The effect of host country political risk on capital expenditures of majority-owned foreign affiliates of U.S. multinational companies

Abstract

This study examines the impact of the host country political risk on capital expenditures of majority-owned foreign affiliates of U.S. multinational companies from 2009 to 2022. Drawing on theories of international business and political risk, this research assesses whether U.S. multinational companies reduce their capital allocation to foreign subsidiaries when faced with higher levels of host country political risk. Additionally, this paper examines whether this effect differs across industries, with the expectation that highly regulated industries are more sensitive to political risk than less regulated industries. The analysis uses industry- and country-level capital expenditures data from the U.S. Bureau of Economic Analysis combined with country-level political risk data from the World Bank’s Governance Indicators. By applying fixed effects panel regressions, controlling for parent firm characteristics and host and home country macroeconomic factors, this paper finds a marginally significant negative relationship between host country political risk and capital expenditures. Additionally, it discovers that this relationship differs across industries; however, highly regulated industries are not more politically sensitive. This implies that regulation alone may be an insufficient predictor of how capital expenditures respond to political risk.