida was responsible for 13% of the attacks in 2016. In Somalia, 92% of the deaths were due to al-Shabaab. In addition, India has mostly faced terrorist attacks such as bombings and explosions coming from Maoist groups, including the Communist Party of India and the Red Corridor. The main source of Islamic terrorism is the dispute between India and Pakistan about the regions Jammu and Kashmir. In 2015, the deadliest Islamic groups in Pakistan were Lashkar-e-Taiba and Hizbul Mujahideen. Turkey has experienced a large increase in terrorist attacks from 2015 until 2016. From 2014 to 2016, 75% of all attacks were caused by the Kurdistan Workers’ Party (PKK). Lastly, the historical situation in Libya with regard to terrorism will be described. In 2011, terrorism started in Libya as a result of the overthrow of Prime Minister Muammar Gaddafi. Three ISIL affiliates are active in Libya: Barqua Province, Tripoli Province and Fezzan Province of the Islamic State. The deadliest in 2016 was the Tripoli Province of the Islamic State, which conducted many kidnappings and caused many deaths due to bombings and explosions.
2.3.4 FDI into high-risk countries
Despite the risk of terrorism, there are also motives that can attract investment in high-risk countries. Van Wyk and Lal (2010) examined the factors for FDI flows in 18 countries in the MENA region. Their study demonstrated that economic growth, current account deficits, trade openness and less-restrictive business regulations were main determinants for FDI in these countries. Aziz and Mishra (2016) also investigated the determinants of FDI inflows in their study of 16 Arab countries including Syria, Yemen and Libya. The results identified gross domestic product (GDP) and GDP growth rate as significant determinants of FDI inflows. In addition, research by Tatogluab and Glaisterb (1998) explored the main drivers for western MNEs to invest in Turkey using a sample of 98 firms. The findings of this research indicated that the main motives to invest in Turkey were to gain presence in new markets and faster market entry. Furthermore, research on determinants of FDI in India has found that
transnational attributes are the main factors for FDI inflow in India. A further study focusing on the determinants for FDI activity in India found that market size and infrastructure were also main factors for FDI inflow between 1991 and 2014 (Sharma, 2015).
The determinants to invest in Nigeria have also been investigated (Nurudeen, Wafure & Auta, 2011). The major determinants of FDI inflow to Nigeria are openness of the economy, trade, privatization, the level of infrastructure, and exchange rate. The causal relationship between FDI, terrorism and economic growth was also specifically examined in Pakistan (Shahzad, Zakaria, Rehman, Ahmed & Fida, 2016). The results indicated that terrorism deteriorated the impact of FDI in Pakistan. Furthermore, Akbar and Akbar (2015) examined FDI inflows in Pakistan and found that GDP, degree of trade openness, and regime of dictatorship were positive determinants for FDI inflows. Meanwhile, negative determinants included terrorism attacks, foreign debt, exchange rate, political instability and domestic capital formation.
As previously mentioned, political instability can be a reason to refrain from investment in a certain country. However, there are other determinants that can attract MNEs to invest in a country despite its political instability. For example, in Pakistan many firms have invested in the primary sector consisting of oil, gas and mining (Shah, Ahmad & Ahmed, 2016). Syria demonstrates a comparable situation. Syria has long been in a state of war and can be categorized as a developing country (Matar, 2016). According to the demand-management approach, the main driver to invest in Syria is to gain profit (Matar, 2016). Afghanistan, as the world’s largest opium producer, could also be an important country to invest in. In addition, the country is largely used for the transport of hashish, arms and cigarettes (Institute for Economics and Peace, 2017).
Although terrorism can be seen as a negative influence on FDI decisions of MNEs, the situation in Pakistan with regard to FDI inflow reveals contrasting results (Lee, 2017). Terrorism led to an unfavorable investment environment in Pakistan around 1990. In 1994, Pakistan was ranked 50th in the world for the amount of FDI received and 19th for the number of terrorist attacks. The US then decided to provide aid for counterterrorism. This did not lead to the destruction of terrorism, but it did restore confidence for investors. In 2006, Pakistan was listed number 16 in the world for terrorism, which was worse than in 1994. However, the inward FDI increased tenfold (while global FDI only increased five-fold).
