The growing practice of “impact investing” – investing for both pecuniary (financial) and non-pecuniary (social, and environmental) outcomes – has attracted increasing attention in recent years. However, questions remain on the outcomes of impact investments, especially in high-risk countries. The international business and strategy literature establishes that country risk from institutional hazards negatively impacts foreign investments. Leveraging a novel unique hand-collected dataset of impact investments globally, we theorize and empirically test the role of impact investment as a safeguard against institutional hazards. Impact investment may mitigate the adverse effects of institutional hazards through three mechanisms: (1) by reducing the cost of capital, (2) by catalyzing further investments, and (3) by fostering capacity-building to improve institutional environments. These mechanisms help firms manage uncertainties involved in foreign investment and reduce incentives to exit high-risk countries. Analyzing 794 U.S. firms and their subsidiaries in 79 countries over the 2000 to 2015 period, we find empirical support for our assertions.
