The institutional environment for multinational investment

This article posits that the effect of political hazards on the choice of m arket entry mode varies across multinational firms based on the extent to w hich they face expropriation hazards from their potential joint-venture par tners in the host country (the level of contractual hazards). As political hazards increase, the multinational faces an increasing threat of opportuni stic expropriation by the government. Partnering with host-country firms th at possess a comparative advantage in interactions with the host-country go vernment can safeguard against this hazard. However, as contractual hazards increase, the potential benefit to the joint-venture partner of manipulati ng the political system for it's own benefit at the expense of the multinat ional increases as well, thereby diminishing the hazard-mitigating benefit of forming a joint venture. A two-stage bivariate probit estimation techniq ue is used to test these hypotheses on a sample of 3,389 overseas manufactu ring operations by 461 firms in 112 countries.