Foreign Market Investment as a Locus of Response to Adverse Performance

Abstract Performance gap recognition derives from social comparison with rivals. We propose that the attribution of these gaps to foreign direct investment (FDI) inadequacy – and thus the likelihood of responding with FDI – is also guided by such social comparisons. Specifically, the performance gap becomes a stronger trigger for foreign market investment when underperforming peers are less engaged in FDI than outperforming counterparts, as this highlights the role of FDI scarcity in explaining the gap. Similarly, a firm's lower FDI involvement increases the performance gap's capacity to trigger FDI by making FDI inadequacy a more plausible explanation, whereas extensive existing FDIs shift the blame away from FDI insufficiency. By examining the locus of investment activity under the performance gap, we show that the associated FDI‐triggering capacity is limited to institutionally proximate environments where the upside potential for addressing the performance gap can be recognized upfront through current models, methods, and resources. Institutionally distant investments, whose potential evolves through experimentation with the local context, become increasingly unlikely as a firm falls behind its rivals. These findings suggest that a firm's response to the performance gap is shaped by inferences about the causes of underperformance and the clarity of an alternative's capacity to address the gap.