Experience, Equity and Foreign Investment Risk: A PIC Perspective

Abstract

We re-examine foreign investment risk-mitigating effects of firm experience and equity stakes using an empirical context largely ignored by international business (IB) research: project investment companies (PICs). PICs permit cleaner separation of individual investment project risk from the parent firm, which may otherwise pool risk characteristics from managing multiple projects across different industries and countries. PICs also permit potentially unbiased, prospective risk assessment at the time of a project’s initial announcement based on the mix of debt and equity funding the project. In observing risk at initial announcement, we can also observe risk characteristics for completed and uncompleted projects. Consistent with previous IB research, our analyses of 396 PICs announced in 53 countries from 1990-2006 indicate that investment risk measured as the percentage of equity capital funding a PIC decreases with greater host-country policy stability, lead-investor experience in the host country, and lead-investor equity stakes. But contrary to previous IB research, we find that lead-sponsor experience and equity stakes reduce overall PIC equity less (not more) at announcement as host-country policy stability deteriorates. From a PIC perspective, investor experience and equity stakes are complements to (not substitutes for) host-country policy stability. We confirm these trends with alternative analyses replacing the percentage of PIC equity at announcement with a related risk measure, whether there is a substantial delay in securing financing for the PIC after it is announced. PIC-based evidence complements existing evidence on foreign investment project risk and suggests future research opportunities that might benefit from integrating both evidentiary sources.

Keywords: foreign investment risk, project investment companies, experience, equity, policy stability

JEL Classification: F23, G31, K31, L14, P16