The divestment-reinvestment sequence in foreign countries: The role of relational vs. transactional ownership

• Published in: Long range planning Vol. 56; no. 2; p. 102306
• Main Authors: Mariotti, Sergio, Marzano, Riccardo, Piscitello, Lucia
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.04.2023
• Subjects: Divestment-reinvestment sequence; Escalation of commitment; Family-owned firms; Relational vs. transactional ownership; State-owned firms; State-owned firms; Family-owned firms; Divestment-reinvestment sequence; Relational vs. transactional ownership; Escalation of commitment
• ISSN: 0024-6301; 1873-1872
• DOI: 10.1016/j.lrp.2023.102306

In this paper, we claim that ownership is a key determinant of the firms' divestment-reinvestment sequence in a foreign country. Building on the notion of ‘relational vs. transactional ownership’, we distinguish between relational-type firms (namely, family-owned and state-owned firms), and transactional-type firms (privately non-family-owned firms). We argue that relational-type firms are less likely to both divest from, and reinvest in, a given foreign country. In fact, relational owners set a lower performance threshold of intervention than transactional ones; additionally, in order to turn the tide, the former often increase resource injection when subsidiary performance falls below the threshold. Such an escalation of commitment increases sunk costs and further decreases the likelihood of divesting the subsidiary. Moreover, when a divestment occurs, the memory of high sunk costs incurred reduces the propensity to reinvest in the same host country. We test our conceptual framework on a large sample of investments, divestments and subsequent re-entries undertaken in the period 2000–2015 by 602 Italian firms. Our econometric findings corroborate our hypotheses, thus contributing to the literature on the interdependencies between divestment and reinvestment choices, and their relationships with corporate ownership.