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Power transitions in the host country and the survival of subsidiaries in infrastructure industries

Funding information Fundación Banco Sabadell, through the Cátedra de Crecimiento e Internacionalización Empresarial; Ministerio de Economía y Competitividad, Grant/ Award Number: ECO2013-46235-RECO2017-86101-P; Ministerio de Educación, Cultura y Deporte, Grant/Award: Programa FPU Research Summary: We argue that for firms competing in infrastructure industries, a change in the government that granted the permission to invest in the host country increases the likelihood of divestment of foreign subsidiaries. The logic surrounding this behavior lies in the fact that these firms may develop cooperative relationships with the granting government and that a power transition depreciates the relational capital accumulated and the effectiveness of the commitments achieved. Building on the literature on relational governance and the relational view of corporate political actions, we argue that this effect increases with host country governmental discretion and with investment longevity. An empirical analysis of the survival of foreign investments made by Spanish firms from infrastructure industries during the period 1986 to 2008 provides support for our hypotheses. Managerial Summary: The aim of this article is to analyze how changes in the host government that granted the investment in the host country influence firms’ foreign subsidiaries’ survival in the case of firms competing in infrastructure industries. We found that for firms in these industries, power transitions in the host country erode the cooperative relationship they may have with the granting government, increasing the probability of firms' foreign subsidiary divestiture. In addition, we identify two factors that make this effect greater: the length of operation of the foreign subsidiary and host country governmental discretion.