How do country institutions affect foreign investment? Evidence from European multinational companies

We examine the impact of host-country institutions on subsidiary location decisions made by European multinational companies (MNCs) across 144 countries. Our analyses occur at the firm-level. We find that better protection of property rights, higher regulatory quality, and more developed financial markets attract more investment from MNCs. In line with our hypotheses, we document a stronger impact of these institutions on foreign investment when (i) entry and trade barriers of the host country are higher, (ii) the geographic distance between home and host country is larger, and (iii) MNCs are more financially constrained. Our findings suggest the MNCs are willing to trade off weaker institutional features with stronger ones. For instance, firms are prepared to invest in countries with higher entry or trade barriers in exchange for stronger property protection. This study expands our understanding of how institutions affect foreign investment, and which factors moderate their effects, offering new insights into the complexities of international business strategy.