Subnational Institutions and Location Choice of Emerging Market Firms

Abstract

Abstract I examine how subnational institutions of emerging markets affect the location choice of emerging market firms. I argue that the weak institutions in emerging markets push firms to acquire the skills needed for survival in unfavorable institutional environments. When they start their international venturing, such knowledge, skills, and capabilities will become their unique advantage, which makes them more resilient to red tape, nepotism, and corruption in the host countries. Using a sample of 143 outward FDI events of Chinese multinationals, I test the relationship between subnational institutions at home and firm propensity to enter a target market with weak institutional systems and found robust empirical support for the use of different estimation strategies. Further, my results demonstrate that the effect of subnational institutions at home on location choice is more pronounced in private enterprises compared to state-owned enterprises. This study reveals the importance of home country effects in location choice research and tests empirically the existence of institutional advantage.