History Matters: Colonial-Based Connectivity and Foreign Headquarter Location Choice.

Date01 Octubre 2022
AuthorAndreu, Ana Botella

1 Introduction

Many European countries were deeply involved in colonialism in the past, with some exerting and wielding tremendous economic and political influence over the years as colonial centers. As a result, associations persist in the form of special economic connections (UNCTAD, 2016), concessions for ease of business practice (Jones & Khanna, 2006), or strong FDI links (Haberly & Wojcik, 2015) between Europe and its former colony countries. It is not a coincidence that these special connections and the ease of doing business in the former colonies accord privileges to some European countries in influencing the attraction of FDI.

However, the role that these connections with former colonies play in making a host country more attractive as an FDI recipient from foreign firms has received little attention in international business (IB) studies. This is particularly true for FDI used to establish affiliates that provide headquarter (HQ) activities to the other businesses of the foreign investors (intermediate or regional headquarters; Pla-Barber et al., 2021). Given the sensitivity of these activities for the company, and the importance of receiving and maintaining such FDI establishments for the host countries, it is imperative and relevant that we improve our understanding of the factors that drive FDI location choices for such activities (fDi Intelligence, 2020). This is particularly true for European countries whose governments intensively subsidize investments in high value-added activities by multinational corporations (MNCs), as a means of retaining their location advantages for those activities. This study intends to fill these gaps by investigating the extent to which a host country's connections to its former colonies acts as a location factor for foreign investments in headquarter activities of MNCs.

Previous studies show that foreign HQs are highly mobile (Benito et al., 2011; Laamanen et al., 2012), although HQ location decisions have only recently started to receive scholarly attention (Belderbos et al., 2017). Foreign HQ location choice is extremely sensitive to the institutional characteristics of host countries (Valentino et al., 2019; Zhou, 2015). However, few studies have gone beyond institutional quality to highlight the importance of relationships across countries (Li et al., 2018), or their historical contexts (Glaister et al., 2020; Makino & Tsang, 2011) as institutional cornerstones for attracting FDI. This is because beyond coordinating and controlling, HQ activities include knowledge brokering and expanding the MNC network across regions (Alfoldi et al., 2012). Thus, as they entail high value-added activities, a deeper investigation of the attributes affecting foreign HQ mobility becomes critical to help policy-makers and managers derive clearer implications of their decisions.

In this study, we examine the role of connections based on historical ties between countries as conduits for connecting regions, and as a factor affecting MNCs' decisions on the location of their foreign HQ activities. In other words, we propose that an MNC's foreign HQ investment decision tends to favor European countries with extended influence, and institutional and economic connections with former colonies, over European countries without them.

To address this, we introduce the concept of colonial-based connectivity as a characteristic of some European countries that have established connections with their former colonies outside their own region. These connections are based on historical ties, and have been sustained over time through ongoing economic, political, and cultural influence and interaction. Consequently, common formal rules have been developed over time, in the form of agreements, treaties and collaborations, that facilitate access from Europe to countries in Africa, Asia and Latin America. Based on this, our study introduces colonial-based connectivity as a new explanatory variable; this is a location factor that combines historical and economic connections between countries, as a determinant of the location choice of foreign HQs within the European region. We emphasize the historical and economic dimensions and the resultant connectivity as factors that work together to foster colonial-based connectivity. In other words, we investigate whether European countries' extensive vivid connections with former colonies represent a characteristic that attracts foreign HQ investment to Europe.

We build on the institutional theory proposed by North (1990) to develop our hypothesis, and empirically test it by drawing on a database of 2230 foreign green-field investments in HQ activities in Europe, undertaken by MNCs in the period 2003-2016. The empirical findings strenuously support the importance of relationships between European countries and their former colonies, in driving the location decisions of foreign HQ investments in Europe. We control for a rich set of traditional factors affecting the location choice of foreign HQ activities, such as institutional quality, and economic and non-economic location characteristics. The results hold against a set of robustness checks.

