A Study On The Impact Of Regional Social Trust On The Location Choice And Performance Of Foreign Subsidiaries In China

Foreign-invested enterprises,as an important body promoting China’s economic growth,are an important force in accelerating China’s high-quality development.According to the data from Ministry of Commerce,China attracted US$173.48 billion in foreign investment in 2021,making it the second largest FDI inflow country in the world for five consecutive years.How to provide a good business environment for foreign enterprises and enhance the attractiveness of foreign direct investment(FDI)in China is not only the main goal of China to build a higher level of export-oriented economy,but also an important issue of concern in the international business field.As an important component of the business environment for FDI firms,the host country institution can influence the transaction costs and uncertainties of FDI firms,which in turn affects their location choice and performance.However,there are some gaps in the existing literature when studying the impact of host country institutions on foreign firms’ location choice and performance:(1)the existing literature mainly focuses on the formal institutions of host country regions on foreign firms’ location choice and performance,but not enough attention is paid to the role of informal institutions;(2)limited by the endogeneity of self-selection,the existing literature mostly focuses on the independent impact of host country institutions on foreign firms’ location choice and performance,and there is a lack of research on the relationship between location choice and performance of foreign firms;(3)existing studies mostly use quantitative research,focusing on a specific host country institution and studying its "net effect" on the performance of foreign firms,and lacking identification of the paths to improve the performance of foreign firms.Based on the practice background and theoretical gaps,this study focuses on the research theme of "how regional social trust affects the location choice and performance of foreign subsidiaries in China" and conducts an in-depth study based on the Orbis database of foreign subsidiaries in China from 2008 to 2020,in an attempt to better utilize foreign investment for stable economic growth in China.First,this study develops a theoretical model of the impact of regional social trust on the location choice of foreign subsidiaries in China.The results show that regional social trust positively attracts the location choice of foreign subsidiaries in China,and this promotion effect is only reflected in the sample from the Middle East.Moreover,the promotion effect of regional social trust on the location choice of foreign subsidiaries in China is more pronounced when the regional formal institution is strong,the home country of foreign firms has low linguistic similarity with China,and no Bilateral Investment Treaty is signed between the home country of foreign subsidiaries and China.Second,this study develops a theoretical model of the impact of regional social trust on the performance of foreign subsidiaries in China,and examines the relationship between location choice and performance of foreign subsidiaries in China by combining the results of the previous study.The logic is as follows: drawing on the idea of strategic matching,the relationship between the consistency between theoretical expected location choice and actual location choice and performance is examined.It is found that regional social trust positively affects the performance of foreign subsidiaries in China,and this facilitative effect is only reflected in the sample from the Middle East.The boosting effect of regional social trust on the performance of foreign subsidiaries in China is more pronounced when foreign subsidiaries in China are inexperienced and adopt the wholly owned entry mode.Alleviating the financing constraints of foreign subsidiaries in China and reducing agency costs are the mechanisms through which regional social trust affects the performance of foreign subsidiaries in China.In addition,the investment location that can be predicted by regional social trust and regional formal institution,language similarity and Bilateral Investment Treaty has a positive impact on the performance of foreign subsidiaries in China.Finally,this study uses the fs QCA method to investigate how the interaction of regional social trust,regional formal institution,language similarity,Bilateral Investment Treaty,foreign subsidiaries’ operating experience and entry mode enhance the performance of foreign subsidiaries in China,so as to complement the research analysis method of enhancing the performance of foreign subsidiaries in China and provide ideas and solutions for the path of enhancing the performance of foreign subsidiaries in China.It is found that six antecedents,namely regional social trust,regional formal institution,language similarity,Bilateral Investment Treaty,experience of foreign subsidiaries in China and entry mode,form four paths leading to high level of foreign affiliate performance in China.Through the above theoretical and empirical analyses,this study contributes to the research on location choice and performance of overseas subsidiaries of multinational firms in international business as follows:(1)by introducing the informal institutional perspective of social trust,this study provides empirical support for an in-depth understanding of the impact of informal institutions on the location choice and performance of foreign firms investing in emerging economy countries;(2)by using a strategic matching perspective to study the relationship between location choice and performance of foreign subsidiaries in China,this study not only provides a solution to the endogeneity problem in the study of the "location choice-performance" relationship,but also helps to further clarify whether the theoretical expected location choice is expected to bring high performance to foreign subsidiaries in China.(3)Combining the quantitative research of cross-case regression analysis with the qualitative research within the case,the study further identifies the paths to enhance the performance of foreign subsidiaries in China based on the clarification of the influence of regional social trust on the performance of foreign subsidiaries in China,which makes up for the shortcomings of the traditional contingency theory perspective in explaining the performance of foreign subsidiaries in China and helps foreign subsidiaries in China to select the appropriate conditions to improve their performance based on the research results.