Academic journal article International Journal of Management

Effect of Extreme Uncertainty on Decision-Making: The Case of Foreign Direct Investment in Emerging and Transitional Economies

Academic journal article International Journal of Management

Effect of Extreme Uncertainty on Decision-Making: The Case of Foreign Direct Investment in Emerging and Transitional Economies

Article excerpt

The idea that uncertainty pervades foreign direct investment (FDI) particularly in emerging and transitional economies borders on the tautological. Prior research has examined a wide range of sources of uncertainty in such investments ranging from host country attitudes towards uncertainty avoidance to the myriad ambiguous externalities that managers must address in making such investment decisions. We offer an alternative theoretical conceptualization of the role that uncertainly plays in the challenge of foreign direct investment in emerging and transitional economies (FDIET). We argue that such decisions require that managers make choices under Extreme Uncertainty in these contexts because the exogenous and endogenous elements of such business contexts interconnect in ways that take them to the edge of unanalyzability. Further managers in FDIET environments experience radically decreased analyzability of their contexts because the exogenous or the endogenous elements develop interconnections within each set or across sets in unpredictable ways. Further, in FDIET contexts, the links among and between firms and other elements in the organizational field propagate in unpredictable ways and this trend continues generally unbounded. The issue is not that there is simply more uncertainty in Extreme Uncertainty (FDIET) contexts or that this uncertainty is just harder to understand. Rather, the Extreme Uncertainty (FDIET) state is fundamentally different from high levels of conventional uncertainty. As such, conventional decision making is not effective. Because of the non-linear pattern of interactions, firms and managers are far more likely to misinterpret information and information sources because they can not accurately perceive feedback from their own and others ' actions. We provide a set of assertions about Extreme Uncertainty's causes and implications in the FDIET context plus provide suggestions for managers to pursue. These suggestions include sensemaking approaches instead of rational decision process, selectionism (trying many solutions in parallel and selecting the best ex post) plus trial and error learning (flexibly adjusting project activities and targets to new information, as it becomes available.) Finally, our conceptualization of Extreme Uncertainty serves as a unifying construct for the wide range of terms that have been used in the literature to describe the business context when the non-linear conditions in that context cause decision making to be extraordinarily difficult e.g. ambiguity, equivocality "competing on the edge" non-linear environments, hyperturbulence, unforeseeable uncertainty, contextuality and radical openness.

The idea that uncertainty pervades foreign direct investment (FDI) particularly in emerging and transitional economies borders on the tautological (e.g. Decker and Zhao 2004; Rivoli and Salorio 1996). The uncertainties in FDI stem from a wide range of sources ranging from host country attitudes towards uncertainty avoidance (e.g. Bhardwaj, Dietz and Beamish 2007) to the myriad of uncertain externalities that managers must address in making such investment decisions (e.g. Picot 1 980). Most current uncertainty definitions stem from Galbraith (1 973) but as we discuss below, this conceptualization is not sufficient to describe all elements of the uncertainty in FDI. Inherent in Galbraith's (1973) idea is that if one gets enough information one should be able to make the correct decision. At the roots of Galbraith's definition are Knight's (1921) ideas about risk ("where the outcome of a group of instances is known either though calculation a priori or from statistics of past experience") and uncertainty (each "situation dealt with is in a high degree unique" 233-234). In both cases, decision makers lack information. In either risky or uncertain circumstances, Knight (1921) argues that decision makers make decisions regarding either predictable or unique circumstances based on their prior experience and their ability to link related events -using information gathering and processing. …

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