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Policy uncertainty and behavior of foreign firms in emerging economies

Amit Karna (Strategy Area, Indian Institute of Management Ahmedabad, Ahmedabad, India)
Shamim S. Mondal (Independent Researcher, Bengaluru, India)
Viswanath Pingali (Economics Area, Indian Institute of Management Ahmedabad, Ahmedabad, India)

Management Decision

ISSN: 0025-1747

Article publication date: 14 June 2022

124

Abstract

Purpose

This study aims to examine how foreign and domestic firms react to policy uncertainty in an emerging economy. In addition, the study investigates if older foreign firms better adapt to policy uncertainty than newer entrants.

Design/methodology/approach

The study uses pharmaceutical sales data on India’s cardiovascular segment for January 2011–May 2016. The authors use fixed fixed-effects panel data regression to measure the market reactions of foreign and domestic firms faced with policy uncertainty.

Findings

While domestic and foreign firms react similarly to anticipated policy changes, foreign firms react more adversely to policy uncertainty. Among foreign firms, early entrants respond less adversely than new entrants.

Research limitations/implications

Foreign firms are able to cope with anticipated policy changes in similar vein as the domestic firms by way of a priori reading of the host country’s regulatory landscape. The foreign firms’ response to policy uncertainty is significantly different from domestic firms. The difference between the market response of foreign and domestic firms decreases over time.

Practical implications

The authors' findings demonstrate that adaptability is the key for new foreign firms to face policy uncertainty. Foreign firms can respond to policy changes, especially the unanticipated ones by imbibing local practices.

Social implications

The authors' findings suggest that enhanced policy uncertainty hurts foreign firms more adversely than domestic firms, and newer foreign firms are more hurt with policy uncertainty than the existing ones. Such uncertainty could also have unintended consequences for consumer welfare.

Originality/value

The authors' study uses two natural experiments in the same industry within short periods of time. The comparison offers key insights on the differences in domestic and foreign firm responses to the two types of policy uncertainty.

Keywords

Acknowledgements

The authors gratefully acknowledge comments and suggestions provided by David Ridley, Ramesh Bhat, seminar participants at Kenan Institute for Ethics (Duke University), Indian Statistical Institute, Calcutta and NMIMS (Deemed to be) University, the editors and two anonymous reviewers of this journal, whose insightful reviews helped us improve the manuscript, and numerous other colleagues who commented on the earlier versions. The authors also sincerely thank AIOCD for the data. The authors remain solely responsible for any remaining errors. A part of the manuscript was developed when Viswanath Pingali was visiting the Kenan Institute for Ethics (KIE), Duke University, as a Lamb Fellow. Viswanath Pingali gratefully acknowledges the hospitality.

Citation

Karna, A., Mondal, S.S. and Pingali, V. (2022), "Policy uncertainty and behavior of foreign firms in emerging economies", Management Decision, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MD-04-2021-0520

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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