Industry agglomeration, sub-national institutions and the profitability of foreign subsidiaries

Li, Xiaoying; Zhang, Yin-Fang; Sun, Laixiang

Abstract

This study investigates the impact of agglomeration and its interaction with subnational institutions on the profitability of multinational enterprises (MNEs) subsidiaries operating in an emerging economy. We argue that in an emerging economy like China, competition in product and factor markets is more intense between foreign firms than between foreign and domestic firms owing to market segmentation. Consequently, agglomerating with other foreign firms has negative impact on the profitability of foreign subsidiaries. In contrast, foreign firms agglomerating with domestic firms may reap gains owing to less competition and improved access to local resources and knowledge. We find that these effects are more pronounced to domestic-market-oriented foreign firms. Furthermore, sub-national institutions moderate the above relationships. Our arguments are supported by the empirical analysis based on a comprehensive dataset of foreign firms operating in China over the period of 1999-2005.

Citation

Li, X., Zhang, Y.-F., & Sun, L. (2018). Industry agglomeration, sub-national institutions and the profitability of foreign subsidiaries. Management International Review, 58(6), 969-993. https://doi.org/10.1007/s11575-018-0361-3

• Journal Article Type: Article
• Acceptance Date: Jul 6, 2018
• Online Publication Date: Aug 17, 2018
• Publication Date: Aug 17, 2018
• Deposit Date: Jul 31, 2018
• Publicly Available Date: Sep 12, 2018
• Journal: Management International Review
• Print ISSN: 0938-8249
• Electronic ISSN: 1861-8901
• Publisher: Springer
• Peer Reviewed: Peer Reviewed
• Volume: 58
• Issue: 6
• Pages: 969-993
• DOI: https://doi.org/10.1007/s11575-018-0361-3
• Keywords: Industry agglomeration, MNE subsidiaries, Sub-national institutions, Emerging economies, China
• Publisher URL: https://doi.org/10.1007/s11575-018-0361-3
• Related Public URLs: https://www.springer.com/business+&+management/journal/11575