Stronger together: Country‐of‐origin agglomeration and multinational enterprise location choice in an adverse institutional environment

Abstract

AbstractResearch SummaryResearch suggests that multinational enterprises (MNEs) are attracted to locations with concentrated firms from the same home country to benefit from interactions with market forces, but it remains an open question whether such agglomeration facilitates MNEs' interactions with nonmarket actors such as the host government. We submit that since country‐of‐origin agglomeration can enable collective actions and create collective gains, colocation with compatriot firms will help MNEs navigate an adverse institutional environment. In line with this reasoning, we hypothesize that MNEs are more attracted to locations with country‐of‐origin agglomeration when MNEs face an exogenous shock that increases their regulatory burden in the host country. Our analysis offers corroborative evidence. The study adds to research on agglomeration, institutional environment, and location strategy.Managerial SummaryWhy do multinational enterprises (MNEs) locate near compatriot firms in a foreign location? The commonly recognized benefits include resource access and knowledge spillover from interactions with market forces such as suppliers and customers. We submit that colocation with compatriot firms can also help MNEs navigate an adverse institutional environment by generating “stronger‐together” benefits. Colocation can enable collective actions and create collective gains for MNEs in their interactions with the host government. We find that after a diplomatic dispute, Korean MNEs are more attracted to locations in China that already have a cluster of Korean firms, whether in the same/related industries or in unrelated industries; this is particularly the case for small MNEs and in locations with weak institutions.