When in Rome? Examining the Institutional Determinants of Agglomeration for Foreign Entrants.

Abstract

Although scholars from various disciplines have examined the antecedents to foreign direct investment (FDI) location choice, we understand less than we should about how the institutional environment of both the host and home country impact those decisions. To fill that gap, this paper examines institutional factors impact the agglomeration patterns of foreign entrants. We theorize that institutional contexts characterized by collectivist cultures, as well as economic and political uncertainty, encourage foreign entrants to locate within existing geographic agglomerations. To test our hypotheses, we empirically examine the location patterns of 181 foreign plant investments made by 61 parent firms across 22 countries in the global semiconductor industry. The findings reveal that foreign entrants are more likely to agglomerate in host countries characterized by collectivist cultures and by political and economic uncertainty. Home country characteristics had very little impact on the agglomeration decision of the foreign entrants. These results enrich traditional literature on FDI location choice by suggesting that the decision to agglomerate is context-dependent. Moreover, when choosing a location within a given country, foreign entrants are more likely to adapt to characteristics of the host country.