2.4 FDI from the Fortune Global 500 firms into high-risk countries
Although research has been conducted regarding FDI and its relation to countries at high risk of terrorism, little research has specifically focused on the impact of decisions of the largest global firms with regard to terrorism. The environment in which MNEs operate is an important topic in IB (Oetzel & Miklian, 2017), particularly the risks MNEs face when operating in unstable environments due to institutional failures, crime and violence. It is important for MNEs to overcome the threats in unstable environments because these threats could possibly lead to a decline in FDI. In order to be able to operate in an unstable environment, MNEs can adopt strategies for peacebuilding and conflict avoidance. For example, one approach for MNEs to include peacebuilding is by creating partnerships with NGOs to exchange resources and knowledge.
2.5 Research gap
Previous research has not addressed the specific characteristics of firms regarding their investment in high-risk countries under threat of terrorism. This study therefore uses data from the Fortune Global 500 firms to examine the different firm- and industry-level characteristics that influence the likelihood of a firm to invest in terrorism-endangered countries. The aim of this study is to answer the following central research question: How do firm- and industry-level characteristics affect the likelihood of firms to invest in countries that rank highly on the terrorism risk index?
CHAPTER 3: THEORETICAL FRAMEWORK
3.1 International business in terrorism-endangered countries
This research analyzes the relationship between IB and investment in countries at high risk of terrorism. Previous research has been conducted on IB in terrorism-endangered countries, particularly in Afghanistan, India and Pakistan (Bader & Schuster, 2015). Further research conducted by Bader and Schuster (2015) focused on the social networks of expatriates who were sent to countries that are endangered by terrorism. The level of analysis of Bader and Schuster’s 2015 research was the employees in the firm. However, in this study, the focus is specifically on the firm-level and industry-level characteristics of MNEs operating in terrorism-endangered countries. An explanation of the variables is provided in greater detail below.
3.2 Development of hypotheses
The development of the hypotheses in this research is explained as follows. The first and second sections respectively address the influence of firm-level characteristics and industry-level characteristics of MNEs on investment decisions. The third section then describes the moderating role of internationalization strategy on investment decisions.
3.2.1 Firm-level characteristics: firm size
An important firm-level characteristic is the size of a firm. Firm size is ‘‘a part of the firm’s characteristics and is expected to influence export performance directly or indirectly’’ (Aaby and Slater, 1989; Madsen, 1994; Holzmuller and Kasper, 1991; Cooper and Kleinschmidt, 1985; Styles and Ambler, 1994 in Moen, 1999: 54). According to Bilkey and Tesar (1977; Johanson and Vahlne, 1977 in Taylor & Jack, 2013), firm age and size are related to the number of geographic markets that the firm serves. Research on firm size has found that small firms that export adopt the stage theory of internationalization (Wolff & Pett, 2000). This theory involves small steps through which firms expand via different phases in a sequential process
(Johansson & Vahlne 1977 & 1990 in Rugman & Verbeke, 2005). Meanwhile, large firms employ one of the generic business-level strategies to compete (Wolff & Pett, 2000). As a firm grows larger, it can use and develop resources that are necessary to become successful.
If a firm wants to grow larger, it can expand internationally by identifying which specific markets to enter and through which modes to do so in a successful manner. Managers face the challenge of selecting the right internationalization decision by using the right product/market/mode (PMM) combination that will lead to the best outcome for the firm (Liesch, Steen, Knight & Czinkota, 2006). Firms that operate in world markets can gain learning externalities over time and improve their risk-assessment skills for further expansion. However, international markets are increasingly confronted with terrorist attacks. Thus, if a firm decides to internationalize in an environment that is under conditions of risk, the threat of terrorism constitutes a risk of internationalization for the firm. Moreover, if there is frequent risk of attacks in a region where the firm will have to operate, the firm must consider multiple forms of operations (Suder, 2004 in Liesch et al., 2006).
