Minyuan Zhao, Olin Business School
Abstract: Institutional environments are often considered exogenous in firms’ investment decisions. While the non-market strategy literature has discussed various approaches that firms may adopt to influence their interactions with institutions, such discussion is mostly absent in the analysis of market strategies. In this paper, we argue that in countries with significant government discretion, firms may obtain better treatment from the local institutions by locating R&D or manufacturing — the types of investments usually welcomed by the local governments — in the host countries. Using a sample of global patenting and litigation records of the Fortune Global 500 companies from 2007 to 2014, we find that firms tend to have a better chance at obtaining patents, or reversing unfavorable patenting decisions at patent authorities, after their increased local R&D or manufacturing presence. The results are only significant in countries with weak legal institutions, and in countries with relatively weak domestic industries. The effect of investment on firm-specific experience with local institutions thus offers an alternative explanation for location decisions that may seem suboptimal when environments are treated as exogenous.