International expansion is often considered as an important option for survival in emerging economies. It not only helps firms to capitalize on market opportunities in foreign countries, but also helps them effectively cope with foreign competition in the home country.
In recent years, foreign institutional investors (often U.S. or European financial institutions) have increased their investments in emerging economy firms. Foreign institutional investors not only have better monitoring capabilities but they are also pressure-resistant investors with relatively few business relationships with the firms they invest in. Therefore, foreign institutional investors may endeavor to maximize the value of their investments by exerting influence on corporate strategy (including International expansion). We propose an inverted U-shaped hypothesis regarding a relationship between foreign institutional ownership and firms’ international expansion. Although firms expansion ownership between better monitoring capabilities investors often support this kind of risk, especially when their investment in each company is a relatively small part of a diversified portfolio. Therefore, foreign institutional investors who hold relatively small investments in emerging market firms are likely to support ID in those firms, even though it increases agency risk. However, as foreign institutional ownership in individual firms increases beyond a certain point, institutional fund managers may become increasingly risk-averse due to the short-term returns demanded by their clients.
Furthermore, we explore the moderating role of business group affiliation rela-tionship between foreign institutional ownership and firms’ international expansion.
Overall, the empirical findings support our two hypotheses. The level of foreign institutional ownership will have an inverted U-shaped relationship with international-ization; that is, the level of foreign institutional ownership will initially be positively related to international expansion, but at some point will become negatively related to international expansion. Lastly, business group affiliation will positively moderate the above relationship.
