Sister cities, cross-national FDI, and the subnational FDI location decision

We investigate how intergovernmental ties at subnational levels between home and host countries influence the intensity and location of foreign direct investment (FDI) inflows. We focus on an intriguing type of subnational tie, namely, International Friendship (Sister) Cities. A sister city is a decentralized form of intergovernmental relationship that provides a platform by which a multinational corporation (MNC) can approach a local government, customers, and clients to acquire localized information and political capabilities. We argue that cities with a sister-city relationship attract more FDIs than other similar cities within a host country. The benefit extends to the national level as MNCs have higher FDI levels in host countries with a greater number of sister cities with their home country. We further investigate whether the effect of sister cities on an MNC’s country selection is greater when host-country subnational governments have a higher degree of autonomy relative to the national government, and lesser when governments have a higher level of policy uncertainty. Using data from the 1990–2009 period, we find consistent support for our ideas as tested at two levels of analysis: a city-level matched sample analysis on Japanese FDI inflows, and a country-level analysis on Japanese MNCs’ country selection.