Risk and experience in foreign direct investment decision making: evidence from Chinese firms

International business activities and foreign direct investment in particular involve an element of risk and uncertainty, sometimes to a great extent. Despite this almost axiomatic statement, less academic research has been conducted on this subject, compared to the considerations of return and cost. While the globalisation era introduces an integration of world economy, ever more diverse types of risks are looming on the horizon in relation to cross-border investment, ranging from political unrest to creeping appropriation, from natural disaster to terrorism, and from technological failure to industrial espionage, all of which tend to deter the free movement of capital and value-adding resources around the world.

This thesis provides by far the most extensive review of the research on risk and uncertainty across the macro management fields of studies. Particular attention has been paid to construct clarity and how construct clarity can serve to categorise a vast body of knowledge and address previous inconsistent conclusions. To further the inquiry, this thesis focuses on one of the conceptualisations of risk that is most relevant to the context of foreign investment decision making. New insights are generated by proposing a microfoundational framework based on a key construct – risk propensity – as a necessary complement to the current research on risk in foreign direct investment. Conventional understanding of the capabilities paradigm is reformulated in this light. In order to test the efficacy of “risk propensity” and the static assumption of risk preference embedded in the conventional theories, this thesis draws upon quasi-experiment methods and models managerial heterogeneity based on stated preference data. In addition to individual level choice modelling, firm level analysis of location choice is conducted, yielding new insights into the role of experience in firms’ decision making. China provides the empirical setting for both analyses. It is found that a theoretical understanding of risk helps explain the varying effect of context and experience on risk-taking. Generalisations of this statement may be made to strategic decision making, organisational learning and behavioural strategy research.