Obstacles or catalysts? A balanced view of formal institutional risks on FDI location choice

Ming-Chang Huang (), Tian-Jyun Gong (), Shih-Ping Sun () and Ping-Hsin Lin ()
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Ming-Chang Huang: National Yunlin University of Science and Technology
Tian-Jyun Gong: National Chung Cheng University
Shih-Ping Sun: National Yunlin University of Science and Technology
Ping-Hsin Lin: National Yunlin University of Science and Technology

Asian Business & Management, 2023, vol. 22, issue 5, No 12, 2077-2105

Abstract: Abstract The formal institutions of host countries are key to foreign direct investment (FDI) location choices. Most research suggests that formal institutional risks have a negative impact on FDI; however, some empirical findings indicate an insignificant or even positive influence. Multinational enterprises (MNEs) from developed countries consider weak institutions as risks and uncertainty, whereas MNEs from emerging markets (EMNEs) may prefer to invest in countries with risky institutions. Regarding the inconsistent arguments and the incongruent findings, the effect of formal institutional risks on location choice remains a puzzle. This study aims to refine the theory of formal institutions on FDI location choice of EMNEs. We argue that, for EMNEs, formal institutional risks reveal opportunities and limitations simultaneously, resulting in a nonlinear influence on FDI location choice. Using the 1997–2007 location decisions of Taiwanese MNEs, our results show an inverse U-shaped relationship between economic risk and FDI location choice.

Keywords: Foreign direct investment; Formal institutions; Formal institutional risks; Location decision; Emerging-market multinational enterprises (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1057/s41291-023-00242-5

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