Institutional distance, firm heterogeneities, and FDI location choice of EMNEs

Purpose - This paper aims to propose an integrated framework combining the cost-reduction rationale and the institution-leveraging rationale to explain how institutional distance, both formal and informal, influences emerging multinational enterprises (EMNEs)’ foreign direct investment (FDI) location choice. This paper also explores the moderating role of EMNEs’ FDI experience and strategic intent on value chain positioning as a reflection of firm heterogeneities, on the link between institutional distance and location choice. Design/methodology/approach - This paper tests the hypotheses based on a firm-level longitudinal data set of FDI by Chinese EMNEs. The unique data are manually collected from Chinese companies listed on Shenzhen and Shanghai Stock Exchanges, composed of 250 FDI entries of 122 manufacturing firms from 2006 to 2010. The conditional logit model is used to estimate the proposed main effect and moderating effect. Findings - Cultural distance does not deter Chinese EMNEs’ entrance in general, but firms investing in low value-added manufacturing subsidiaries are more likely to choose culturally similar countries than those investing in high value-added subsidiaries such as in upstream R&D and downstream marketing. Formal institutional distance with positive direction promotes Chinese EMNEs’ entrance, and this effect is enhanced when firms have less FDI experience and have the strategic intent to invest in high value-added subsidiaries. Originality/value - This paper contributes to the current literature by identifying a holistic view of the institutional influences on FDI location choice of EMNEs and revealing how firm-level heterogeneities, particularly FDI experience and strategic intent of subsidiary value chain positioning, shape the boundary conditions of the institutional effects in different ways.