Mitigating soft and hard infrastructure deficiencies in emerging markets

Abstract

This study examines the impact of soft and hard infrastructure deficiencies on foreign firms’ investments in emerging markets and firm strategies to mitigate such impact. Soft infrastructure refers to intangible components such as institutions and regulations, while hard infrastructure encompasses tangible physical components like transportation, energy systems, and water supply. Drawing on resource dependence theory, we argue that foreign firms are likely to decrease their investment scale in countries with deficient soft and hard infrastructures to reduce uncertainty. We further propose two strategies to mitigate the negative effects of infrastructure deficiencies. First, foreign firms can adopt an influencing strategy, increasing their influence on the host government to alleviate the negative impact of soft infrastructure deficiencies. Second, a shielding strategy can be employed to reduce dependence on the host government, particularly when dealing with hard infrastructure deficiencies. We analyze data from a sample of 3,341 foreign firms operating in 88 emerging economies between 2005 and 2020 and find empirical support for these arguments, highlighting the significance of infrastructural considerations for foreign investments in emerging economies.