Foreign Location Choice Research Articles

Institutional distance and location choice: an experimental approach to the perception puzzle

PurposeIn this research, we designed and implemented a unique vignette experiment to study the effect of managers' perceptions of institutional distance on foreign location choice, as well as the moderating effect of managerial international experience and preferred entry mode on this relationship.Design/methodology/approachWe employ an experimental vignette methodology (EVM) approach applied in the context of Chinese managers to test the causal relationships depicted in our hypotheses. In this way, we measure the decision-makers' perceptions ex ante, i.e. in conjunction with and prior to a decision about a foreign location choice.FindingsOur findings show that managers' ex-ante perceptions of institutional distance negatively affect decisions on foreign location choice. Also, we find that managerial international experience and preference for high commitment entry modes mitigate the negative effect of managers' perceptions of institutional distance on foreign location choice.Originality/valueThis research study adds to our understanding of the effect of managers' perceptions of institutional distance and managerial contingencies on foreign location decisions. Further, it advances novel experimental design in international business research in general and on foreign location choice in particular.

Navigating multiple institutional environments: institutional quality and the role of Belt and Road Initiative on location choice of Chinese MNEs

Purpose This study aims to explore the extent to which Chinese multinational enterprises (MNEs) rely on supranational institution – the Belt and Road Initiative (BRI) – versus host country institutional quality to navigate their foreign location choice. Design/methodology/approach This study uses a conditional logit regression model using a sample of 1,302 greenfield investments by Chinese MNEs in 54 BRI participating countries during the period 2011–2018. Findings The results indicate that as a supranational institution, the BRI serves as a substitution mechanism to address the deficiencies in institutional quality in BRI participating countries, thereby attracting Chinese MNEs to invest in those countries. In addition, the BRI’s substitution effect on host country institutional quality is more pronounced for large MNEs, MNEs in the manufacturing industry and MNEs in inland regions. Originality/value This study expands the understanding of the BRI as a supranational institution for MNEs from emerging markets and reveals its substitution effect on the host country institutional quality. Furthermore, it highlights that MNEs with diverse characteristics gain varying degrees of benefits from the BRI.

The Role of Inward FDI and Family Firm Heterogeneity on Foreign Location Choice: Evidence from India

The Role of Inward FDI and Family Firm Heterogeneity on Foreign Location Choice: Evidence from India

Can Friend at Home Help Me Go Abroad? Effects of Hometown Network on Firms’ Foreign Location Choice

Can Friend at Home Help Me Go Abroad? Effects of Hometown Network on Firms’ Foreign Location Choice

Home Country Image and Nonmarket Political Strategy Effects on Foreign Lcation Choice of EMNEs

While the literature has generated impressive insights on why emerging market multinationals enterprises (EMNEs) select certain foreign locations over others, we still lack an understanding of how the home country institutional image creates barriers to EMNEs’ foreign location choices and the mechanisms through which EMNEs overcome this effect. In this study, we investigate how the home country institutional image affects EMNEs’ foreign location choices and how EMNEs can use home country nonmarket political strategy to overcome the effect. We argue that EMNEs struggle with poor home country institutional images that are carried over in host countries and create barriers when EMNEs enter into developed or more institutionally distant markets from their home country. Specifically, we suggest that EMNEs are more likely to choose institutionally similar countries as their foreign direct investment (FDI) targets to help them offset the additional liability they carry. While nonmarket political strategy can serve as a response to such disadvantages, it will not completely nullify the home country institutional image effect. This strategy can provide proximity to nonmarket elements and help EMNEs overcome the barriers created by poor home country institutional image on foreign location choice. We test and find support for our theoretical framework using a longitudinal dataset from 2002 to 2017 of outward FDI (OFDI) by Brazilian firms.

