Sector-Mediated Transmission and Selective Exit: Micro-Foundations of Managerial Cognition in Fragile Institutional Contexts

Despite growing interest in foreign divestment, international business research still says little about the micro-foundations through which macro-level institutional fragility is translated into firm-level exit decisions. This study addresses that gap by examining how managerial cognition mediates multinational enterprises’ (MNEs) exit responses in Pakistan between 2020 and 2025. Drawing on semi-structured interviews with senior managers across 10 MNEs spanning six sectors and five home countries, and using Coleman’s Bathtub model as an organising lens, the study shows that macro-level shocks do not confront firms uniformly; rather, they are transmitted through sector-specific regulatory regimes that shape the situational conditions managers face. In addition, it identifies selective exit as a distinct strategic response to institutional fragility, whereby firms divest institutionally exposed business lines while retaining relatively insulated ones. This response rests on a micro-foundational mechanism (differential exposure assessment) through which managers compare institutional risk across business lines and preserve strategic optionality where possible. The study contributes to micro-foundations research, institutional theory in MNEs, and the foreign divestment literature by clarifying how shared macro-level fragility generates differentiated situational pressures and differentiated exit responses.