Affiliation: College of Arts and Sciences, Department of Political Science
When firms internationalize, they select from a menu of entry modes. Firms' choice of entry mode is partially dependent on host country external uncertainty, one component of which is policy risk. Extant political science work on the determinants of cross-border investment has tended to ignore variation in entry modes, focusing instead on foreign direct investment (FDI) flows. Redirecting the conversation from aggregated FDI flows to firm-level internationalization decisions, I argue that preferential trade agreements (PTAs), as a signal of commitment to certain policies, lower policy risk and facilitate high-risk entry modes. Further, I theorize that PTA chapters targeted at certain sectors should primarily impact firms in those sectors. Using firm-level transactions data from up to 146 non-OECD countries from 1990-2017 and multilevel logistic regression, I find that PTAs are strongly associated with riskier entry modes and that there is a moderate sector-specific effect for services chapters.