This study makes a three-fold contribution to the literature. First, we respond empirically and theoretically to recent calls to understand where foreign HQs locate (Valentino et al., 2019). Beyond physical and knowledge connectivity (Belderbos et al., 2017; Castellani et al., 2021), foreign HQ activities appear sensitive to a variety of other dimensions and, specifically, they seem to attribute value to historical cross-regional connections. Theoretically, this is related to the roles that foreign HQs develop beyond controlling and coordinating subsidiaries. Second, our study relates to the literature on the role of institutions for international management and business (Aguilera & Grogaard, 2019; Cuervo-Cazurra et al., 2019) and the recurring need for a more fine-grained operationalization of the institutional dimensions relevant to MNC decisions. We establish that a country's historical linkages with its former colonies provide grounds for formal and informal institutional connections between these countries, that persist over time and fuel their current economic exchange relationships; thereafter, we introduce colonial and economic relationships as relevant factors that influence MNCs' FDI decisions. Furthermore, we review a systematically under-investigated dimension in IB, examining evidence that prior colonial relationships and historical context influence FDI decisions (Jones & Khanna, 2006), and generate location preferences toward some countries (Glaister et al., 2020; Makino & Tsang, 2011). These path-dependent interactions between countries create conduits between regions, and facilitate access to other markets, thereby reducing uncertainty for further international operations and signaling more familiar institutional landscapes for firms.

The rest of the paper is organized as follows. The next sections develop the theoretical framework and the colonial-based connectivity concept. The fourth and fifth sections describe the data employed in the empirical analysis and econometric strategy. The sixth section discusses the empirical results and conducts a rich set of robustness checks, while the final section concludes the paper.

2 Literature Review

2.1 The Location Choice of Foreign Headquarter Activities

Foreign headquarters are the result of the geographical dispersion of headquarter activities due to the increasing complexity of MNCs in the international context (Kunisch et al., 2019). They are defined as intermediate units located between the corporate headquarters (corporate HQs) and other subsidiaries, in terms of strategy and structure (Pla-Barber et al., 2021). The concept of foreign headquarters includes any type of headquarters different from the corporate HQs, like regional or divisional HQs. While corporate HQs seem to be "sticky" as they stick to their home countries (Meyer & Benito, 2016), foreign headquarters are highly mobile (Laamanen et al., 2012; Valentino et al., 2019). Their location choices appear to be particularly sensitive to institutional context characteristics (Valentino et al., 2019; Zhou, 2015). For example, impartial and transparent legal systems, or the supply of specialized services are characteristics of high-quality institutions that are attractive to foreign headquarters. The general perception is that the quality of institutions matters, such as "the more the better" (Valentino et al., 2019). Other studies focus on a combination of institutional factors and physical international connections that affect foreign headquarters' location choices (Belderbos et al., 2017; Castellani et al., 2021).

The above studies assume that foreign headquarters have specific roles and therefore, certain location characteristics are valuable for developing those roles. In this sense, while corporate HQs usually focus on activities related to the company's legal domicile (including MNC accounting, legal tasks, or resource allocation decisions), foreign headquarters are observed to develop three different roles. The first one is the traditional role of coordinator and controller over the existing subsidiaries, operations, or areas of influence beyond the limits of the corporate HQ. Related functions are monitoring regional markets, consolidating budgets, accounting and finance, and reporting to the corporate HQ (Alfoldi et al., 2012; Enright, 2005; Pla-Barber et al., 2021).

The second is their role as nodes or hubs for knowledge and information, essentially as knowledge brokers in multinational networks (Lunnan & Zhao, 2014). As a result of coordinating operations in distant locations, foreign headquarters usually pick up and transfer information between the host and home regions (Asakawa & Lherer, 2003; Li et al., 2010; Budhwar, 2012; Edgington and Hayter, 2013; Amman et al., 2014). This...

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