The Effect of Subnational Institutions on Foreign Firm Performance: Insights from Emerging Economies

While prior studies have acknowledged the influence of host country institutions in foreign firm behaviors and performance, few investigations have included the roles of subnational institutions. As a matter of the striking institutional difference between emerging economy countries and developed countries, it is important to fully understand the impact of heterogeneous institutional environments of subnational regions in emerging economies on foreign firm performance, which would help foreign firm make a more suitable secondary choice decision of investment destinations at the subnational regional level. At the subnational regions level of emerging economies, we verify the respective and interactive effects of subnational formal and informal institutions (i.e., legal effectiveness and social trust) on foreign firm performance, and further identify the contingent factor (i.e., foreign firm’s institutional experience) that moderates these relationships based on the analysis of multiple secondary databases from China. The results show that, first, both legal effectiveness and social trust at subnational level positively affect foreign firm performance respectively. Second, legal effectiveness and social trust at subnational level have complementary effect in promoting the performance of foreign firms. Third, foreign firm’s institutional experience in target region of emerging economies host country strengthens the positive impact of subnational legal effectiveness on performance, but weakens the positive impact of subnational social trust on performance."