Feeling threatened: when perceived threats “trigger” foreign direct investment decisions

Purpose Research offers numerous explanations for decisions to pursue foreign direct investment (FDI) projects, including proactive efforts to diversify operations to reduce risks and build resiliency. We posit that general managerial perceptions of increased threats in the environment can trigger new FDI projects to diversify as a reactive search behavior rather than a purely proactive process to insulate firms from potential future risks and build resilience. Furthermore, we posit that this mitigative search behavior should be positively moderated by firm size. Design/methodology/approach Data were collected from 517 pharmaceutical firms across 27 countries during the years 2014 through 2021. Data sources included the EU Industrial R&D Investment Scoreboard, EDGAR, Google Patents, Compustat, Orbis and fDi Markets databases. Increases in the perception of threats were operationalized using text analysis of “risk” sections in reports filed with the SEC, while FDI decisions were operationalized using firm announcements of new FDI projects, or FDI to expand existing operations abroad. Heckman models were used to adjust for selection bias driven by differences in firms that do, or do not, file reports with the SEC. The resulting database included 2,122 firm-year observations for the first step in the Heckman models, of which 1,114 were included in the second step. Findings Results show that an increase in managerial perceptions of threats in the environment is positively associated with subsequent decisions to diversify through new FDI projects but not FDI to expand existing foreign operations. Additionally, this positive relationship was enhanced, or positively moderated, by firm size. Research limitations/implications The key limitation of this study is that it focuses on a single industry, potentially reducing external validity. In terms of implications for research, this study identifies a new type of triggered organizational search behavior and a novel theoretical mechanism explaining new FDI project decisions. At a minimum, empirical research considering FDI decisions as outcomes may need to control for managerial perceptions of threats. Originality/value This study illustrates that the diversification motive for FDI decisions is more nuanced than a purely proactive effort to reduce downside risks and build resilience. Instead, a mitigative form of search through new FDI project decisions to diversify and limit downside risk can be triggered. This insight introduces a new type of organizational search behavior to the literature and offers a novel behavioral explanation for some new FDI project decisions.