Social trust and the location choices of foreign firms in China–The moderating role of formal institution and cultural distance

Abstract

The institutional environment has a significant impact on the location of overseas investments by multinational enterprises (MNEs). However, there remain two research gaps. First, fewer studies focused on the impact of subnational regional institutions on the location choices of MNEs. Second, study on informal institutions has been more limited. This study investigates the effect of the informal institution (social trust) in the Chinese subnational region on the location choices of foreign firms and the mechanism of its role. Using the sample of foreign firms’ location choices in China from 2008 to 2020 in Orbis Global Enterprise Database, this study finds that social trust positively related to the location choices of foreign firms in subnational regions. Our results also show that this positive effect is contingent on the formal institution and the cultural distance between home and host country. When the formal institution is strong and the cultural distance between home and host country is high, social trust has a more significant positive impact on the location choices of foreign firms in subnational regions. Besides, the results show that cost advantage, information advantage and innovation advantage are important mechanisms for social trust to influence foreign firms’ location choices in subnational regions. This study is important for understanding the role of subnational regional informal institutions in influencing strategic decisions of MNEs. At the same time, it has certain guiding significance for governments in attracting foreign direct investment and for multinational enterprises in selecting suitable overseas investment locations.

Antecedents of immigrants’ entrepreneurial intention formation process: an empirical study of immigrant entrepreneurs in Canada

“…Consequently, this would lessen the disadvantage they face in their host countries. Finally, in international business literature, several recent studies have begun to focus on the joint effect of formal and informal institutions (Shen et al, 2023). The results of our study are consistent with this and call for institutional complementarity in the support to be offered to immigrant entrepreneurs.…”

Foreign subsidiary performance: social trust–entry fit

“…This view is consistent with some previous research, for example, Papageorgiadis et al (2020) found that an informal institution related to intellectual property enforcement positively moderates the effect of formal law (intellectual property law) on foreign direct investment flows, indicating a complementary effect between the two in attracting foreign direct investment. Similarly, Shen et al (2023) found that social trust and formal institutions have a complementary effect in attracting foreign direct investment. Thus, we propose the following hypothesis.…”

“…Conversely, under conditions of low social trust, opportunism is likely to occur in economic exchanges, leading to additional uncertainty and transaction costs (Shen et al, 2023;Chen and Wu, 2023). Meanwhile, firms have difficulty in accessing local resources and are vulnerable to penalties from the host government and other stakeholders for violating institutional rules (Zhang and Beamish, 2019).…”