The impact of subnational heterogeneity on foreign direct investment location decisions and the performance of foreign affiliates: The case of multinational enterprises in China

The international business (IB) literature increasingly recognises the limitations of the nation as a level of analysis when examining the impact of location and geography on multinational enterprises (MNEs). This has resulted in a growing interest in the interactions between subnational locations, subnational heterogeneity and MNEs. This study builds on this perspective to examine the impact of city-level heterogeneity, within an emerging economy, on the performance of foreign affiliates and foreign direct investment (FDI) location decisions. More specifically, the study explores subnational core-periphery disparities in China, with a focus on identifying the locational determinants of, and strategic motivations for, FDI into the ‘peripheral’ cities of emerging economies. Drawing on 42 interviews, as well as econometric analysis of secondary data, the key findings of the study are: (1) subnational heterogeneity across factors of production, institutions and agglomeration economies embedded in a foreign affiliate’s local context affect performance outcomes. Furthermore, core-periphery disparities negatively impact on firm performance across China’s cities by increasing liabilities of foreignness (as reflected in negative performance effects) beyond core cities; (2) FDI in peripheral cities of China is often driven by idiosyncratic managerial opportunity recognition (‘sense of place’) pertaining to their unique market, resource and institutional conditions; (3) the locational determinants of FDI significantly differ between core and peripheral cities in China, particularly concerning preferences for agglomeration and institutional conditions. Furthermore, FDI into peripheral cities is spatially dependent with core cities at a regional, but not at a national level and; (4) MNEs accommodate heterogeneity between Chinese cities by locating different business activities across core and peripheral cities. Overall, the study provides new theoretical insights into the determinant effects of subnational heterogeneity on the performance, and FDI location decisions, of MNEs.