Firms must also consider the link between international terrorism and decision management (Liesch et al., 2006). Larger firms will have more financial resources to plan this strategy. Because of the access to more (financial) resources, a larger firm will be more likely to invest in a high-risk country than a smaller firm. It will be easier for large firms to employ the necessary resources to react to the threat of terrorism. Henderson and Fredrickson (1996) similarly argued that larger firms will get involved in extensive international expansion more easily because they are more capable of undertaking complex decision processes. Therefore, this study expects that larger firms will be more likely to invest in a high-risk country with respect to terrorism. The hypothesis regarding firm size and investment in high-risk countries is as follows:
Hypothesis 1. Firm size is positively related to a firm’s likelihood to invest in a high-risk country with respect to terrorism.
3.2.2 Industry-level characteristics: foreign direct investment motives
A second level of characteristics that are analyzed in this research are industry-level characteristics. According to Dunning (1988), there are four industry-level motives for foreign direct investment: resource seeking, market seeking, efficiency seeking and strategic-asset seeking. Resource seeking refers to the opportunity to have access to resources. Efficiency seeking deals with the lower costs of production and the availability of spatial clusters such as science parks where firms can cooperate with local knowledge, for example from universities. Market seeking justifies investment in foreign countries because of the possibility to enter new markets. Finally, strategic-asset seeking focuses on the availability of assets such as technical knowledge, learning experiences and management expertise. This motive has grown because of mergers and acquisitions.
Previous research has found that the reason why firms have invested in high-risk countries with regard to terrorism, such as Pakistan and Afghanistan, was because of the richness of natural resources oil (Shah et al., 2016) and opium (Institute for Economics and Peace, 2017). According to research by UNCTAD (2017, in Shapiro, Hobdari & Oh, 2017), 16 firms of the largest 100 MNEs in the world operate in the natural resource sector. This indicates that the natural resource sector is more multinational than expected when looking at their share of FDI. The 16 firms investing in the natural resource sector share similarities such as being (largely) state-owned. Many economies rely on the natural resource sector; thus, MNEs can support sustainable development in developing countries which are rich in natural resources. The resource-based view from Barney (RBV) (1991) proposes that resources are important for a firm to gain competitive advantage. Competitive advantage can be achieved when resources are valuable, rare, inimitable and not substitutable. Collier and Hoeffler (2001 in Piazza, 2016)
suggested that natural resources can also be linked to civil war, as the possession of these resources can lead to more wealth. Piazza (2016) investigated the link between oil wealth and terrorist attacks and found that oil resources increase the risk of terrorism in developing countries. In addition, the study by Ezeoha and Ugwu (2015) on the impact of armed conflicts on FDI in Africa revealed that African countries are an important FDI destination because of natural resource seeking. Moreover, their study demonstrated that the impact of conflict is higher for natural resource-rich countries than non-natural resource-rich countries in Africa.
Two prominent examples of natural resources are oil and gas. The oil and gas industry has experienced several world wars such as the Suez Canal crisis and the Gulf War (MacMillan, 2000). The business of oil is often seen as ‘‘the world’s biggest and most pervasive business, the greatest of the great industries that arose in the last decades of the nineteenth century’’ (Yergin, 1991: 13). A great deal of conflicts, global politics and power struggles has taken place in this field. Furthermore, areas in which oil plays an important role for terrorist groups include Syria and Iraq (Institute for Economics and Peace, 2017). These countries belong to the top 10 high-risk countries for terrorism. Because the most terrorism-endangered countries in the world are rich in natural resources, it is expected that firms operating in a natural resource industry will be more likely to invest in these countries than firms that are not operating in this industry. This is because firms that are active in the natural resource-intensive industry need these resources for their business. That is, such firms have a specific reason to invest in these countries despite the high risk of terrorism. Therefore, the second hypothesis is as follows:
Hypothesis 2. A firm belonging to an industry focused on natural resources is positively related to its likelihood to invest in a high-risk country with respect to terrorism.
3.2.3 Internationalization strategy: global/regional strategy
Hypothesis 3 addresses the moderating effect of the relationship between firm-level characteristics on investment decisions in high terrorism-endangered countries. When MNEs
decide to expand their activities abroad, there are several strategies available. Rugman and Verbeke (2004) explained one such strategy to expand abroad: the global strategy. A global strategy consists of a firm that expands its operations by spreading all over the world (Rugman & Verbeke, 2004). This strategy is also called globalization. However, many of the largest firms in the world are not globally, but rather regionally based. Most of the firms that are labeled as “global” are actually only operating in certain parts of the world, predominately in the “triad” consisting of North America, the European Union and Asia, or what has lately been changed to the “tetrad” by adding China (Glänzel, Debackere & Meyer, 2007).
