MNE SPACE AND SUBNATIONAL LOCATION CHOICE

Multinational enterprises (MNEs) tend to invest less in countries or the regions of a country that have weak institutions to avoid high risk and high uncertainty. However, their sensitivity to institutional development may vary with their experience in host countries. This study theorizes that the geographic dispersion of an MNE’s subsidiaries, the so-called MNE space, in a host country will substantially alleviate the MNE’s concerns about weak institutions in the host country. To test our idea, we measure MNE space by the relative structural position in the network formed by the MNE’s existing subsidiaries in the host country. A large space helps MNEs develop a diverse institutional knowledge base which can mitigate the risk associated with weak institutions in a subnational region. Therefore the negative relationship between weak institutions and MNE location choice will be weakened with an increase in MNE space. Such an effect is stronger for MNEs with richer prior experience in the host market and with a larger home-host institutional distance. An analysis of the sequential location choices in China made by 288 Fortune Global 500 MNEs during 1997-2009 renders strong support to our predictions.