Chinese SMEs’ location choice and political risk: The moderating role of legitimacy

Abstract

International business studies show that multinational enterprises generally invest in locations with fewer political risks, but that this may not always apply to emerging-market multinational enterprises, due to the specific characteristics of their home countries. In this paper, we examine the impact of political risk on the location decisions of Chinese small and medium-sized enterprises (SMEs), and explore the legitimacy of firms from China in different host countries as a moderator of the relationship between political risk and location choice. Our empirical investigation is based on an original database of 617 foreign direct investment (FDI) location-choice decisions made by 240 Chinese SMEs between 2006 and 2017. The results show that political risk deters Chinese SMEs from choosing certain locations, but political and economic legitimacy positively mitigate this relationship. Combining the political institutions approach and legitimacy-based view of political risk, we contribute novel insights into the role of legitimacy of firms from the same country of origin in emerging market SMEs’ strategic choices of FDI location.