US companies in transition economies: wealth effects from expansion between 1987 and 1999
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US companies in transition economies: wealth effects from expansion between 1987 and 1999 Rossitza B Wooster Department of Economics, California State University, Sacramento, CA, USA Correspondence: RB Wooster, Assistant Professor, Department of Economics, California State University, Sacramento, 6000 J Street, Sacramento, CA 95819-6082, USA. Tel: þ 1 916 278 7078; Fax: þ 1 916 278 5768; E-mail: [email protected]
Abstract This study uses a unique sample to evaluate changes in shareholder wealth from announcements of expansion by US firms into 18 transition economies, through four entry modes, from 1987 to 1999. On average, expansion in transition economies is associated with significant positive wealth effects. Results show that value creation is most significantly associated with expansion through less risky entry modes into host countries that are in the more advanced stages of market liberalization and structural reform. Sample firms with lower profitability also experience significantly higher abnormal returns, while significant value creation documented for firms entering transition economies in 1989, 1990, and 1992 suggests first-mover advantages. Journal of International Business Studies (2006) 37, 179–195. doi:10.1057/palgrave.jibs.8400187 Keywords: foreign direct investment; transition economies; event study
Received: 18 August 2003 Revised: 3 June 2005 Accepted: 15 June 2005 Online publication date: 9 March 2006
1. Introduction The fall of communism in the countries of Central and Eastern Europe (CEE) and the republics of the former Soviet Union (FSU) marked the beginning of unprecedented economic reforms aimed at transforming the former centrally planned economies into market-oriented ones. With the liberalization of trade and investment regimes in these transition economies, many US firms initiated eastward expansion to establish a presence in the region and take advantage of large markets, low production costs, and raw materials (Gatling, 1993; Estrin et al., 1997). Throughout the 1990s, however, significant expansion opportunities were coupled with the economic and political turmoil associated with marketoriented reforms. Not surprisingly, the experience of US companies in the region has been mixed: news of high-profile investments such as General Electric’s successful acquisition of the Hungarian light-bulb maker Tungsram was often coupled with disappointing news such as Phibro Energy’s struggles in the Russian oil industry (Stevenson, 1993). A natural question that arises in the face of the mixed anecdotal evidence is whether, on average, expansion into transition economies has been associated with value creation. While one would expect that wealth effects are likely to vary according to
US companies in transition economies
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when, where, and how US firms enter the region, previous studies provide only partial evidence owing to data limitations or scope of analysis. For example, in t
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