International Business is still Regional Business: the influence of sub-national institutions on the location choices of multinational enterprises in the European Union

Abstract

With the increased literary recognition that host countries' institutional configurations represent a key determining factor in the strategic location choices of multinational enterprises. This study aims to deepen the understanding of the relationship between institutions and the location of foreign subsidiaries by paying special attention to the overlooked role of sub-national formal and informal institutions. Therefore doing away with the erroneous assumption of spatial homogeneity within host countries. At the same time, aiming to expand understanding of the role of informal institutions beyond the location determining effect of culture, current research also provides a novel contribution through introducing informal institutions in the form of regional social capital. In following both Institutional Theory and Social Capital Theory, it is postulated that higher quality formal institutions in potential host region provide specific benefits. This subsequently positively influences the number of foreign subsidiaries in that given region. While the role of social capital, in the forms of bridging and bonding social capital, is expected to respectively have both a positive and negative associated with the number of foreign subsidiaries in a potential host region. Applied to the specific sub-national context of the European Union, where regional data in the form of Quality of Government Index and the European Values Study were respectively used to measure regional formal and informal institutions at the NUTS2 level. The results from the quantitative empirical analysis in this study nuance the finding that formal institutional quality unilaterally leads to more inward foreign activity, as evidenced by the significant negative association found between regional formal institutional quality and the number of foreign subsidiaries operating in NUTS2 regions. Suggestive of some sort of inverted U-shape where at some point increases in formal institutional quality are too restrictive to foreign subsidiaries’ operations. Additionally, in providing evidence that a significant relationship does exists between social capital and foreign subsidiaries belonging to specific industrial groups (for example knowledge intensive industries), current research also shows the need to specifically look at industrial preferences towards host countries and regions institutional configurations when analysing the location determining effects of institutions.