Abstract/Summary

This study examines how informal institutions at the home country subnational level drive the foreign direct investment (FDI) of firms from emerging markets, where informal institutions play a salient role because of the underdevelopment of formal institutions. Integrating the institutional escape view and institutional support view, we argue that social trust, as a critical dimension of informal institutions, affects firms’ FDI decisions. Using a sample of publicly listed firms in China, our empirical analysis finds an inverted U-shaped relationship between subnational social trust and the likelihood of firms’ international expansions. Furthermore, this relationship is contingent on firms’ affiliations with business groups.