Heterogeneous firm response to organized crime: Evidence from FDI in Mexico

We thank Editor Massaki Kotabe and two anonymous reviewers for their comments and suggestions. In addition, we appreciate helpful feedback on earlier versions of this paper from Myles Shaver, Jennifer Oetzel, Adam Fremeth, anonymous reviewers for the 2011 31st Strategic Management Society Annual International Conference and conference participants. Jorge Delgado and Avilia Bueno provided valuable assistance with data collection.This paper examines the impact of organized crime on Foreign Direct Investment (FDI) considering the role of foreign investor home-country experience. Extant research shows a negative impact of organized crime on FDI. We expect investor home-country experience with organized crime to ameliorate this deterrent effect. We do not find support for this prediction analyzing FDI net flows into Mexican states from 2001 to 2010. Our analysis does, however, reveal a heterogeneous investor response to organized crime. Our results suggest, surprisingly, that crime in host locations is actually positively associated with investment from high-crime countries. This research makes several contributions. Our evidence suggests that firms seek to leverage home experience with high levels of local organized crime, involving seemingly localized routines and practices, as they expand abroad. In addition, our work draws attention to the effect of institutional variation within host countries in foreign entry. It also expands the literature by focusing on organized crime, a largely unexplored source of country risk in international management research. Finally, it brings attention to the role of powerful international criminal organizations, drug cartels, in shaping cross-border business activity.