Managerial Interpretation of Non-economic Shocks: Socio-cultural Spillovers and the Events of September 11th

Mazhar Islam (University of Minnesota)
Adam Fremeth (University of Minnesota)
Alfred Marcus (University of Minnesota)

Abstract: The risks of operating multinational firms have been studied from the perspective of those factors that can be considered endogenous to a particular country or the economic system as a whole. The decision to internalize operations with a foreign subsidiary as opposed to arms-length transactions are understood by considering the various hazards that a particular market may present. However, global markets are not only subject to these institutional factors that can make particular markets more attractive but also a series of exogenous factors, which generally come in the form of a non-economic shock. The impact of non-economic shocks is more complex to recognize and can leave managers with information that lacks clarity or usefulness. When the source of these non-economic shocks can be isolated to an individual or group the event can have a socio-cultural spillover that systematically harms foreign markets which may be linked with that source but had no role in the event. Using the terrorist attacks of 9/11 as the empirical context and a novel econometric approach, we find that the costs of operating in Muslim-populated countries increase above what can be explained by those endogenous institutional factors. Our results suggest that a differential increase in costs of operations in particular foreign markets following an exogenous non-economic shock can be attributed to a manager’s likelihood to categorize countries together and link them with the source of the shock.


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