Role of “Indianness” in International Location choice – The effect of religion and langauge

Unlike other countries’ firms that have undergone the path of liberalization since the 1990s, Indian Multinational Enterprises (MNEs) have registered exceptional cross-border activities. Originating from the institutional void, a large majority of successful Indian MNEs are generally part of a single business family’s portfolio of businesses, commonly known as business groups (BGs). MNEs are embedded in their home country environment before their internationalization. Thus, acknowledging the role of home country institutions in shaping the culture of the organization, we adopt the concept of “Indianness” and unpack it in the form of linguistic and religious diversity which shapes the organizations in their formative years. This study aims to understand the impact of Indianness on the foreign location choice of the most deeply entrenched organizational forms, that is, the Indian BGs. Here we show that Indian firms prefer to internationalize to nations that are least distant linguistically and religiously and have a less diverse set of languages and more diverse religiously. Additionally, as the religious distance seems to dissuade the location choice in high distant nations, international experience gained by the same BGs’ affiliate in the same or psychically similar host nations aids in choosing religiously distant nations. These results are contrary to the belief that high religious or linguistic distance dampens the prospects of foreign location choice. This study also highlights the role of prior experience in the same or psychically similar nations in aiding the reduction of the negative impacts of religious differences. This study brings to fore the importance of home country (informal)institutions or as we term them Indianness in the case of Indian MNEs internationalization.

Are governance mode and foreign location choices independent?

AbstractResearch SummaryThis article explores the relationship between organizational governance and location choices. While the existing literature provides significant intuition regarding the factors that influence these choices, it often assumes that governance and location choice are independent from one another. This article tests the veracity of this assumption in the global semiconductor industry. We report evidence of significant correlations across choices regarding how to govern and where to locate production, evidence of a reciprocal relationship between governance and location choices, and evidence suggesting how interdependence between governance and location choices affects the stability of relationships highlighted by extant theories. We conclude with implications for future theoretical and empirical research based on the existence of these interdependent effects.Managerial SummaryManagers face difficult choices when deciding how to organize the performance of an activity. They must choose whether to outsource an activity by balancing the potential benefits of a supplier's lower costs or knowledge against the costs of diminished coordination and control. They must also choose where to perform an activity by considering the benefits of locally bound expertise as well as potential costs associated with cultural, legal, and social barriers. While prior research has often addressed these issues by assuming that these choices are independent, this paper demonstrates that governance and location choices are interdependent and that each choice reciprocally affects the other. It concludes by suggesting managers utilize an expanded governance‐location choice set when evaluating where and how to manage their core activities.

Correction to: Jurisdiction shopping and foreign location choice: The role of market and nonmarket experience in the European solar energy industry

Correction to: Jurisdiction shopping and foreign location choice: The role of market and nonmarket experience in the European solar energy industry

Jurisdiction shopping and foreign location choice: The role of market and nonmarket experience in the European solar energy industry

Several countries provide policy support to specific sectors in order to facilitate industry transitions. While industry-support policies stimulate the growth of their target sectors, little is known about how such policies engender heterogeneous international strategies. In this article, we investigate how industry-support policies influence foreign location choices. We argue that firms engage in jurisdiction shopping, choosing to invest in countries with more generous policy support, but that this tendency varies markedly across firms. Specifically, we suggest that firms’ nonmarket experience exacerbates the effect of policy support on location choice, whereas market experience has less of an impact. Further, we propose that some firms view generous policies more skeptically than others, depending on the nature of their nonmarket experience. We test and find support for our predictions using a longitudinal dataset of foreign investments of firms entering the solar energy industry in the European Union. Our findings indicate that supportive policies stimulate the energy transition, attracting in particular foreign entrants diversifying into renewables or having more policy experience. At the same time, they suggest that adverse policy changes in one country affect how firms assess policies in other countries, highlighting the need for policy coordination at a supranational level.

Jurisdiction Shopping and Foreign Location Choice: The Role of Market and Nonmarket Experience in the European Solar Energy Industry

We investigate how industry-support policies targeted at specific sectors influence foreign investment location choices. We argue that firms engage in jurisdiction shopping, selecting to invest in countries with more generous policy support, but that this effect varies markedly across firms. Our theory suggests that firms’ nonmarket experience positively moderates the effect of policy support on location choice, while the moderating effect of market experience should be less impactful. We further argue that, depending on the nature of their nonmarket experience, firms may become less attracted to places with more generous policy support. We find support for our predictions by examining foreign investments of firms entering the solar energy industry in the EU during 2004-2013. We discuss implications of our study for international business, research on public policy and strategy, and the energy transition.

