Institutional environment relatedness and foreign investment failures in the Brazilian telecommunications industry

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.