Foreign Investments Don't Reduce Risk

Article excerpt

Contrary to common business wisdom, American companies don't reduce their financial risks when they expand operations outside the U.S. or establish joint ventures with foreign firms. A study of 332 U.S. manufacturing companies found that those with international joint ventures (IJVs) actually had higher levels of downside risk--a measure of the likelihood that a firm will not meet specified financial performance objectives. The study also found that multinational companies showed no difference in downside risk when compared to firms with just domestic operations.

These results should be surprising to many businesses and economic experts who praise the flexibility and performance advantages of joint ventures and international investments, maintains Michael Leiblein, assistant professor of management and human resources at Ohio State University's Fisher College of Business, Columbus. He conducted the study with Jeffrey Reuer, an assistant professor at the French business school INSEAD.

It is understandable that business experts would expect firms with international investments to have less downside risk, Leiblein says. "Experts have long assumed that multinational firms and firms with IJVs have diversified their risk and given themselves more flexibility by spreading their resources into several different economies."

These investments are thought to provide "real options" that help to reduce risks typically associated with international expansion. …