Global cities and the location choice of foreign subsidiaries

The impact of investment purposes and institutional environment

Abstract

The purpose of this paper is to identify the characteristics of foreign subsidiaries located in global cities from the perspectives of MNC’s investment purposes and the host country’s institutional environment. From the perspective of horizontal and vertical FDI, and the host country’s institutional environment, we argue that the relationship between investment purposes of foreign subsidiaries and their location in global cities varies with the economic freedom and social openness of the host country. Using data on the foreign subsidiaries of Japanese firms, we find the following trends. (1) Firms tend to choose global cities for the location of their foreign subsidiaries with horizontal FDI purposes. (2) This tendency is stronger when the host country’s economic freedom is lower. (3) Firms tend to choose locations other than global cities for their foreign subsidiaries with vertical FDI purposes. (4) This tendency is weaker when the host country’s social openness is lower. These results show that the importance of global cities in foreign markets for MNCs varies by investment purposes and country’s institutional environment.