In addition to the globalization strategy, firms may expand abroad using regional strategy. Region is ‘‘a grouping of countries that are relatively similar to each other and relatively dissimilar to countries in other regions’’ (Verbeke & Asmussen, 2016: 1054). Regional strategy emphasizes expansion to one or several regions, but not to all regions in the world. This is also called regionalization or semi-globalization (Ghemawat, 2003). Ghemawat (2003) argued that the international integration of markets is for the most part not completely integrated nor isolated. Therefore, he referred to semi-globalization as the incomplete integration of operations across borders. The work of Rugman and Verbeke (2004 in Verbeke & Asmussen, 2016) revealed that previous research on FG500 firms has concluded that only nine firms were balanced with regard to sales across the globe. The remaining FG500 firms operated primarily in their home region and could therefore be considered to have a regional strategy. The role region plays in the strategy of MNEs can be explained by two different approaches. The first approach considers FSAs as region-bound, meaning that there are less exploitation possibilities in other regions than in the home region. The second approach looks at firms that have already expanded into host regions and the limitations with regard to achieving global economies of scale. Firms can adapt to regional barriers through regional
responsiveness, which can include changing the organizational structure to adapt to regional factors.
The third hypothesis in this research analyzes the moderating effect of internationalization strategy on the relationship between firm size and the likelihood of investment in terrorism-endangered countries. The related model includes the 10 most highly-rated countries for risk of terrorism, most of which are situated in the MENA region (Institute for Economics and Peace, 2017). A visual representation of the top 10 highly terrorism-endangered countries can be found in Appendix A. As most of the largest firms have their roots in the “triad” or “tetrad” regions (Japan and China, North America and Europe), it is expected that firms that have a higher tendency towards a globally-oriented strategy will expand outside the triad region more easily than firms that have a regionally-oriented internationalization strategy.
Moreover, having an orientation towards a more global strategy could lead to a more positive relationship between firm size and the likelihood to invest in a high terrorism-endangered country (located in the MENA region) than for firms that are regionally focused. Taking into account the firm size, it is expected that firms with a more globally-oriented strategy will have a more positive outcome with regard to the likelihood to invest in a high terrorism-endangered country. To analyze whether a global strategy positively moderates the effect of firm size on the likelihood of investment in high terrorism-endangered countries, the hypothesis 3 is the following:
Hypothesis 3. A firm’s global (versus regional) orientation positively moderates the relationship hypothesized in Hypothesis 1.
It is likewise expected that a more globally-oriented internationalization strategy has a positive influence on the relationship between operating in a natural resource-intensive industry and the likelihood to invest in a high-risk country with regard to terrorism. This means that if a firm operates in a natural resource-intensive industry and has a more globally-oriented internationalization strategy, the likelihood to invest in a high-risk country with regard to terrorism will be higher. Hypothesis 4 is therefore as follows:
Hypothesis 4. A firm’s global (versus regional) orientation positively moderates the relationship hypothesized in Hypothesis 2.
3.3 Conceptual model
The hypotheses discussed above result in the conceptual model provided in Figure 1. This conceptual model depicts the relationship between the firm- and industry-level characteristics and the likelihood to invest in high-risk countries, moderated by the internationalization strategy of firms.
CHAPTER 4: METHODS
4.1 Sample and data collection
In this chapter, the hypotheses are tested and the different variables are discussed. The statistical analyses that have been conducted will be explained and the results of these tests will be given. The type of research used in this study was a quantitative analysis using a cross-sectional method. A quantitative research is considered suitable for this study because there was a data set available consisting of quantifiable information of the world’s largest firms. The world’s 500 largest firms are also known as the Fortune Global 500 (Fortune, 2017).
