Structural Decisions of Multinationals in Regions with Weak Courts

Evguenia Bessonova and Ksenia Gonchar

HSE Working papers from National Research University Higher School of Economics

Abstract: We investigate the impact of court conditions on multinational decisions on entry, subsidiary size and entry mode across subnational regions in Russia. We apply the literature on heterogeneous firms and the institution-based view of investor behavior, which predict that higher institutional costs raise the size and productivity cut-off of start-up subsidiaries. Our empirical results based on microestablishment data of foreign-owned firms in Russia show that a weaker judicial framework and stronger political power of the local governor significantly de-stimulate entry. The majority of multinationals enter Russia, which is viewed as a high-risk country, through large and very large subsidiaries wholly owned by the foreign parents. Variation of the business strategies of multinationals between regions is largely explained by regional court conditions, as foreign investors adapt their strategic decisions to compensate court deficiencies by increasing the size of the subsidiary and acquiring local institutional knowledge through partnership with resident firms. We also find that structural adjustments to court risks are typical for horizontal investments, which only serve the host market

Keywords: Multinational enterprise; foreign direct investment; production location decision; affiliate size decision; entry mode decision; institutions; Russia (search for similar items in EconPapers)
JEL-codes: F10 F23 L22 R30 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2017
New Economics Papers: this item is included in nep-cis, nep-cse, nep-int, nep-tra and nep-ure
References: View references in EconPapers View complete reference list from CitEc
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Published in WP BRP Series: Economics / EC, April 2017, pages 1-29

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Persistent link: https://EconPapers.repec.org/RePEc:hig:wpaper:161/ec/2017

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