Navigating geographic and cultural distances in international expansion: The paradoxical roles of firm size, age, and ownership

AbstractResearch SummaryWhile geographic and cultural distances deter firms' international expansion, they do so via different mechanisms, such that firms with advantages in overcoming one‐dimension may face disadvantages in overcoming the other. Larger, older, and state‐owned firms have better access to resources in their home countries than smaller, younger, and non‐state‐owned firms, and thus are less concerned about the high operating costs associated with larger geographic distances. However, they are less adaptable to culturally distant countries and thus are more concerned about larger cultural distances. We propose that firm size, age, and state ownership weaken the deterrent effect of geographic distance while amplifying the deterrent effect of cultural distance. Results using data on Chinese firms' location choices of foreign direct investments in 2001–2013 support our predictions.Managerial SummaryA key decision that managers need to make in expanding overseas is the foreign location choice. Although managers generally refrain from expanding to geographically and culturally distant countries, the importance of geographic and cultural distances in their consideration varies across firms, which tend to differ in resource endowment and adaptability. Because larger, older, and state‐owned firms are better positioned to absorb additional operating costs but are less adaptable to foreign countries' local environments than smaller, younger, and non‐state‐owned firms, the deterrent effect of geographic distance (cultural distance) is weaker (stronger) for the former than for the latter. Our findings show that foreign countries that seem to be good fits when considering geographic distance may be misfits when considering cultural distance, and vice versa.

Don't Let a Lucky Streak Define Your International Business

Even though country risk plays a key role in the internationalization process, its impact on foreign direct investment is not yet fully understood. This study advances existing research by deploying prospect theory to analyse firm variance in risk-taking. We employ prior success to evaluate three types of risk encountered in host countries: downside, alternating, and upside risk. The results of an event-history study of 795 manufacturing firms confirm the generally negative effect of host country risk but support the notion of prospect theory that prior success induces a bias on foreign location choices: prior success encourages investors to choose host countries with high downside or upside risk, whereas it discourages them from choosing locations with high alternating risk.

When Do Ethnic Communities Affect Foreign Location Choice? Dual Entry Strategies of Korean Banks in China

Research shows that firms tend to expand into foreign locations with sizeable co-ethnic communities. Yet many cases exist in which the ethnic community influences the investment choice of the same firm in one location but not in another. We offer an institutional lens to explain this heterogeneity in location choice. Ethnic groups function like informal institutions that facilitate transactions between a foreign firm and customers, suppliers, and information providers through interpersonal exchange. Relying on ethnic communities to mediate transactions in foreign markets is valuable but limited by the relatively small scale of these communities. In contrast, relying on formal institutions allows firms to expand more broadly into the foreign market because the impersonal exchange inherent in formal governance is more scalable. This is manifested in ‘dual entry strategies’ by which ethnic communities have a significantly stronger influence on location choice in places with unreliable (weak and unstable) for...

Formal and Informal Institutional Differences Between Home and Host Country and Location Choice: Evidence from the Spanish Hotel Industry

Using secondary data of internationalized Spanish hotel chains, this research attempts to examine the role of formal and informal institutional differences between home and host country from the foreign location choice point of view. Generally speaking, the results show that (a) the higher the formal institutional differences the lower the attractiveness of the foreign location, (b) the negative effect of linguistic differences, as an informal institutional dimension, significantly affects the choice of location, and (c) the moderating role of linguistic differences between formal institutional factors with regards to the choice of location is contrary to our expectations. Based on the findings, this work wishes to offer not just a better understanding of the location choice decisions within the service industry but also to identify both the joint effect of formal and informal institutional factors as well as to distill their individual effects. This is of relevance since there seem to be no conclusive empirical evidence of such effects so far in the literature.