Data was gathered in several different steps. First, information was gathered about FG500 during February and March 2018. A recent overview of firms included in the FG500 can be found in Appendix B. This information was accessible via the Orbis database and provided information regarding the firms such as turnover and type of industry. Moreover, detailed information on affiliates was shown as well. Additional information that was not available via the Orbis database was added from annual reports. The most recent and up-to-date turnover (ranked from high to low) for the 500 firms was retrieved from Fortune (2017). Thereafter, all the collected information on the FG500 was transferred to Excel in April 2018. Via Excel, the entire data on the FG500 including all the information from their affiliates, was transferred to the application SPSS. Via SPSS several statistical analyses have been conducted such as an overview of frequencies for all the affiliates. This data sheet included all the affiliates since this level of analysis indicated whether the affiliate was operating in one of the top 10 countries ranked as highly terrorism-endangered. These countries included: Syria, Nigeria, Afghanistan, India, Iraq, Pakistan, Yemen, Somalia, Turkey and Libya. If an affiliate was operating in one of the 10 countries, it was coded as ‘1’. If the affiliate was not operating in one of these 10 countries, it was coded as ‘0’. This resulted in a total of total of 189,834 affiliates of which 3,553 were active in a country at high risk of terrorism. Subsequently, a new
Excel sheet was created to provide an overview of whether the affiliate was located in a high-terrorism endangered country on firm-level. Lastly, the information including only the FG500 and the corresponding variables was used in SPSS to conduct the statistical analyses on firm-level.
4.2 Variables and measures
A thorough explanation of the variables used in this study will be discussed separately in the section below. Afterwards, an overview of all the variables and a description can be found at the end of this section in Table 1.
4.2.1 Dependent variable
The dependent variable used in this study is the likelihood of investment for FG500 firms in high terrorism-endangered countries. Investment in a high terrorism-endangered country was measured by selecting all the FG500 that had an affiliate in one of the top 10 countries ranked in the terrorism risk index including Syria, Nigeria, Afghanistan, India, Iraq, Pakistan, Yemen, Somalia, Turkey and Libya. This was analyzed in SPSS and a dummy variable was created to indicate whether firms from the FG500 did have an affiliate in one of the top 10 countries regarding risk of terrorism. If the firms did have an affiliate in a such a country, the firm was labeled ‘1’. In case the firm did not have an affiliate in a high-terrorism endangered country, it was labeled as ‘0’. A visual representation and a list of rankings from the top 10 countries ranked on the terrorism index measured in this study can be found in Appendix A.
4.2.2 Independent variables
The independent variables in this study are measured on two different levels. The first level included firm-level characteristics. The specific variable that has been measured was firm size. Firm size consisted of a continuous variable which was measured by using the amount of total revenue (turnover) in US million dollars from the firm indicated on the Fortune website
(Fortune, 2017). The second level of characteristics was the industry-level characteristics. Industry-level was operationalized by using an industry coming from Dunning’s motives. The focus was put on the natural resources motive meaning that a firm invests in a country because of the availability and the price of natural resources (Dunning, 1988). According to Dunning (1988), natural resource-seeking involves both the availability of natural resources as well as the infrastructure to enable resources to be exploited. The industry-level was coded as a dummy variable. All industries that were related to a natural resource intensive industry belonged to this category. This included both the firms that operated in the extraction as well as trading of natural resources (e.g., oil, gas and electricity). All the firms belonging to a natural resource related industry were given the label ‘1’. Firms operating in other industries were labeled ‘0’.
4.2.3 Moderating variable
The internationalization strategy of a firm is the moderating effect in this study. Rugman and Verbeke (2004) have shown that there are two ways to expand internationally, regionally or globally. To measure the effect of the internationalization strategy, the amount of global sales from the total sales of a firm was used. Global sales are measured by the sales outside the home region. The ratio could range from 0 to 1. A lower (closer to 0) sales/total sales outcome indicates a more regionally oriented strategy while a higher outcome (closer to 1) indicates a more globally oriented strategy.
