I examine how subnational institutions of emerging markets affect the location choice of emerging market firms. I argue that the weak institutions in emerging markets push firms to acquire the skills needed for survival in unfavorable institutional environments. When they start their international venturing, such knowledge, skills, and capabilities will become their unique advantage, which makes them more resilient to red tape, nepotism, and corruption in the host countries. Using a sample of 143 outward FDI events of Chinese multinationals, I test the relationship between subnational institutions at home and firm propensity to enter a target market with weak institutional systems and found robust empirical support for the use of different estimation strategies. Further, my results demonstrate that the effect of subnational institutions at home on location choice is more pronounced in private enterprises compared to state-owned enterprises. This study reveals the importance of home country effects in location choice research and tests empirically the existence of institutional advantage.
Emerging markets have seen impressive development in recent years. In 2000, developed countries accounted for 80.7% of the global outward FDI and developing countries accounted for only 18.8% of the global total, while in 2013, the global outward FDI shares for the developed and developing countries shifted to 39% and 53.6%, respectively (UNCTAD). The development of emerging economies is also well documented in current management research. An increasing number of articles have discussed the motivation (e.g., Aulakh, 2007; Estrin et al., 2017; Luo and Tung, 2007; Madhok and Keyhani, 2012), location choice (e.g., Ramasamy et al., 2012), and entry mode of emerging market multinationals (e.g., Madhok and Keyhani, 2012; Peng, 2012). Across the literature is debated whether the emerging market firms follow the same internationalization path as their predecessors from developed countries did decades ago (e.g., Dunning et al., 2008; Hennart, 2012; Narula, 2012; Ramamurti, 2012). For this reason, more work needs to be done to theorize the internationalization patterns of emerging market firms and explain the unique traits that characterize the international expansion of emerging firms. It has been suggested that new theories be adapted and new paradigms be forged in order to accomplish this (Cuervo-Cazurra, 2012; Luo and Tung, 2007; Narula, 2012). One phenomenon that characterizes the internationalization patterns of emerging market firms are their unique location decisions. Unfavorable institutional environments, in which corruption, red tape, and nepotism are pervasive, are recognized as risky for outward FDI and will decrease the willingness of multinationals to invest overseas (Cuervo-Cazurra, 2006, 2008a, 2008b; Habib and Zurawicki, 2002). However, prior research has found that some emerging market firms prefer to invest in less developed countries with chronically weak institutions (Morck et al., 2008; Peng, 2012).