Do Birds of a Feather Flock Together? Firm-level Evidence on Corruption and FDI

This paper examines the relationship between corruption and nonmarket strategy in a multinational context, using a unique dataset with accurate, firm-specific measures of corruption. The study first examines the effects of home country corruption on firms’ foreign investment location choice. We find that a firm’s home country corruption norm is related to where it invests abroad, but this effect exists only among multinational firms from clean countries. The study then moves beyond the institutional context to explore the rationale behind the heterogeneity among firms from the same home country in compliance with a host government’s bribery request. We propose that a firm’s bribery experience interacts with their home country corruption to affect its foreign investment location choice. Only bribery experience of firms from dirty countries is found to be related to the firms’ foreign location choice. In addition, firm- specific bribery experience is not found to be related to firm performance. Our study built a unique dataset using resources from the United Nation’s (UN) Oil-for-Food Program (OFFP)’s investigation information to conduct both country and firm-level analysis. This paper contributes to the strategy and international business literature by expanding the study of corruption from country level to micro level by connecting nonmarket capability through foreign bribery experience to home country corruption, and to the limited literature using OFFP as a unique data source to study firm behaviors.

Performance Feedback, Slack, and Imitation in Foreign Location Choice

Foreign location decisions are among the most challenging choices of firms' international strategy. We investigate firms' inclination to imitate others' location choices in foreign entries. Drawing...

European Integration and Outward FDI from Central and Eastern Europe – Is There Any Evidence of Knowledge‐seeking?

AbstractThe European Union (EU) Member States in central and eastern Europe (CEE) witnessed a surge in outward foreign direct investment (OFDI) between 2000 and the start of the global financial crisis. This article investigates whether the European integration process altered the relative importance of host country location factors. In particular, we investigate to what extent knowledge‐seeking is a relevant investment motive, which has been documented as a key determinant for OFDI from other emerging economies. We apply a discrete choice approach to model foreign location choice of firms from CEE countries (CEECs) within the EU 27 (1996–2010). We find that the EU integration process is related with increasing importance of market access and less emphasis on labour cost advantages. We find heterogeneity in the valuation of foreign knowledge‐related assets. The location probability within the EU15 is positively associated with knowledge‐seeking. It also plays a role for technology‐intensive industries and larger firms.

Foreign Location Choice: Review and Extensions

International Business (IB) research on foreign‐location choice has experienced a revival in recent years, yet a comprehensive review has been sorely lacking. The purpose of this review is to synthesize the findings of recently published articles on the topic of foreign‐location choice and offer fruitful directions for future research. This review consists of three sections: first, the authors provide a historical overview of this research stream by tracing its origins and analyzing the general trend that has shaped research on foreign‐location choice. Next, the authors conduct a review of 137 recent articles published in leading IB and business/management journals. These articles are categorized according to common topics, and the main findings of each category are synthesized in order to bring some cohesion to this fragmented field. Lastly, the authors identify issues that remain under‐researched or require re‐thinking some taken‐for‐granted assumptions. Through this effort, they are able to connect the past, present and future of research on foreign‐location choice and to shed some new light on the IB literature.

Do Foreign Investments Benefit Business Group Affiliated Firms? Empirical Evidence from India

Business groups are the prevalent governance form in emerging markets. Since diversified business groups frequently act as a substitute for missing institutions in less developed countries, a general consensus among institutional economists exists that group affiliation is beneficial to firms in the home market. It is yet unclear, however, whether firms can translate benefits derived from group membership to the international context. This research investigates whether or not it is advantageous for multinational enterprises to be part of a business group. Specifically, this study examines globalization strategies of group affiliated firms such as their mode of entry selection and their foreign location choice. Using hierarchical linear modeling on a sample of 197 Indian firms which are part of 96 business groups, we find that business group membership is generally harmful to multinational activity. However, if increasing globalization and market liberalization was to drive affiliated firms into international marketplaces, then they should at best invest in developed markets via partially-owned establishments.

Defying isomorphism in foreign-location choice: The role of business group-level international experience in Korean MNCs

This study contributes to our understanding of how institutions shape the internationalization processes of Asian multinational corporations (MNCs). I explore how business-group affiliation affects the ability of MNCs to escape isomorphic pressures in overseas location choices. From a sample of Korean MNCs, I find that this ability increases with the levels of firm-specific advantages and international experience held by the respective MNC and that international experience within the same business group of the MNC also mediates this ability. This article contributes to the institution-based view of international strategy and business by identifying mechanism through which business-group affiliation, a common characteristic of Asian business systems, affects MNC decision making.