How regional courts in Russia affected multinational decisions on affiliate size, entry and organization

Abstract

We investigate the impact of court conditions on multinational decisions on entry, subsidiary size and entry mode across subnational Russian regions in 2001–2014. We apply the literature on heterogeneous firms and the institution-based view of investor behaviour, which predict that higher institutional costs raise the size and productivity cut-off of start-up subsidiaries. Our empirical results based on microestablishment data of foreign-owned firms in Russia show that a weaker judicial framework and stronger political power of the local governor significantly de-stimulate entry. Most multinationals entered Russia, which is viewed as a high-risk country, through large and very large subsidiaries wholly owned by foreign parents. We largely explain business strategy variation of multinationals between regions by regional court conditions, as foreign investors adapted their strategic decisions to compensate court deficiencies by increasing the size of the subsidiary. When the investment climate deteriorated, firms turned to local partnerships as a viable mode of entry.