Academic journal article Management International Review

Emotions and Foreign Direct Investment: A Theoretical and Empirical Exploration

Academic journal article Management International Review

Emotions and Foreign Direct Investment: A Theoretical and Empirical Exploration

Article excerpt

Abstract

* Emotions are largely absent in economic models. Possibly for this reason, many theories fail to explain the actual decisions made by managers.

* Therefore, we integrate emotions with regular microeconomic theory. We focus on FDI decisions, and include both economic and emotional variables in our analysis of the firm's decision-making process.

* In our theoretical analysis, emotions are included in a utility maximization model that considers not only the utility of the firm but also the utility of the individual decision-maker.

* In our empirical analysis, the presence of emotions in FDI decision-making is tested using a sample of Dutch enterprises that considered an investment in Central or Eastern Europe between 1990 and 2000.

Key Results

* The empirical results show that emotions are important in economic decisionmaking. The presence of positive emotions increases the chance of Dutch firms to engage in an FDI in Central and Eastern Europe.

Introduction

Unlike Dr Spock cruising the Galaxy in his Voyager, most humans are not stripped of their emotions when making decisions. But equally most humans do not possess Dr. Spock's information processing capacities when making choices (Earl 2001). This is nevertheless how economic analysis models human decisions. Standard rational choice models and the bulk of empirical studies on microeconomic choice behavior use a rational choice model wherein little room is left for emotions to play a role, let alone a decisive one. The skills required to select and to handle the information that is needed to guarantee the rationality of the choice, are assumed to be abundantly available among human decision-makers. This assumption is not different in the study of foreign direct investment (FDI-) decisions. The complicated processes leading to a decision either to invest or not and where to invest (geographically) are notoriously difficult to model and the last thing that we need is more complication in terms of emotions playing a role. Direct investment-decisions are assumed to be based on estimates of the Net Present Values of all investment options and the final decision on whether or not to proceed with the investment in a particular country is assumed to be based on the ranking of all options (including the negative ones of not to invest) in terms of their estimated Net Present Value.

When preparing a survey on investment-decisions of Dutch firms in Central and Eastern Europe and Central Asia. In open interviews with investors we explored the many reasons that might have played a role during open interviews with investors. During these discussions, approximately half of the respondents implied that "emotional" elements played a role in making final choices both regarding the decision to invest and the final choice of the country. Considerations such as the fact that the manager had participated in an exchange program during his/her study in that specific country, the fact that the partner of (one of) the owner(s) holds citizenship of the host country or that a personal acquaintance asked the Dutch firm to take over the foreign business, were among the important factors quoted to have been decisive elements in the decision process. These considerations seem far away from the algorithms of pure rational choice, but the question is whether they are.

In this paper we explore theoretically how emotions can be seen as complements to rational choice processes and illustrate empirically that emotional factors do play a role in foreign direct investment-decisions. The second section includes a description of the economic decision-making literature including emotions and a frame that can be used to include emotions in investment-decisions. In section three a simple utility maximizing decision-making model will be described, with the specifications on how to include emotions. Section four provides empirical evidence that emotions are an influencing factor in the FDI-decision-making process, using the data from a survey among Dutch enterprises considering a foreign direct investment in Central and Eastern Europe. …

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