Many scholars have demonstrated that prior experience with FDI leads to subsequent performance improvements. The inference of such studies implies that firms with more prior FDI experience will outperform firms with less prior experience. However, I find contrary evidence which suggests firms with dissimilar types of experience are more likely to fail. This study contributes insight to the overarching hypothesis that prior experience leads to subsequent performance improvement by further specifying the conditions which uphold this theoretical view. I conjecture that firm's heterogeneity of prior experience acquired in idiosyncratic institutional environments mediates firm success given the level of relatedness of the prior experience to the local market conditions. The evidence demonstrates that firms with similar prior institutional experiences are more likely to experience market success than firms with dissimilar institutional experiences. Second, I examine the financial performance of each firm to determine the mechanisms of prior experience that lead to subsequent performance and find that firms with similar prior experiences are more successful due to three differentiating mechanisms: 1) their ability to select better projects exante entry, 2) their ability to accurately predict cash flows and 3) their ability to mitigate the risk through market volatilities. Moreover, firms lacking these competencies due to a lack of market specific knowledge acquired from unrelated experiences have a higher likelihood of failure. Utilizing a hazard rate model, I examine the effects of prior institutional experience similarity on failure rates of foreign firms who have entered the Brazilian telecommunications industry from 1997-2004.

While analyzing how and why firms can respond to product market demands has long been a central issue in the strategy literature, recent research suggests the need for a comparable level of attention on how and why firms respond to non-market (i.e., institutional) demands. In this study, we theoretically and empirically analyze how Brazilian corporations responded to dramatic recent changes in their institutional environment. Specifically, using extensive qualitative and quantitative data, we show how the enactment of a new set of corporate governance guidelines by the Brazilian stock market (aimed at reducing longstanding agency problems related to pyramidal group ownership) generated a number of strategic responses by Brazilian firms that suggest improved corporate governance. However, we also find that for numerous firms, the changes observed are more symbolic than substantive.

Organizational learning theory predicts that prior experience leads to performance gains. However, in some cases experience can lead to negative performance outcomes, especially when the current organizational environment deviates from the prior learning context. This paper develops theory on the institutional experience of multinational corporations (MNCs) to explain how and what they learn from prior experiences in host country institutional environments. By utilizing field studies on telecommunications regulation, executive interviews (conducted in Brazil, Spain, Portugal, Canada and the U.S.) and a uniquely constructed foreign direct investment dataset, I develop a knowledge acquisition theoretical framework to explain the mechanisms by which prior experience drives MNC’s performance. Experience is operationalized as the knowledge acquired in heterogeneous regulatory environments in 80 host countries. Based on dimensions of the global industry regulation index, firm-level Mahalanobis distance measures are computed for 96 subunit operations investing in Brazilian telecommunications industry from 1997 to 2004. I argue that a high level of similarity between the MNC’s institutional experience and the host country’s institutional environment predicts firm success in subunit organization abroad. Empirical tests show that similarity in prior regulatory experience prolongs survival; however, firms with institutional experience unrelated to the target country’s regulatory environment are four times more likely to fail.

The widely accepted conventional viewpoint of Jensen and Meckling (1976) suggests that large listed firms have diffuse shareholders and no controlling owner. However, recent research shows that large corporate sectors of many economies outside the U.S. and U.K. are dominated by pyramidal corporate groups, not widely held firms. Thus, corporate governance behaviors and agency issues in the context of the pyramid take on new meaning. These pyramidal structures have entrenched controlling insiders who impose exacerbated agency problems to under-informed outside investors, particularly joint venture partners from host countries dominated by widely held firms. The controlling insiders are thought to divert resources between companies they control to advance their private agendas of wealth or utility maximization and not the joint venture. We identify the differences in the agency problems in widely held stand alone firms versus pyramidal firms and expose the pitfalls of joint venturing with firms belonging to pyramidal groups. We show that joint ventures between multinationals based in countries where pyramiding is rare and pyramidal group member companies have significantly elevated failure rates. We infer that this reflects the multinationals’ unfamiliarity with the expropriation risks associated with pyramidal groups. Conversely, joint ventures among pyramidal groups are more likely to succeed. We present clinical examples that illustrate the mechanisms that drive such divergent performance in joint venture partnerships. While our results are based on a single industry in a single country, we believe the concerns are general.

Little is known about the variations in industry regulations across nations. Recent studies in neo-institutional economics reveal that heterogeneity in national institutions strongly affects private sector foreign investment. This study builds on Levy and Spiller’s (1994) theoretical direction to develop a generalizable global regulatory framework and specify the critical dimensions of industry regulation that vary between nations. I construct and validate six dimensions of regulation that are subsequently used to compare regulatory conditions across countries. The examination of 131 telecommunications regulatory agencies in 80 countries results in a regulatory distance measure that compares each country to the recently privatized telecommunications industry in an emerging economy (Brazil). Future research extensions of this paper will demonstrate that 1) multinational corporations are likely to under perform in regulatory environments that vary dramatically from their home and prior host country experiences, 2) instable regulatory institutions hinder industry growth post market privatization and liberalization, and 3) bilateral/regional foreign trade efficiencies improve as the regulatory policies converge through NGO participation.

Citigroup has discovered that Daniel Dantas, hired five years earlier to manage Citigroup's $750 million private equity investment in a Brazilian telecommunications industry joint venture, has allegedly mismanaged more than $300 million in assets and contracts. Dantas’s misconduct relates to his management of Citigroup’s CVC Fund and II-FIA, a legal entity representing a group of large Brazilian pension funds. Together with Dantas’s Grupo Opportunity, CVC and II-FIA own Brasil Telecom, the third largest telecommunications company in the country. The partnership’s pyramidal ownership structure makes his actions difficult to track. Citigroup must quickly determine how to disrupt Dantas’s intricately woven web of control without allowing him to extract further value from the partnership. This case provides concrete examples of the expropriation risks joint venture partners face when unfamiliar with pyramidal group ownership structures.

Citigroup has discovered that Daniel Dantas, hired five years earlier to manage Citigroup's $750 million private equity investment in a Brazilian telecommunications industry joint venture, has allegedly mismanaged more than $300 million in assets and contracts. Dantas’s misconduct relates to his management of Citigroup’s CVC Fund and II-FIA, a legal entity representing a group of large Brazilian pension funds. Together with Dantas’s Grupo Opportunity, CVC and II-FIA own Brasil Telecom, the third largest telecommunications company in the country. The partnership’s pyramidal ownership structure makes his actions difficult to track. Citigroup must quickly determine how to disrupt Dantas’s intricately woven web of control without allowing him to extract further value from the partnership. This case provides concrete examples of the expropriation risks joint venture partners face when unfamiliar with pyramidal group ownership structures.