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Positive institutional changes through peace
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Journal Article
Positive institutional changes through peace
2021
Overview
Despite the fragile economic and political environment in conflict-affected countries, a significant number of multinational enterprises (MNEs) enter these markets, particularly as conditions begin to improve. To better understand how MNEs respond to positive institutional changes in challenging markets, we examine the relative effects of peace agreements and MNE capabilities on foreign direct investment. We expect that MNEs can engage in institutional arbitrage by leveraging political capabilities in their home market as well as their environmental, social, and governance capabilities to enter conflict-affected countries. Thus, rather than focusing solely on managing downside risk, we also analyze the relative value of MNE capabilities as countries strive to become more peaceful. Specifically, we hypothesize and find that peace agreements and the associated positive changes in the political environment in the host country are less important for MNEs with political capabilities and strong environmental and social governance than they are for other MNEs. The results raise important questions about why and how certain firms may thrive in challenging environments and reveal the differential impact of positive institutional change.
