SYSTEMIC RISK, LOCAL RISK, AND GEOGRAPHIC DISTANCE IN PROJECT-BASED PARTNERSHIPS

This paper examines the effect of different types of risk on the geographic distance between partners in project-based alliances. We build on prior findings showing that geographic distance impedes the formation and internal functioning of partnerships. Using data on 5,608 large-scale infrastructure projects in 143 countries, jointly financed by 2,647 banks between 2000 and 2013, we extend this previous research with an external perspective. We show that distance in the formation of partnerships is a trade-off between the internal benefits of working with geographically proximate partners and the external socio-political benefits of partnering with geographically distance organizations. Our findings show that when partnerships face high systemic external risk (i.e. risk which is not attributable to a specific local actor) there is a clear preference for geographic proximity. However, when external risk is local (i.e. related to a specific actor like a host government, supplier or customer) firms form distance partnerships which provide access to non-redundant political and economic resources which allow the partners to mitigate local risk and discipline external actors. We also show that the inclusion of strategic partners with political leverage (state-owned firms, international organizations, and firms with extensive industry experience) helps mitigate local risk and reduces the need for geographically distance partnerships.