4.2.4 Control variables
To make sure that the influence on the outcome variable will be solely explicable by the effect of the independent variables, control variables are included in this method. Control variables consist of factors that might as well have an impact on the outcome variable. The control variables included in this study are the number of employees of the firm and whether a firm is being categorized as a public firm or not. Number of employees is measured by using the size (number of employees) from Orbis. This is because firms with a larger number of employees
are supposed to have higher foreign sales intensities which can be related to a higher tendency towards a global internationalization strategy (Denicolai, Zucchella & Strange, 2014). With regard to the control variable public, it is expected that the probability to get listed is higher for larger firms than for smaller firms (Pagano, Panetta & Zingales, 2002). A dummy variable was created in which the score ‘0’ was used to for firms not publicly listed while the score ‘1’ was given to publicly listed firms.
Table 1. Operationalization of variables
4.3 Statistical analyses and results
4.3.1 Descriptive statistics
In order to conduct statistical analyses, the data including all the affiliates was transferred into SPSS. The missing variables are excluded via listwise deletion meaning that no missing data in any variable were analyzed. Moreover, dummy variables were created at the affiliate level for natural resource intensive industry, public listed firms, and whether the affiliate was operating in a high-terrorism endangered country. After this, descriptive statistics, skewness, kurtosis and normality tests were conducted for all variables. This led to a total sample of 189,834 affiliates coming from 500 firms. The total number of affiliates located in a country at
high risk of terrorism was 3,553. Building on this information, a new file was created on firm level including variables for the FG500. After having deleted the missing values via listwise deletion, the final sample included a total of 468 firms.
Subsequently, analyses were conducted at the firm-level. A binary logistic regression analysis was used to find the effect of firm size and whether a firm was operating in a natural resource intensive industry or not, and the likelihood for a firm to invest into a risk country with regard to terrorism. The descriptive statistics including means, standard deviations and correlations of the firms are shown in Table 2. Moreover, with regard to the independent variables, the descriptive statistics show that the average firm size is equivalent to a total turnover of $56,794.49 million dollar. The lowest turnover was $21,609 million dollar and the highest was $485,873 million dollar. The average number of employees of a firm was 125,693. The lowest number of employees was 200 employees and the firm with the most personnel consisted of 2,300,000 employees. The variable public had a mean score of .8355 which means that 83,55% of the firms used in the analyses were publicly listed. In other words, 391 out of 468 firms were publicly listed. The mean score for natural resource intensive industry was .2051, so 96 firms were operating in a natural resource intensive industry. The mean value of the dependent dummy variable indicating whether the firm is operating in a country at high risk of terrorism or not was .5513. This means that more than half of the included firms had an affiliate located in a high-terrorism endangered country since the outcome is higher than 0.5 (in which 0 means that the firm has no affiliate in a high-terrorism endangered country while 1 means that the firm is indeed operating in a high-terrorism endangered country). The number of firms operating in a high terrorism-endangered country was equivalent to 258. Lastly, the variable internationalization strategy had a mean score of .1825. Since the score is lower than 0.5, this means that most of the firms had a more regionally oriented internationalization strategy.
Table 2. Means, standard deviations and correlations for the variables
Secondly, descriptive statistics were shown regarding the firm-level. This included a general overview of the variables regarding all the firms included in this study (Appendix C).
4.3.2 Binary logistic regression analysis
In order to be able to conduct the regression analysis, the assumptions of the multiple regression model had to be met. An Ordinary Least Square (OLS) method is used to analyze the correlations between the independent variables. The variables were tested for problems due to multicollinearity which could lead to misinterpretation. Multicollinearity means that the correlation between predictor variables is above 0.7 (Field, 2013). There was no high correlation between any of the variables (Table 2). Moreover, multicollinearity could also be checked via the Variance Inflation Factors (VIFs). The VIFs need to be lower than 10. In this case, multicollinearity did not cause a problem since all the VIFs were around 1. Additionally, all the values of the tolerance statistic could be checked for multicollinearity. These were between .74 and .97 which is an acceptable value and therefore multicollinearity did not cause any problem.
After this, a binary logistic regression analysis has been conducted to investigate the ability between the independent variables and the dependent variable (Field, 2013). This type of test is suitable for this study because the outcome variable is binary. Binary means that the variable can have two values, in this case this means that the outcome can either have the value 0 or 1 (0 = not operating in a high terrorism-endangered country or 1 = operating in a high
