Supranational institutions and multilevel institution environments : evidence from MNCs’ foreign market entry decisions

Abstract

When making foreign investment, multinational corporations (MNCs) are embedded in the multilevel institutional environment, which generally includes home country institutions, host country institutions, and supranational institutions. These institutions independently and interdependently determine MNCs’ foreign market entry strategies, such as location choices and ownership decisions. Previous research draws on institutional theory, mainly explores how state-centered institutions (e.g., home country institutions, host country institutions), or the institutional distances among the states may influence MNCs’ foreign market entry decisions. In contrast, little attention has been paid to the role of supranational institutions, nor the interrelationship between state-centered institutions and supranational institutions. However, the profound transformation of regulatory patterns that involve the relative decline of state-centered institutions and the raise of supranational regulatory modes in recent years significantly changed the “rules of the game” in international arena, and called for more research on the dynamic influences of multiple institutions, especially how supranational institutions influence cross-border economic activities. My thesis presents two studies to fill in this research gap. The first study examines the influence of supranational institutions (i.e., bilateral investment treaties and preferential trade agreements) on the foreign market entry location choice of MNCs. I argue that the influence of supranational institutions on the location choice of MNCs varies depending on the host country’s political uncertainty, home country’s institutional voids, and MNCs’ institutional embeddedness. Using a sample of 13,126 foreign market entries of 1,137 MNCs from 2005 to 2015, I find that MNCs tend to enter host countries that have enforced bilateral investment treaties/preferential trade agreements with their home countries, especially when host country political uncertainty is high, when home country institutional voids prevail, and when MNCs are private firms. The second study investigates the individual and joint influences of home country institutions and supranational institutions on the acquirers’ cross-border acquisition (CBA) ownership decisions. I posit that that while the acquirer’s home country economic institutions and political institutions are respectively the “invisible hand” and “visible hand” that together determine the transaction cost of cross-border acquisitions, their influences shall depend on the bilateral trade relationship between the acquirer’s home country and the host country. My empirical results based on a sample of 8,341 CBA deals from 2001 to 2016 reveal that a host country’s trade dependence on the acquirer’s home country strengthens the positive effect of home country’s economic freedom on the acquirers’ CBA ownership sought, but weakens the positive effect of home country’s political certainty on the acquirers’ CBA ownership sought.