Abstract
Although existing research has explored the main effects of the sustainable investment climate, including political and legal environments, on the performance of firms' geographic diversification, most studies neglect the role of strategic leadership, especially the CEO. The concept of managerial discretion provides a theoretical lens to fill this void. Using a large database from the Investment Climate Survey conducted by The World Bank, which covers 12400 firms from 120 cities among China’s 30 provinces, we empirically prove that the investment climate, including governmental, legal, and financial environments, significantly influence the degree of CEO managerial discretion. Moreover, CEO managerial discretion is positively associated with firm geographic diversification and mediates the relationship between the investment climate and firm geographic diversification. Specifically, the greater the CEO managerial discretion, the lower degree of firm investment within the city and the province in which it is headquartered and the higher level of the firm’s internationalization. Implications for firms’ geographic diversification and constructing a sustainable investment climate for emerging markets are finally given.
Highlights
The investment climate is the institutional, policy, and regulatory environment in which firms operate—factors that influence the link from sowing to reaping [1]
We have argued that regional differences in the investment climate in China will be associated with differences in CEO managerial discretion in Hypothesis 1 (H1)
The degree of government intervention is negatively related to CEO managerial discretion (r = −0.129, p < 0.01), while the value of both legal justice (r = 0.140, p < 0.01), and financial development (r = 0.040, p < 0.01) are positively correlated with CEO discretion
Summary
The investment climate is the institutional, policy, and regulatory environment in which firms operate—factors that influence the link from sowing to reaping [1]. Business is founded on the principle that economic activity benefits from clear rules that cover 12 areas of regulations and allow voluntary exchanges between economic actors, set out strong property rights, facilitate the resolution of commercial disputes, and provide contractual partners with protections against arbitrariness and abuse. Such rules are much more effective in promoting growth and development when they are efficient, transparent, and accessible to those for whom they are intended.
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