Where angels fear to tread: FDI into sanctioned locations

Abstract

Multinational enterprises (MNEs) are increasingly challenged by the strategic implications of economic sanctions, which are imposed in response to geopolitical instability, international conflict, and violations of international norms. In this paper, we propose that superior resources and capabilities enhance the ownership advantages of MNEs, enabling them to pursue foreign direct investment (FDI) in sanctioned locations. We also build on institutional theory to examine contextual conditions and find that effective home country institutions deter investment to sanctioned locations and decrease the magnitude of the moderating effect of firm resources and experience. Moreover, being in a sanctioned location leads firms to invest more to other sanctioned locations because of the resulting specific ownership advantages. We test our conjectures on a large panel dataset and find support for our arguments. In post hoc analysis, we also examine the impact of sanctions on locational choice, highlighting that they have a deterrent effect. Our results have important implications for managers and policy makers in terms of international management and institutional dynamics.